The Canada revenue agency’s (CRA) new guidelines on how it determines whether an organization will be considered to be a properly registered charity continues the CRA’s recent trend of greater oversight of the sector.
For charities, including family foundations set up by high net-worth individuals, that means increased efforts to ensure their activities comply with the CRA’s guidelines.
“Where there is a desire to have [a family] foundation operate some of its own charitable programs directly,” says Camille Jordaan, tax associate with law firm Borden Ladner Gervais LLP in Toronto, “clients now may have to incur additional time and expense to ensure that their foundation’s charitable purposes are drafted in line with the guidance. Clients also may face increased costs and delays when they want their foundation to take on new charitable mandates or expand a particular program or activity.”
Tax experts suggest the CRA’s guidance entitled How to Draft Purposes for Registered Charities, released in late July, is notable not so much for any new direction it provides, but because it updates and details formally the CRA’s current regulatory process pertaining to charities.
“[The guidance] confirms what the CRA has been doing in practice for years,” says Andrew Valentine, an associate in the charities and not-for-profit group of law firm Miller Thomson LLP in Toronto.
The CRA’s recent released guidance provides the agency’s recommended approach to drafting purposes – also known as “objects” – for organizations intending to become registered charities and for charities that are considering altering their existing purpose. “Purpose” is CRA-speak for the objective that the charity seeks to achieve. Relieving poverty, advancing education, advancing religion and furthering health are the four broad categories of charitable purposes.
The CRA guidance further states that a charity must define clearly both the scope of the activities through which the charity will seek to provide its purpose and the segment of the public that is the intended beneficiary of the charity’s activities.
More detailed
The new CRA guidance requires charities to be much more detailed in their approach to defining their purposes and activities.
“[The guidance] requires more specificity up front [regarding the charity’s stated purpose],” Valentine says, “and it gives charities less flexibility in terms of how precisely it carries out its charitable purposes.”
In years past, the CRA had been more liberal in its policies toward charities’ purposes and activities. “Previous policy,” Valentine says, “allowed charities to have fairly broad statements of purpose.”
Over the past 10 years, the CRA has increased its oversight of the charitable sector, particularly regarding certain donation receipt-related tax strategies in which the tax receipt offered exceeds the amount of the donation.
“The CRA’s increasing scrutiny,” Jordaan says, “of both registered charities and organizations seeking to become registered as charities can be seen as a reaction to various abuses involving charities that have come to light in recent years, including tax-shelter and donation-receipt scams.”
In certain cases, the CRA has moved to deregister some charities altogether. The agency also has tightened its guidelines on what is considered to be a registered charity.
Charitable purpose
Organizations may be recognized as registered charities -and, therefore, be tax-exempt and able to issue tax receipts to donors – if they meet the criteria under the Income Tax Act (ITA). Primarily, the organization must have an exclusively charitable purpose and its activities must be focused exclusively on pursuing that purpose.
However, the ITA does not define what a charitable purpose or activity is. Therefore, the courts must look to case law to determine what qualifies as a charitable purpose or activity. The CRA sets the policy for administering charities, but the agency’s guidances do not have the force of law.
The CRA may be overreaching its jurisdiction with its new guidance on charitable purposes, according to Valentine’s newsletter regarding the guidance: “It is possible that [the] CRA’s interpretation of the legal requirements for a statement of purpose may be challenged in court. In our view, the CRA’s approach is much more restrictive than the case law requires.”
However, in practical terms, the CRA’s guidance is likely to have significant effect on how charities decide to constitute themselves and operate in the future, says Ted Hyland, a lawyer with Iler Campbell LLP in Toronto: “Charities tend to comply rather than take the CRA to court if they don’t agree with the CRA’s interpretation of the law and application of policies. Most charities don’t have the resources to take up that fight.”
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