In a recent decision of the Federal Court of Appeal Public Television Association of Quebec v. Canada (National Revenue), 2015 FCA 170 the court dealt with funding by a Canadian registered charity of a US charity.  There have been 3 earlier cases dealing with foreign activities and direction and control and this case confirmed the same rules and CRA's important guidance on the subject.  The FCA upheld the revocation of the PTAQ because it was acting as a conduit and making gifts to a non-qualified donee.  There is a good discussion of what is a conduit and how this particular fact situation is a conduit. 

I have written an extensive article in 2008 explaining the difference between a conduit and an appropriate structured arrangement that some may find helpful.   

The CRA was concerned that the charity was acting as a conduit. “The Organization’s only activity was the purchasing of a program package from Vermont Public Television (VPT) located in the US. VPT’s broadcast signal reached, among others, into bordering regions of Southern Quebec, including Montreal.”

CRA noted “…It seems that the Organization is used to issue donations receipts for donations received by VPT from Canadian donors. This is not acceptable. The “Fund-raising agreement”, at paragraph 5d), even provides that “All donations received by the Agent from persons resident in Canada shall be deem to be donations received on behalf of the Principal.” This is not acceptable especially when there is no evidence that VPT does any fundraising on behalf of the Organization.”

The CRA had concerns that just because programs are commercial free, that does not make them educational: “It is our position that the activities of the Organization cannot be reasonably interpreted as “advancing education through the use, creation, publication and distribution” of educational materials, particularly since the Organization does not create or publish television programs but rather serves to facilitate broadcasting of programming developed outside its control and direction” (Appeal Book Vol. 4 p. 690).  

Some concluding thoughts:

1) If you are funding activities outside of Canada then through the tax system the Canadian government is subsidizing that expenditure between 40-65% in many cases.   You need to understand the Income Tax Act requirements and follow them.  CRA's Guidance Canadian Registered Charities Carrying Out Activities Outside Canada sets out these rules.  Alternatively ,you can be a non-profit that is not a charity, dispense with the donation tax subsidy, and you have greater freedom to do whatever you want to do. 

2) If CRA will go after a vanilla charity like PTAQ dealing with public broadcasting in the US, then they will apply the rules to any and all charities.  

3) Direction and control is a factual issue and simply stating that we 'retain a high degree of control over the funds' does not make it so.

4) Keep in mind that Canadian charities operating within Canada and transferring resources to non-qualified donees within Canada also need to comply with the same rules.  These rules are set out in CRA’s Guidance “Using an Intermediary to Carry out a Charity’s Activities within Canada” and it is cited in the decision and it is almost identical to the CRA guidance on foreign activities.

5) If people want a change to the clearly set out law on direction and control of resources it is Finance and not CRA that will be able to provide such change.  With the current concern about accountability for funds going abroad it is unlikely that Finance is going to make any dramatic changes.