Recently a bill was proposed in the Senate –BILL S-222 An Act to amend the Income Tax Act (use of resources), which will eliminate the “own activities” requirement of charities and change the rules for Canadian charities working with non-charities, both in Canada and abroad.   The bill was introduced on February 8, 2020.   In this brief note, I will highlight some concerns with the bill. We have already discussed yesterday our concerns with the preamble.


The main provisions


The 3 most pertinent parts of the bill with italics and we will briefly comment on them.


SUMMARY This enactment amends the Income Tax Act to permit charities to provide their resources to a person who is not a qualified donee, provided that they take reasonable steps to ensure those resources are used exclusively for a charitable purpose.


charitable activities includes

(a) public policy dialogue and development activities carried on in furtherance of a charitable purpose; and

(b) making resources — including grants, gifts or transfers — available by transactions, arrangements or collaborations of any kind whatsoever in furtherance of a charitable purpose to a person that is not a qualified donee if those resources are made available by a charity that takes reasonable steps to ensure that those resources are used exclusively for a charitable purpose in accordance with subsection (27). (activités de bienfaisance)


(15) Section 149.1 of the Act is amended by adding the following after subsection (26):

(27) A charity is considered to have taken reasonable steps to ensure its resources are used exclusively for a charitable purpose if

(a) before providing resources to a person who is not a qualified donee it collects the information necessary to satisfy a reasonable person that the resources will be used for a charitable purpose by the person who is not a qualified donee, including information on the identity, experience and activities of the person who is not a qualified donee; and

(b) when providing resources to a person who is not a qualified donee, it establishes measures, imposes restrictions or conditions, or otherwise takes actions necessary to satisfy a reasonable person that the resources are being used exclusively for a charitable purpose by the person who is not a qualified donee



Some positives


Before I express some concerns with the proposed changes, I do want to highlight some positives.  First, this bill may result in a lot of legal work for lawyers.   Will lawyers now have to do lots of legal opinions on whether a particular arrangement is appropriate for a “reasonable person”?  After all the stakes are high – if your arrangement is not at the appropriate level you will lose your charitable status!


Anytime one raises an issue relating to compliance it forces people to actually think about what the rules are and how to work within those rules and whether changes are needed.  CRA has two guidances on dealing with intermediaries in Canada and another for foreign activities. I often run across people who have lots of opinions as to what the rules are but have never read these guidances or discussed them with CRA.  Or they read them years ago, say the guidance say x,y,z and you look carefully at the guidance and it does not say that!   These guidances were developed as a result of 5 court cases in Canada that took almost 20 years and lots of consultation with the sector.  We will now move to another 20-year odyssey of working out what these new rules mean.





Because these proposed changes are so ambiguous it could in theory actually result in a much higher standard for Canadian charities operating outside of Canada.  I have argued that we should have higher standards – but my worry is that these standards could be impossibly high.  Or perhaps they will be much lower – I guess it depends on what a judge thinks the “reasonable person” would do.  I am a fan of the rule of law and transparency about the legal requirements for charities.   I am not looking forward to a system where there can be wildly different opinions on basic legal compliance and every arrangement requires the involvement of law firms.  With this new confusing and ambiguous standard expect multiple cases to go to court to understand more about what the court considers appropriate.



Red Herring


There are many pressing issues affecting the charity sector and this is a giant red herring.

Canadian foundations are sitting on perhaps $80 billion in assets – some of the biggest are not even distributing the mandatory 3.5%.   Let us not discuss that.

Funding by foundations of many groups who work with those who have the greatest need is sometimes abysmal.  Lots of money for some areas and almost nothing for others. As just one example see the very well written report Unfunded: Black Communities Overlooked by Canadian Philanthropy” – shows minuscule funding of Black-led organizations and groups that work primarily with Black communities.  Let us not talk about that.

Although some charities have done quite well in COVID times, and others have maintained themselves, there are many charities very hard hit by COVID and there has been almost no extra money from the Federal government to assist. Let us not discuss that.  When you look at how much the federal government will give to some other industries and the little that the charity sector has received it is appalling.

Many foundations have wildly unequal relationships when dealing with qualified donees (let alone non-qualified donees), why would anyone think that tweaking the Income Tax Act is going to magically ensure that these groups believe in equality, capacity building, and collaborative decision making.   As we have discussed within the current rules there are lots of things that can be done to work cooperatively with other groups in equal  partnerships etc.


While the vast majority of charities, even if they are not successful, are trying to do the right thing.  There are a small number of charities, or people who work for charities, who do some pretty despicable things and although the media has been doing a better job of covering this – many get away scot free.  Charities don’t even have to report to CRA if they have had a major embezzlement or the religious leaders has raped a congregant. In some countries like the UK you must report such matter to a regulatory authority or you need on your annual return to identify that you had a “serious incident” that has not been reported.  We don’t have that in Canada.


I can understand why some people don’t want to discuss these issues and would prefer to discuss almost anything else.


Talk, not action


The current Federal government has implemented some very large programs like the CEWS to ameliorate the impact of COVID and many charities have benefitted from those programs.  However, the Federal government has done little beyond that to actually fund the response of many charities outside of a small number of prominent organizations receiving some funds.  I am worried that the Federal Liberals will see this type of push for legislative change as being in lieu of real funding for organizations and meaningful change which might be seen to adversely affect their friends.   The Federal government is providing about 1/3 of the funds it is supposed to provide for official development assistance to meet the .7 of GNI commitment yet it gets a lot of positive social media publicity for every little announcement.   If the Federal government really wanted large amounts of funds to go to local organizations in the Global South they can insist in their funding that this be done.   Rarely is that the case and the vast majority of funds leaving Canada, from the Federal government and otherwise, as is the case in many Western countries, goes to governments, multilateral institutions, well-financed affiliated charities, etc.   You can read this article about the US which does not have direction and control and you see a similar pattern.  Unfortunately, most funders are not that interested in funding small local groups that are doing great work, especially when that group does not have an English social media department so that the extreme generosity of the funder can be appropriately recognized.


Some people have made a lot of money during COVID, others about the same and some are in free fall.  The same is the case for the charity sector – clearly, this proposal is not coming from, or going to help, those in real need.


Bad timing


There has been a drop in public confidence in the charity sector, in part attributable to coverage of a number of charities and their foreign activities.   At the moment, it seems like a bad time to bring in new rules for foreign activities that are ambiguous as to effect and not clearly increasing accountability and transparency of charities operating outside of Canada.  There may be more allegations coming down the line about inappropriate foreign activities and unfortunately, most foreign activity groups are in the same boat if public confidence is reduced, it can affect the whole foreign activity sector.  As it is, charities that conduct foreign activities have the lowest level of trust in the public.

I have had a number of philanthropists contact me about this confusing legislation.  Some did not like the rhetoric being used to push this change but others were worried that this was another indication that certain charities are not interested in transparency and accountability.  Some were concerned that when they give a large grant to an organization they want it deal with at a high standard and not a “reasonable person” standard.  That brings us to the next point.


Fiduciary Duties


Directors are held under corporate and trust law to a fiduciary standard, and it is not clear that amending the ITA lowers that standard.  It is also the issue of Federal vs. provincial powers that should be kept in mind with the constitution provided a role for each.  What is clear is that the CRA views its role as to implement the ITA and if the ITA says that it is acceptable to spend funds at a standard that is far below fiduciary duties then it may not be legal, but CRA will probably not be the ones enforcing it.  Provincial governments could enforce but we have seen they have little interest in the regulation of charities. Even Ontario, which is the most involved as a province in charity regulation, only has a small department that has very minimal resources.  Although some lawyers have advocated for provincial regulators to become more involved do we really want 14 charity regulators in Canada!   I guess some people do.  These changes may make the lives of many charities much more difficult but lots of work for law firms so I should not be complaining.


Next we will discuss the “reasonable person”.


Here are all 4 notes:

Will changing structured arrangements into a reasonable person test help the charity sector? – Part 1 – The preamble

Will changing structured arrangements into a reasonable person test help the charity sector? – Part 2 – The Main Provisions and various general concerns

Will changing structured arrangements into a reasonable person test help the charity sector? – Part 3 – The Reasonable Person – lots of questions

 Will changing structured arrangements into a reasonable person test help the charity sector? – Part 4 – Charitable purposes and Conclusion