Canadian registered charities can in general carry out their own activities by using staff or volunteer. That is not too difficult to understand. However, CRA also allows that a Canadian registered charity can carry out its own activities by using intermediaries such as contractors, agents, joint ventures etc.
In CRA’s Guidance “Using an Intermediary to Carry out a Charity’s Activities within Canada” it notes:
3.2. How can a charity carry out its own charitable activities?
A charity may use its own staff (including volunteers, directors, or employees) to carry out its activities. Assigning the charity’s staff to carry out its activities is typically the easiest way for a charity to meet the own activities test.
A charity may use an intermediary to carry out its activities. For this guidance, an intermediary is an individual or non-qualified donee [Footnote 6] that the charity works with to carry out its own activities. For example, a charity might do one of the following:
• hire a company;
• enter into an agreement with a non-profit organization to have the organization deliver specific charitable programs for the charity; or
• pool its resources with another organization to complete a project.”
As well in the Guidance CRA discusses in what is known as the ‘Charitable Goods Policy”:
“In certain limited circumstances, the CRA will consider a charity to be carrying out its own activities by transferring certain resources to a non-qualified donee. Before a charity carries out its own activities by transferring its resources to a non-qualified donee, the CRA expects all of the following conditions to apply:
• The nature of the property being transferred is such that it can reasonably be used only for charitable purposes (for example - medical supplies like antibiotics and instruments, which will likely only be used to treat the sick, or school supplies like textbooks, which will likely only be used to advance education); Note: transfers of money are not acceptable, and always require ongoing direction and control.
• Both parties understand and agree the property is to be used only for the specified charitable activities.
• Based on an investigation into the status and activities of the non-qualified donee receiving the property (including the outcome of any previous transfers by the charity), it is reasonable for the charity to have a strong expectation that the organization will use the property only for the intended charitable activities.
Investigating the status and activities of an intermediary would typically include examining details such as the intermediary’s stated goals and purposes, any previous relationship with the charity and other charities, its history and general reputation, and relevant media reports.
If any of the above three conditions do not apply, then a charity will only be able to meet the own activities test by directing and controlling the use of its resources as otherwise stated in this guidance. [Footnote 8] If a charity does not direct and control the use of its resources as required, it risks sanctions under the Income Tax Act. This includes financial penalties and revocation of its status as a registered charity.
Examples of a transfer of resources to a non-qualified donee where the above conditions could apply include the following:
• transfers, by a research organization, of books and scientific reports to a reputable library or school that is not a qualified donee
• transfers of food and blankets to a non-profit organization that is coping with a natural disaster, and has a long history of successful operations
A charity cannot transfer any kind of property if it knows, or ought to know, that the property will be used either for non-charitable purposes [Footnote 9] or to circumvent the provisions of the Income Tax Act.
If a charity intends to build or buy capital property in partnership with an intermediary, the charity must retain ownership of its share of this property. In exceptional cases where it is impossible for the charity to retain ownership of its share of the property, the charity should consult with the CRA to consider the available options.
A charity does not have to adopt measures to direct and control the use of its resources when transferring property to the proper beneficiaries of its charitable activities. For example, a charity could give school supplies, such as books or writing instruments, to impoverished students without having to direct and control how the students use those resources.”
For more information on the CRA Guidance “Using an Intermediary to Carry out a Charity’s Activities within Canada” (Reference number CG-004) see:
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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.