Exploring new ways for charities to work in partnerships

Registered charities in Canada find themselves increasingly drawn to find ways of operating through partnerships and networks. There are two legal impediments they face in doing their work. One is the requirement under the Income Tax Act that charities carry on their own activities themselves, known as the “direction and control” requirement. The other impediment is the prohibition against registered charities making gifts to any entity that is not a qualified donee (qualified donees are registered charities and other various tax-exempt entities specified in the act).

The  Canada Revenue Agency’s (CRA) view is that charities are allowed to use their resources in only one of two ways: either by making gifts to other qualified donees (for most charities, this means to other registered charities) or by applying their resources to their “own activities,” which the charities must carry on themselves.

It is in this context that the Senate Special Committee on the Charitable Sector, established in January 2018, held hearings into the effect of laws and policies on the charitable sector. It issued its report, Catalyst for Change: A Roadmap to a Stronger Charitable Sector, in June 2019.

The committee examined both of these impediments, and found that they result in extra complexity and cost for charities, causing them to shy away from entering into partnerships. Charities are forced to enter into complex agreements with partners in which the charities retain “direction and control,” imposing onerous and clumsy decision‑making and reporting requirements on the partner organization, all in the effort to demonstrate that the charity remains in control of every last nickel that is spent.

The fact is “direction and control” is often illusory — beyond the capacity of many charities to ensure — which is often why they simply give up and avoid partnerships altogether. Partnerships are critical, though, for charities involved in international development work. One witness that the committee quoted in the report said that the rules undermine Canada’s stated policy for international development “[…] to follow partnership principles of local ownership, participation and inclusive decision‑making.”

The prohibition against registered charities making gifts to a non‑qualified donee limits the kinds of relationships that charities may have with entities that are not, themselves, also registered charities. Running afoul of the prohibition can result in a charity losing its charitable registration. To avoid this fate, charities either avoid the partnerships altogether, or, if they want to transfer funds to partners in support of work in common, they enter into complicated agreements.

Committee recommendations

The committee landed on a couple of recommendations to address these obstacles. First, it recommended that the federal government direct CRA to revise its guidance and administrative policy to shift focus away from “direction and control” to “expenditure responsibility.” In other words, instead of charities having to prove that they retain “control” over how (and on what) their funds are spent, they would be responsible for ensuring that the funds are spent to further their charitable purposes. The expenditure responsibility approach will still require monitoring and due diligence on the part of charities, in order to be accountable for how charitable funds are spent. It is hoped, though, that organizations partnering with charities will have greater latitude in determining how the funds that the charities provide are spent. As long as the funds are spent on activities that further the charities’ charitable purposes and the charities have sufficient evidence to give an accounting of the expenditures, then that should be sufficient. As well, as one witness was quoted in the report, it would relieve charities of having to “prove a fiction,” namely, that the activities being reported are their own.

Secondly, the committee recommended the establishment of a pilot project “[…] to allow registered charities to make gifts to non-qualified donees in certain limited circumstances, namely where the gifted funds are subject to careful monitoring and used for exclusively charitable purposes, in order to facilitate cooperation between registered charities and non-charities.” Gifts to non-qualified donees allowed under this recommendation would be limited in scope: they’d have to be used for “exclusively” charitable purposes — in other words, the funds gifted to the non‑qualified donee could not be used for a mix of charitable and non-charitable purposes. And, such gifts would have to be made for the purpose of facilitating cooperation between registered charities and non-charities.

These two recommendations are important. They aim to loosen up the methods that registered charities are permitted to employ, to enable charities to enter into partnerships intended to respond creatively, together, to new and emerging challenges.

In its 1999 decision in Vancouver Society of Immigrant and Visible Minority Women v. M.N.R., the Supreme Court of Canada affirmed the long-standing principle of the common law (judge‑made law) that recognizes the importance of modernizing the law of charity in light of changing social needs. That principle traditionally referred to recognizing new charitable purposes in light of changing needs; it applies equally to ensuring that charities are allowed to innovate in finding ways to work in partnerships — to meet the challenges facing the world of today and of tomorrow.

The government should respond sympathetically, and quickly, to these two committee recommendations.

Edward Hyland is partner at Iler Campbell LLP, Toronto, Ontario. Iler Campbell LLP is a law firm serving co-ops, not-for-profits, charities and socially-minded small business and individuals in Ontario.