Fundraising is a major compliance and public relations issue
for registered charities that has unfortunately received a disproportionate
amount of attention from the media. As such, the charitable sector was
anxiously awaiting the revised
("CRA") in April
2012. The New Guidance is a significant improvement over previous versions, but
still remains a challenging document to work with.
Six months after its release, some of the practical
considerations of the New Guidance are becoming clearer. This article
discusses some of those considerations,
and specifically the importance of ensuring a proper allocation of financial
expenditures with regards to tracking fundraising expenses, as well as the
importance of understanding the nuances in calculating the fundraising ratio.
For an overview of the New Guidance in its entirety, readers
are directed to Charity Law Bulletin No. 283, CRA Releases New Fundraising Guidance
Proper allocation of
For CRA's purposes, financial expenditures by a charity fall
into one or more of four categories: charitable, political,
management/administration, and fundraising. This categorization affects how a
charity records its fundraising expenditures on its annual T3010 on line 5020,
and is one of the considerations used to determine whether the charity will be
within acceptable limits when CRA evaluates its fundraising activities.
Registered charities must report fundraising expenditures
(all costs related to any fundraising activity) on their T3010. If a charity's
fundraising activities include content that does not relate to fundraising, the
charity may be able to allocate these costs to one of the other categories of
To determine if an activity is exclusively (or almost exclusively)
undertaken for the purpose of raising funds, the fundraising content must be
separated from the other content and then apportioned to the appropriate
categories in accordance with CRA requirements. CRA permits charities to
allocate their expenses as 1) 100 percent fundraising; 2) zero percent
fundraising; or 3) a pro-rated allocation as described below. The charity
always bears the onus of explaining and justifying all of its allocations.
100 percent to fundraising
percent or more of the expenses of a fundraising activity are devoted to
fundraising, a charity must allocate all of the costs to fundraising. The
remaining ten percent of the expenses will be considered ancillary and
incidental to fundraising.
that CRA will consider to be 100 percent fundraising expenditures include
activities involving participant selection or audience targeting based on their
ability to give, gaming, awareness building, infomercials and telemarketing,
branding and marketing, pledge raising, sports competitions, golf tournaments
and gala dinners.
Zero percent to fundraising
If a charity can demonstrate that it would have undertaken
the activity without a fundraising component, CRA permits it to allocate zero
percent to fundraising and instead allocate 100 percent of the activity's costs
to the other applicable expenditure categories, i.e., charitable, management/
administration or political.
To demonstrate that it would have conducted the activity
anyway, the charity must be able to satisfy the "substantially all" test. That
is, the charity must be capable of demonstrating that substantially all (i.e.,
90 percent) of the activity advances an objective other than fundraising.
Pro-rated cost allocation
In some cases, a charity may be able to pro-rate the
allocation of activity costs between fundraising and the other possible
expenditures. A charity that attempts to establish a pro-rated allocation will
bear the onus of producing the necessary accounting records to support the
allocation. The New Guidance explains in considerable detail the
characteristics of the different types of charitable, fundraising,
management/administrative, or political content.
The key to effectively allocating a charity's expenses is to
start the process at the outset of the year, allocating the charity's expenses
to the appropriate expenditure category at the time the funds are spent.
Tracking these allocations throughout the year as opposed to waiting until the
T3010 has to be filed six months after the financial year end of the charity
requires that the charity maintain detailed books and records.
Fundraising ratio considerations
The fundraising ratio is the ratio of total fundraising
costs (as determined in accordance with the allocation process described above)
to total fundraising revenue, calculated on an annual basis. A charity's
fundraising ratio is meant to serve as a general self-assessment tool and is
therefore not determinative on its own of whether a charity is complying with
CRA's rules on fundraising.
However, CRA's new Charity Quick View
portrays the fundraising expense line (5020) from a charity's T3010, and
therefore is becoming a popular resource tool for donors and the media. It is
important to note that the T3010, as well as the CRA's Charity Quick View,
does not actually show the calculation of the
fundraising ratio but instead only shows the individual lines of fundraising
revenue and expenses.
Since donors generally prefer their donations to be used for
charitable activities as opposed to fundraising, charities must be aware of the
narrative that the amount of fundraising expenses reported on their T3010 will
communicate to the public and its impact upon the calculation of the
fundraising ratio, whether that calculation is done by CRA, members of the
public or the media.
For these reasons, it is important that charities ensure
that they track the component line items of their fundraising ratio correctly
and do so as favourably as possible within what is permitted by the New
As indicated above, a charity's total fundraising
expenditures (the numerator in the fundraising ratio) is the total fundraising
costs that the charity expends in a year as determined in accordance with the
New Guidance, and is recorded on line 5020 of the T3010. However, determining a
charity's fundraising revenue (the denominator of the fundraising ratio) can
often be misunderstood, and omitting all fundraising revenues from the
calculation of the fundraising ratio may portray the charity as spending a
greater portion of its funds on fundraising than is actually the case.
In this regard, the total fundraising revenue, as the
denominator in the fundraising ratio, includes amounts reported on lines 4500
and 4630 of the T3010.
Line 4500 tracks all
tax receipted donations, whether they originated from fundraising or not, such
as an unsolicited gift from an estate. This means that charities can include on
line 4500 receipted donations that did not relate back to any fundraising
Line 4630 includes the amounts for which the charity did not
issue a tax receipt, but were generated as a result of fundraising activities.
Although some charities may not think to include sponsorship income on line
4630, charities can include sponsorship contributions on line 4630, which can
often make a significant difference for larger charities that have sponsorship
income. As well, income from cause-related campaigns can also be reported on
line 4630. In addition, it is important to include gross non-receipted
fundraising revenue on line 4630 instead of only net fundraising revenue.
The end result is that including receipted donations that do
not necessarily result from fundraising activities on line 4500 and sponsorship
and cause-related campaign funds on line 4630, as well as gross rather than net
non-receiptable fundraising income on line 4630, may increase a charity's
global fundraising revenue and thereby decrease its fundraising ratio for CRA
A charity that discovers it has omitted certain allowable
fundraising revenues in past years may want to consider rectifying its previous
year's T3010 by filing a T1240 to show the correct line items on line 4630.
allocating financial expenditures and calculating the fundraising ratio,
charities will want to keep in mind both their compliance obligations with CRA
and the public perception of their fundraising expenditures. In this regard, it
is important that charities act within the parameters of the New Guidance in
tracking fundraising expenditures and revenue but do so in a way that reflects
as favourably as possible on the charity.
Guidance provides a number of opportunities that charities can utilize when
tracking their fundraising revenue to present their fundraising ratio in the
best possible light. However, as with many things involving charities, the
devil is in the details. Therefore a careful study of the New Guidance is
Terrance S. Carter is the managing partner with Carters
Professional Corporation and counsel to Fasken Martineau DuMoulin LLP on
charitable matters. He is a member of Canada
Revenue Agency's Technical Issues Group, past member of CRA's Charities
Advisory Committee, Chair of the National Charity and Not-for-Profit Section of
the Canadian Bar Association,
and has been recognized as a leading expert in Canada by Lexpert and Best
Lawyers in Canada.