There are certain activities that are “prohibitied activities” such as illegal activities.  There are other activities that are not prohibited by CRA but CRA has some concerns when the fundraising activities of charities shows these “indicators of concern”.  Some of these indicators of concern include sole-sourced fundraising contracts; non-arm’s length fundraising contracts; paying too much for fundraising merchandise; fundraising activities where most of the gross revenues goes to private individuals or corporations; commission based fundraising remuneration and misrepresentations by the charity.

The CRA in its fundraising guidance in section 11 notes certain areas of concern for CRA:

“11. Areas of concern that could lead to further review
The following is a list of indicators that could cause the CRA to further review a registered charity’s fundraising activities.
a. Sole-source fundraising contracts without proof of fair market value.
b. Non-arm’s length fundraising contracts without proof of fair market value.
c. Fundraising initiatives or arrangements that are not well-documented.
d. Fundraising merchandise purchases that are not at arm’s length, not at fair market value, or not purchased to increase fundraising revenue.
e. Activities where most of the gross revenues go to contracted non-charitable parties.
f. Commission-based fundraiser remuneration or payment of fundraisers based on amount or number of donations.
g. Total resources devoted to fundraising exceeding total resources devoted to program activities.
h. Misrepresentations in fundraising solicitations or in disclosures about fundraising or financial performance.

a) Sole-source fundraising contracts without proof of fair market value
A sole-source contract is a contract entered into where only one party was given an opportunity to make a proposal to the charity. Sole-source contracts for fundraising may lead to an excessive or disproportionate private benefit, which would make the fundraising unacceptable. Any private benefit associated with a charity’s operations must be a minor and incidental by-product of its work.
If a charity enters into a sole-source contract for fundraising services, it should be able to demonstrate that it paid no more than fair market value. Generally, this will show that the charity is acting reasonably in entering into the contract, and will address any concerns that the private benefit arising from the arrangement is excessive or disproportionate. However, other considerations related to the amount or percentage of public benefit may also apply. See Conduct that results in more than an incidental or proportionate private benefit to individuals and corporations.

b) Non-arm’s length fundraising contracts without proof of fair market value
If a charity enters into a non-arm’s length contract for fundraising services or supplies without determining the fair market value of the work to be undertaken, there may be an undue benefit associated with the contract that makes the fundraising unacceptable.
The sanction provisions of the Income Tax Act with respect to registered charities include a penalty related to a charity conferring an undue benefit on any person. [Footnote 8]  If the charity enters into a non-arm’s length contract for fundraising services or supplies, it should be able to demonstrate the amounts paid either reflect or are less than the fair market value. Generally, this will show the charity is acting reasonably in entering into the contract, and will address any concerns that there is an undue benefit arising from the arrangement. However, other considerations, such as whether the arrangement is necessary to fulfill the charity’s purposes, may also apply. See Conduct that results in more than an incidental or proportionate private benefit to individuals and corporations.

c) Fundraising initiatives or arrangements that are not well documented
A charity must properly document its fundraising activities to ensure all its resources are being used for charitable purposes and that other regulatory obligations are being met.
To show that it is retaining control of its fundraising, the charity should have:
• minutes of board meetings or other meetings where decisions on a fundraising contract were made;
• records of research to determine appropriate costs;
• documentation on any procurement processes, appropriate for the size of the fundraising services being sought, undertaken before entering into the contract(s); and
• written copies of any fundraising contract(s) entered into.

d) Fundraising merchandise purchases that are not at arm’s length, not at fair market value, or not purchased to increase fundraising revenue
Where the charity purchases gift incentives, donor premiums, or other fundraising merchandise, it must be able to demonstrate that increased revenue will result directly from the distribution of such gifts or premiums. Otherwise, the purchase of such gifts or premiums may be unnecessary and may raise concerns of a private benefit accruing to the supplier of these items.
The private benefit associated with producing fundraising merchandise is inevitably quite remote from the public benefit the charity exists to pursue. It is therefore difficult to characterize any private benefit associated with producing these items as truly necessary to fulfilling the charity’s purpose(s). See Conduct that results in more than an incidental or proportionate private benefit to individuals and corporations.
If a charity enters into a non-arm’s length contract for fundraising merchandise without determining the fair market value of the work to be undertaken, there may be an undue benefit associated with the contract that makes the fundraising unacceptable.
The charity must be able to demonstrate that it paid no more than fair market value for such services. However, even where a charity can show that costs reflect fair market value, it may not satisfy the requirement that the arrangement not give rise to a disproportionate or excessive private benefit. As well as not exceeding fair market value, transactions that have private benefit associated with them are only acceptable as a minor and incidental by-product of a charity’s work.

e) Activities where most of the gross revenues go to contracted non-charitable parties
If most of the gross revenues of a charity’s fundraising activities go to contracted non-charitable parties, there may be an excessive or disproportionate private benefit that makes the fundraising unacceptable.
Where a high percentage of fundraising proceeds go to a non-charitable party or parties, the charity must show that it has taken steps to determine the fair market value for the good or service supplied, and that it has taken adequate measures to control costs. Generally, the larger the cost, either in absolute terms or as a proportion of the charity’s resources, the more attention the charity should pay to the issue.
Charities can manage this risk in various ways, such as:
• showing that expenditures on the activity or activities represent an investment and will result in lower costs for subsequent activities;
• using volunteers or obtaining non-receipted contributions of services, facilities, or equipment that enhance the activity and are not reflected in the financial reporting of the initiative; and
• disclosing costs so that the public or attendees are not misled about the use of their donations, entrance fees, or other contributions.
In such cases, the charity should be able to demonstrate that it is taking steps to lower its fundraising costs over time. It should also be able to document how and when it intends to achieve a more reasonable return.

f) Commission-based fundraiser remuneration or payment of fundraisers based on amount or number of donations
If a charity provides remuneration for fundraising on the basis of results rather than effort, then there may be a disproportionate or excessive private benefit included in the remuneration that makes it unacceptable.
Where the fundraising arrangement includes commission-based remuneration or other compensation based on the number or amount of donations raised, the charity should satisfy itself that such provisions would not result in disproportionate or excessive private benefit. It is possible that contracts providing for such fees can result in a windfall profit for the fundraiser, particularly when the compensation is set at a high percentage and there are limited or no additional provisions governing how the work is undertaken.
Profits related to effort (for example, devotion of time and resources) rather than fundraising success are less likely to give rise to disproportionate or excessive private benefit. For example, payments which compensate fundraisers based on calls completed or contacts made—regardless of whether a donation is received—or on a periodic (for example, hourly or weekly) basis, at a fair market value for the work entailed, are not generally considered to result in disproportionate or excessive private benefit.

g) Total resources devoted to fundraising exceeding total resources devoted to program activities
If the total amount of resources devoted to fundraising exceeds the total amount of resources devoted to program activities, fundraising may have become a collateral purpose of a charity. This issue may arise regardless of whether fundraising is done through staff or a contractual arrangement.
A charity may make substantial use of non-financial resources, such as volunteers, in fulfilling its charitable purposes. If the charity documents the use of such resources, it can show that a purely financial analysis of its operations does not accurately represent a fair picture of the resources devoted to charitable and fundraising activities.
However, a charity should also be able to demonstrate that its use of non-financial resources is a reasonable and effective way to advance its mandate. Fundraising revenues should primarily be used to support the charity’s operations, not fundraising itself. Where use of financial resources is heavily skewed to fundraising functions, and other operations are carried on primarily with non-financial resources, the fundraising may be an end-in-itself, not a means-to-an-end.
Market conditions may sometimes account for discrepancies in costs of different functions. Where this is the case, charities should be able to provide evidence to demonstrate that the costs of particular functions are reasonable. Merely showing that costs of fundraising are at market rates is not sufficient.

h) Misrepresentations in fundraising solicitations or in disclosures about fundraising or financial performance
A charity must be truthful in its solicitations and its disclosures about its fundraising or finances to avoid the harm that results from deceiving the public or stakeholders (including donors). When the harm entailed in the fulfilment of an organization or foundation’s purposes outweighs its benefit to the public, the purpose(s) are not charitable.
Misrepresentations may:
• result from the intentional conduct of a charity;
• arise through failure to exercise adequate care in producing or delivering information to the public or stakeholders;
• occur prior to or during fundraising;
• occur in a charity’s reporting on its fundraising or financial performance after solicitation;
• result from a statement by the charity, or someone on its behalf, which is inaccurate or deceptive; or
• result from an omission of information that creates a false impression.
This issue may arise even if a solicitation or representation was not illegal or fraudulent, provided there is sufficient harm caused. The harm caused by such misrepresentations includes deception of current or prospective donors and impairment of the fundraising efforts of other charities. The amount of harm associated with a misrepresentation will increase based on its frequency and the number of people to whom it is made.”

To review the CRA Fundraising Guidance see “How do I find the CRA Guidance on Fundraising for Canadian charities?