The charitable sector has been the subject of several
legislative changes in 2011, so charities will want to turn their attention to
new challenges ahead. The following is a brief summary of five of the top
anticipated legal and risk management challenges for charities for 2012.
new fundraising guidance
Canada Revenue Agency
("CRA") Guidance (CPS-028): Fundraising
by Registered Charities
("Guidance") is being revised. While the new
Guidance is not yet available, it is likely to be released early in 2012.
The new Guidance is expected to be a significant improvement,
but will be a longer document at approximately 38 pages compared to the current
version's 31 pages. Given this, it will be important for charities to be
familiar with the entire document, including all appendices, once it becomes
publicly available. Although improved, it is anticipated that the new Guidance
will still be a complex document and will therefore require careful reading.
CRA has advised that the new Guidance will not represent a
new policy position but rather will provide information on current treatment of
fundraising under the Income Tax Act
("ITA") and common law. It will provide general advice only and will be based
on principles established by caselaw that fundraising must be simply a means to
an end, rather than an end in itself. It will apply to all registered charities
and to both receipted and non-receipted fundraising.
Unacceptable fundraising may result in a denial of
charitable registration or, for existing registered charities, sanctions or
even revocation of charitable status. Watch for the release by CRA of the new
Guidance early in the 2012.
Implications of the
2011 Federal Budget concept of "ineligible individuals" for directors, officers
The 2011 Federal
Budget provisions entitled "Strengthening the Charitable Sector" introduce
changes to the regulatory regime affecting registered charities. Of significance
are the provisions rendering certain individuals ineligible to serve on the
board of, or in a senior capacity within, a registered charity.
individual" provisions resulted from of CRA's concerns over charitable status applications
submitted by individuals previously involved with charities that had their
charitable status revoked for non-compliance. The Department of Finance has
introduced the concept of "ineligible individuals" to the ITA. That concept
will enable CRA to withhold or revoke charitable status where "ineligible
individuals" are involved in certain capacities.
an "ineligible individual" is a member of the board of directors, a trustee,
officer or equivalent official, or any individual who otherwise controls or
manages the operation of the charity, then charitable status may be refused or
revoked, or authority to issue charitable receipts may be suspended.
the "ineligible individual" provisions will create another compliance burden.
This screening process may become a disincentive for individuals who would like
to serve on the boards of charities, and may cause difficulties in the future
for charities trying to recruit new directors.
intermediaries inside and outside Canada
To avoid problems when transferring funds or property to
third party intermediaries inside or outside Canada that are not registered
charities, CRA has released two Guidances that need to be carefully considered.
Guidance (CG-004): Using
an Intermediary to Carry out a Charity's Activities within Canada
("Guidance 004") assists charities and applicants for charitable status who are
intending to conduct charitable activities through an intermediary within
Canada. An intermediary is defined by CRA as an individual or non-qualified
donee (e.g. not a registered charity).
Guidance 004 clarifies that CRA's Guidance concerning
operating outside Canada applies equally within Canada as well. In this regard,
CRA earlier released Guidance (CG-002): Canadian
Registered Charities Carrying Out Activities Outside Canada
In essence, both Guidances say the same thing. There are
only two means available under the ITA by which a registered charity can pursue
its charitable purposes: making gifts to a qualified donee (e.g. Canadian
registered charities) or carrying out its own charitable activities.
If the charity is using an intermediary to carry out its own
activities, then the Guidances set out the minimum requirements that CRA
expects to see in place. Essentially, charities cannot simply act as a passive
funding body or conduit on behalf of a non-qualified donee. Instead, charities
must direct and control the use of their own resources.
involving inter-charity transfers
New inter-charity transfer provisions came into effect as a
result of reform to the disbursement quota ("DQ") in the 2010 Federal Budget.
Subsection 149.1(4.1)(d) was expanded to include instances where a charity
receives a gift of property from a non-arm's-length registered charity, and the
recipient charity has expended an amount that is less than the fair market
value of the property on charitable activities by the end of the next fiscal
In essence, this provision establishes a 100% expenditure
requirement involving inter-charity transfers between non-arm's length
Failing to comply with these provisions can lead to the
revocation of charitable status or a penalty for the subsequent taxation year
equal to 110% of the difference between the fair market value of the property
and the amount expended. However, if the donor charity chooses to make the gift
a "designated gift" to the non-arm's length recipient charity, the 100%
expenditure requirement will not apply.
As a result, before a charity makes a transfer of anything
(whether money, property, etc.) to a non-arm's-length registered charity, such
as a transfer between an operating charity and a parallel foundation, it will
be important to ask whether or not it will make the transfer a designated gift
in order to avoid the new 100% expenditure requirement.
Reducing risks from
the discipline and expulsion of members
Often charities and nonprofit organizations will want the
ability to discipline or expel a member. However, they should think through what
is involved and the consequences of improperly disciplining or expelling
members. This issue will generally be a factor for open membership
The legal risks include, but are not limited to, possible
liability for: invasion of privacy, discrimination, lack of due process, lack
of natural justice, and enhanced membership rights under applicable corporate
Practical steps that may be taken to avoid such risks may
include determining the necessity of disciplining members, advising applicants
that granting of membership is in the sole discretion of the board of
directors, ensuring discipline procedures reflect the principles of natural
justice, and ensuring discipline processes are as detailed as possible and in a
written policy of the organization or in its general operating by-laws.
This will be particularly important for charities that
continue under either the Canada
Not-for-profit Corporations Act
, which came into effect on October 17,
2011, or under Ontario's Not-for-Profit
, which will come into effect at the end of 2012. Both Acts
provide for the power to discipline a member or terminate their membership, if
this power and the circumstances and manner in which it will be exercised are
set out in the articles or by-laws of the corporation.
For a more detailed description of the five challenges
described above, see http://www.carters.ca/pub/bulletin/charity/2011/chylb268.htm
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.
Mr. Carter is also editor of www.charitylaw.ca,
www.churchlaw.ca and www.antiterrorismlaw.ca
and a consulting editor of Charities Legislation and Commentary 2009