Topics: What's New from the Charities Directorate of CRA, Canadian Charity Law, Using Intermediaries in Canada
The Charity Commission of England and Wales has released a guidance Grant funding an organisation that isn’t a charity. It sets certain standards when an English charity provides a grant to a group that is not a charity such as a non-profit or social enterprise, businesses or foreign groups that is not "or may not be" a charity. In Canada when a Canadian registered charity gives funds to a "qualified donee" it is typically relatively straightforward and simple, however, when a Canadian charity transfer funds or resources to a non-qualified donee such as a foreign charity then these sort of rules apply. In Canada it is called having a "structured arrangement" with direction and control. I will discuss the Canadian rules at the end.
The guidance notes:
Making grants to organisations that aren’t charities may present new opportunities to further your charity’s purposes. Grants can be for specific activities or services or, in some cases, to develop the organisation’s capacity to deliver activities or outcomes that will further the charity’s own purposes. Remember though, that organisations which aren’t charities don’t have to deliver public benefit or comply with charitable purposes, and may be unfamiliar with charity law requirements.
So you need to understand the relevant risks and boundaries, as well as the opportunities, before you start. Any grant your charity makes must only be used to further or support your charity’s purposes, and for no other purpose. This means there will always be limits and conditions on what you can fund.
The guidance then goes on to describe the process for such grants:
Before you decide to make any grants, you should:
- make sure you understand your own charity’s purposes
- make sure you understand and follow trustee decision-making principles
- put in place appropriate systems and procedures for making decisions about grants
Before deciding to make a grant to a particular organisation, you should:
- consider whether that organisation is a charity or not
- take reasonable steps to assess risks and carry out appropriate checks on the organisation to ensure that it is suitable for your charity to work with
- be aware that trustees remain responsible for grant decisions even if decisions are delegated, and understand where extra care may be needed
When giving a grant to another organisation, you should:
- write appropriate terms and conditions to ensure that the grant can only be used in line with your charity’s purposes, and ensure that the organisation understands and accepts them
- put appropriate monitoring arrangements in place
- know what to do if things go wrong
The guidance requires that appropriate systems are put in place:
Put appropriate systems and procedures in place
Charities that make grants should have appropriate and proportionate systems and procedures in place to:
- allow trustees to set priorities for funding (which they can change or depart from at their discretion)
- require sufficient detail in the grant application, and monitoring procedures, to enable the trustees to identify and assess risks and make informed decisions
- enable the charity to carry out appropriate due diligence on organisations applying for grants
- ensure grants are authorised by the trustees, or within a framework of delegation that ensures appropriate oversight and scrutiny
In the US there is a system called equivalency determination which allows US charities to determine that a foreign group is the equivalent of a US charity. In the UK the Charity Commission just says "If you are not sure whether an organisation is charitable under the law of England and Wales, you should follow this guidance." As the laws and contexts in different countries can vary tremendously it can be hard to determine that a foreign organization is the equivalent of a local charity as opposed to it is delivering a project that is seemingly consistent with the objects of a local charity.
The Charity Commission emphasizes risk and also that the directors or trustees are ultimately personally responsible for the conduct of a charity's operations:
Risk assessment and assurance
All grant-making involves a degree of measured risk-taking. For example, any grant may fail to deliver the intended outcome.
Before you and your co-trustees commit to making a grant to another organisation, you should carry out an appropriate risk assessment.
You must avoid exposing your charity to undue risk. It’s vital to identify and consider risks in relation to a particular grant proposal and respond to them proportionately, as risks will vary in their significance from case to case. Areas of risk to consider include operational (delivery), reputational and governance risks as well as financial ones including exposure to financial crime or tax liability.
You and your co-trustees are responsible for deciding what level of risk-taking is appropriate, responsible and reasonable for your charity in the circumstances. Use your assessment of the risks to help you make your funding decisions.
The Charity Commission also discusses assurance. Although the statements appear to be like motherhood and apple pie and somewhat straightforward - and seems to somewhat gloss over the complexity of international operations - the guidance is then linked to in other Charity Commission guidance. So they talk about due diligence and provide 16 tools in a link to describe the due diligence. Make sure that you have your risk assessment cycle, SWOT analysis, PESTLE analysis, risk matrix, checklist, know your donor, suspicious donations log template, know your partner analysis, partner verification forms, partnership agreement, monitoring visit checklist, monitoring visit log - all ready. The Charity Commission is focussed on fiduciary responsibilities of trustees and directors of charities and in the end the standard that would apply to such fiduciaries is higher than the expectations that a regulator such as CRA for charities operating under the Income Tax Act.
You should also carry out appropriate checks to assure yourself and your co-trustees that:
- the organisation is genuine, reliable and competent to carry out the activity being funded
- the organisation is suitable for your charity to work with and fund
- you will be able to check and confirm that your charity’s funds have been properly used in line with its purposes
- you have identified and managed any exposure to risks such as fraud, financial crime, extremism or terrorism
- in all the circumstances, awarding the grant is in the best interests of your charity
This process is described as due diligence in Commission guidance. It is also known as assurance. You will need to decide what level of assurance or due diligence is appropriate, taking account of the level of risk to your charity’s assets, beneficiaries or reputation. It may include assessing:
- the ‘mission fit’ or match between the organisation’s aims and your charity’s purposes and interests
- the organisation’s track record for delivering the activities you are planning to fund
- its governance and constitutional form
- its reputation
- the full scope of its operations and any conflicts with your charity’s purposes, activities, funding, or other interests
You should evaluate the need for due diligence checks, and how extensive those checks are, even if you think you already know an organisation quite well.
You should carry out additional checks during the course of the funding relationship if you identify any risks that are significant or have materially increased.
The guidance also discusses the many limits of funding an organization that is not a charity and there are many limits. It talks about "any funding of support costs is limited to the specified activities, services or outcomes". For you to be able to do that you need a very specific clear description of the "specified activities" or you funds may deliberately or accidentally be spent on activities that are outside the "specified activities".
Limits on funding organisations that are not charities
A charity can grant fund the support costs of activities, services or outcomes delivered by another organisation that is not a charity, provided these are intended only to further the charity’s own purposes. The charity must not fund any costs which are outside its purposes.
An organisation that isn’t a charity is not restricted by charitable purposes or public benefit. For a charity, which is subject to these restrictions it means that it can only fund activities, services or outcomes of a non-charity that are intended to further the charity’s purposes for the public benefit.
Therefore, when making a decision to grant fund an organisation that is not a charity, you must ensure that:
- the grant is only for activities, services or outcomes that will further your charity’s purposes for the public benefit
- any funding of support costs is limited to the specified activities, services or outcomes
- the terms of the grant require the recipient to comply with these restrictions
- the grant does not give rise to more than incidental personal benefit
- you and your co-trustees can justify your decision as being in your charity’s best interests
These principles also apply if you intend to provide a grant to develop an organisation’s capacity. You and your co-trustees must take steps to ensure that the grant is only used to develop capacity to deliver activities, services or outcomes that fall within your charity’s purposes for the public benefit and for no other purpose, and that any personal benefit is incidental.
All your grant-making decisions must be made solely in your charity’s best interests. You should be able to explain and justify your funding decisions.
The guidance then goes on to discuss the written agreement required:
Setting the terms of the grant
You should explain to the non-charity in writing how the grant can be spent, which must be in line with your charity’s purposes. The written statement should also set out the time period for the delivery of the activities, services or outcomes that you are funding.
And you should cover other terms and conditions that you and your co-trustees decide are appropriate depending on the value of the grant and your assessment of the risks, such as:
- your requirements for receiving reports from the recipient organisation on how they have spent the grant; whether this is a single report at the end of the grant period or whether you will need interim reports
- what records you need to see regarding the use of the grant, for example invoices
- what independent monitoring arrangements you intend to put in place (see the next section)
- what will happen (for example, if you will enforce repayment) if the terms and conditions are breached
- what will happen if the organisation can no longer carry out the terms of the grant
- whether your terms should include appropriate protection of your charity’s intellectual property rights and reputation
In the case of a small grant where you are satisfied that the risks are low, a letter or short agreement may be sufficient. In other cases, you may need a more detailed agreement: you should consider whether you need to take professional advice on preparing the document.
The guidance also has an interesting reference to HMRC rules about non-charitable expenditure which is:
You also need to be aware of HMRC rules about charitable and non-charitable expenditure. HMRC would consider the following (for example) to be non-charitable expenditure, which might affect your charity’s exemption from tax:
- expenditure which isn’t incurred for charitable purposes only
- any payment to an overseas body where the charity hasn’t taken reasonable steps to ensure the payment will be applied for charitable purposes
- any investment or loan made by the charity which isn’t a qualifying investment or loan
It is not clear what "reasonable steps" are - but presumably it would be all the steps required in this guidance unless there are other requirements.
The Charity Commission describes situations where things go wrong and specifically the positive obligation of a charity in England and Wales to notify the Charity Commission of a serious incident in which charity money is lost. We don't have that requirement with the CRA, although we probably should.
If things go wrong
It is impossible to eliminate all risk.
Some grants will not work out as planned and may not deliver the planned outcomes. You and your co-trustees need to be able to explain and justify decisions that you have made.
If something goes wrong, take appropriate action to minimise any financial loss or harm to the charity’s beneficiaries or assets, including its reputation. This may include suspending or withdrawing funding or requiring repayment under the terms and conditions of the grant. Depending on what has gone wrong, plan how you will respond to questions from your staff, volunteers, members, donors, the public or the media.
If it is a serious incident (or you think it is a serious incident), you also need to report the incident to the Commission. A serious incident is an adverse event, whether actual or alleged, which results in or risks significant:
- loss of your charity’s money or assets
- damage to your charity’s property
- harm to your charity’s work, beneficiaries or reputation
If a serious incident takes place, you need to report to the Commission what happened and explain how you are dealing with it.
Find out more: How to report a serious incident in your charity
And if that is not enough the Charity Commission tosses in another 6 related guidances!
In Canada we have a different regulatory system. Some of our rules are far more lax and others are more prescriptive when it comes to groups that are not qualified donees. UK donors are not getting the same tax benefits as Canadian donors for one thing.
CRA has two guidances on charities funding non-qualified donees. One is a guidance called CG-002 Canadian registered charities carrying out activities outside Canada which deals with foreign activities. The other is Guidance CG-004, Using an intermediary to carry out a charity's activities within Canada which has similar rules for dealing with non-qualified donees in Canada.
In short here are the requirements for Direction and Control.
Canadian charities are required to have mechanisms that ensure that the following measures of direction and control are in place when any resources are transferred from a Canadian charity to an intermediary (such as a foreign charity, NGO, or for profit business):
1) Due Diligence – the intermediary must have the skill, knowledge staff and equipment to carry out the charitable activities and, in addition to such capacity, there must be a strong expectation that the intermediary will use the Canadian charity's resources as agreed to.
2) Written Agreement – there must be a written agreement with the intermediary with the necessary elements required by the Charities Directorate guidance and the terms of such agreement must be implemented or revised with mutual written consent as necessary.
3) Detailed Description of Distinct Activities – the written agreement must contain a clear, complete, and detailed description of the activity that the intermediary will conduct. Such activity must be a separate and distinct activity of the Canadian charity.
4) Monitoring and Supervision – there must be appropriate monitoring and supervision of the activity by the Canadian charity.
5) Ongoing Involvement – there must be ongoing communication between the Canadian charity and the intermediary and any significant changes to the detailed description of activities must be mutually agreed upon.
6) Separate Funds – the intermediary must arrange to keep the charity’s funds separate from its own, ideally by having a separate bank account but if that is not possible then such segregation of funds must be reflected in the accounting system of the intermediary.
7) Separate Books and Records – the intermediary must ensure that it keeps necessary books and records for the Canadian Party’s activities.
8) Periodic Payments – The Canadian charity must make periodic transfers of resources, based on demonstrated performance.
9) Books and Records in Canada - Copies of the books and records of the intermediary must be provided to the Canadian charity on a pre-determined basis or the Canadian charity must have access electronically to such books and records and the Canadian charity can make copies of such documents to be held at the office in Canada to meet the Canadian requirement that there needs to be adequate books and records in Canada. Books and records will include either original source documents or copies of such source documents.
Direction and control does not apply when the Canadian charity is providing resources to "qualified donees" under the Income Tax Act (Canada), which are generally Canadian registered charities, certain foreign prescribed universities and the United Nations and its agencies.
The requirements of direction and control are in addition to any other requirements that may be imposed on the Canadian charity by their own corporate documents or corporate legislation, fiduciary and trust duties, donors or funders.
Despite the different terminology it is increasingly obvious that both the CRA and the Charity Commission are having significant expectations of charities when they transfer funds to non-charities or foreign groups.
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.