CRA’s Draft Guidance on granting to non-qualified donees and the qualifying disbursement rules

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CRA’s Draft Guidance on granting to non-qualified donees and the qualifying disbursement rules

CRA’s Draft Guidance on granting to non-qualified donees and the qualifying disbursement rules

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April 5, 2023

As it is now widely known in the Canadian charitable sector, on June 23, 2022, the Income Tax Act (Canada) (the ITA) was amended, pursuant to the Budget Implementation Act 2022, No. 1 (the BIA (2022) No. 1), to provide an alternative option for Canadian registered charities to work with non-registered charities and organizations abroad. Specifically, the amendments to the ITA introduced new “qualifying disbursement” rules that permit registered charities to make certain disbursements to organizations that are not qualified donees.

In addition, the Income Tax Regulations (the Regulations) have also been amended to require additional reporting obligations where a registered charity’s qualifying disbursements to a non-qualified donee exceeds CA$5,000 in a taxation year.

Following amendments to the ITA, on November 30, 2022, the CRA released its Draft Guidance on registered charities making grants to non-qualified donees (Guidance CG-032), which was open to public comment until January 31, 2023 and continues in draft form.

Particularly until CRA releases its final guidance, Canadian charities wishing to explore options to leverage the new rules continue to monitor and navigate how to compliantly grant to non-qualified donees.

Key Takeaways

While the CRA Guidance “Registered charities making grants to non-qualified donees” (Draft Guidance) is still in draft form, charities may now make qualifying disbursements.
The Draft Guidance is expected to be finalized by late summer / early fall 2023, at earliest.
Charities interested in using the new qualifying disbursement rules should proceed with caution, particularly until CRA releases its final guidance and provides further clarity regarding how it expects charities to compliantly make such disbursements.
The T3010, Registered Charity Information Return and its accompanying guide, T4033, are currently being updated, with the expectation that they will be made available in the spring of 2023. In the interim, charities are not required to report their granting activities.

The qualifying disbursement rules before BIA 2022 No. 1 (The Old Regime)

Prior to the amendments to the ITA, a Canadian registered charity could use its resources in the following two ways:

Carrying on its own charitable activities through:

Its staff and volunteers; and
An intermediary (i.e. a non-qualified donee), subject to a charity exercising direction and control.

Gifts made to qualified donees.

As a result, any resources that a registered charity provided to a non-qualified donee had to be used to support the charity’s “own activities”^{^[1]} and notably, is only permitted by the Canada Revenue Agency (CRA) if the registered charity, making the resource transfer, had “direction and control” over the non-qualified donee’s use of the charity’s resources.^{^[2]} Direction and control is defined by the CRA to mean that the registered charity must make ongoing decisions on significant issues related to the activity and documents all steps in its records regarding how it exercises its direction and control.^{^[3]} This limitation was critiqued as being paternalistic and curtailing Canadian charities’ ability to constructively work with domestic and foreign organizations.

The qualifying disbursement rules after BIA 2022 No. 1 (The New Regime)

As described in the image above, there are now two routes to operating a registered Canadian charity:

Route 1: Carrying on “own activities”

The amendments to the ITA did not remove the option for charities to proceed under the “own activities” route. As a result, if the new qualifying disbursement rules do not seem appropriate, a charity may still seek to provide resources to a non-qualified donee, under route 1, if it conforms to the direction and control requirements.

Route 2: Making a qualified disbursement

Changes to the ITA now permit registered charities to make disbursements to both qualified donees and “grantee organizations,” which are effectively non-qualified donees, through the new “qualifying disbursement” rules.

Draft CRA Guidance: Registered charities making grants to non-qualified donees

As previously mentioned, following amendments to the ITA, on November 30, 2022, the CRA released its Draft Guidance (Guidance CG-032). While still in draft form, CRA has advised that the finalized Guidance will aim to help charities understand how they may apply the new qualifying disbursement rules and compliantly make grants to non-qualified donees.

Accountability requirements

As described in the Draft Guidance, a registered charity is only permitted to make a grant to a grantee or non-qualified donee if the charity ensures and demonstrates in its books and records that it meets particular accountability requirements, outlined below.

A “qualifying disbursement” of a registered charity is a disbursement made as gift or by making resources available to:	A “qualified donee”	Limitation: Gifts to qualified donees cannot be qualifying disbursements where the disbursement is greater than 50% of the charitable organization’s income. (This does not apply to public foundations.)
	[New Route] A “grantee organization” (i.e. a non-qualified doneee) if all criteria are met (collectively, accountability requirements)	The disbursement furthers a stated charitable purpose of the charity; The grantee organization exclusively applies the disbursement to charitable activities that further a stated charitable purpose of the charity; and The charity maintains documentation sufficient to demonstrate both (A) the purpose for which the disbursement is made and (B) that the grantee organization exclusively applies the disbursement to charitable activities that further a stated charitable purpose of the charity.

The Draft Guidance notes that the CRA will adopt a reasonable and flexible approach in determining whether a charity has met its accountability requirements.^{^[4]}

Assessing risk

A charity is also advised to assess the level of risk at the outset of making a grant and throughout its life cycle. Specifically, a charity should weigh the significance of each risk factor in determining the grant’s overall risk level: low, medium or high. If there is a significant change in any of the grant conditions, it is important that a charity examine whether a grant’s overall risk level has changed and whether it is appropriate to continue working with the grantee to adjust the grant’s terms.^{^[5]}

Accountability tools

To assist a charity in both 1) strengthening the likelihood of meeting its accountability requirements, and 2) minimizing its risk, the Draft Guidance focuses on accountability “tools” that CRA recommends a charity to use. Examples of the suggested accountability tools include, for instance, a due diligence review of the grantee, a description of the grant activity and monitoring and reporting.^{^[6]}

For example, if a grant has an overall high risk level, the charity may consider employing an extensive due diligence review, greater structure and formality to the grant agreement, and increased monitoring and reporting. Conversely, lower risk grant scenarios will likely not require such formalized and detailed information. A charity may choose to use other tools than what the CRA recommends, however, they must explain their rationale for their use in its books and records. Based on the Draft Guidance, the extent to which the CRA expects a charity to explain their rational currently remains unclear.

Nevertheless, while there may be varying ways for a charity to demonstrate accountability, it is ultimately the charity’s responsibility to ensure that it meets its legislative requirements.^{^[7]}

Maintaining books and records, and reporting requirements

With the implementation of the new qualifying disbursement rules, the T3010, Registered Charity Information Return and its accompanying guide ,T4033, are currently being updated, with the expectation that they will be made available in the spring of 2023. In the interim, charities are not required to report their granting activities.^{^[8]}

However, it is necessary to keep adequate books and records to support all granting activities.^{^[9]} Books and records must contain enough information to allow the CRA to assess whether a charity is operating in accordance with the ITA. As outlined in the Draft Guidance, a charity’s books and records must allow the CRA to check whether:^{^[10]}

The charity’s grants meet the accountability requirements;
The grantee’s use of resources can be verified; and
The grantee continues to use the grant’s resources on the purposes and activities set out in the grant’s terms.

Timeline for release of the finalized CRA Guidance

The Draft Guidance was open for public comments until January 31, 2023, and is expected to be finalized later this year.

Generally, the total estimated time period for the CRA to develop guidance for charities to use is between 10-20 months from when the new legislation came into force. The table below outlines the general procedure regarding the process that the CRA (Charities Directorate) will undertake to develop and release a new guidance for the charitable sector and when the final guidance can be expected to be released to the public.

Process Step	Description	Timing
Development process	Develop a Draft Guidance following the release of new legislation by the Department of Finance	2-4 months
Consultation process	Consult with the sector through various CRA committees Update the Draft Guidance based on received comments Post Draft Guidance for public review, consultation and feedback	2-4 months
Final product	Review public feedback and revise Draft Guidance	2-3 months
Approval process	Obtain necessary approvals from delegated authorities	2-6 months
Release process	Develop media products Prepare questions and answers	2-3 months
Total estimated time period		10-20 months

Recommended next steps and moving forward

Overall, the Draft Guidance appears to be a positive step towards greater flexibility for Canadian registered charities and their ability to work with non-qualified donees through a risk-based approach, using various accountability tools. While the law is in now in place, it is important to remember that the Guidance is still only in its draft form. Until the release of the final Guidance, charities can turn to the Draft Guidance as a preview of what the CRA may expect them to do in regards to making a qualifying disbursement to a non-qualified donee. However, charities interested in using the new qualifying disbursement rules should proceed with prudence until the CRA addresses public comments and provides further clarity on how Canadian charities may compliantly grant to non-qualified donees.

For more information on this topic, please contact the authors Pamela Shin and Tony Manconi. Special thanks to Hannah Bourgeois and Sarah Lam who assisted in preparing this insight.

[1] Canada Revenue Agency, “Using an intermediary to carry on a charity’s activities within Canada” (June 20, 2011, Revised November 27, 2020), at s. 2.2.2, online: Government of Canada, <https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/policies-guidance/using-intermediary-carry-a-charitys-activities-within-canada.html#toc16> [“CRA, ‘Using an Intermediary to carry on a charity’s activities within Canada’”].

[2] Ibid.

[3]CRA, “Using an Intermediary to carry on a charity’s activities within Canada,” supra note 1 at s. 4.

[4] Canada Revenue Agency, “Registered charities making grants to non-qualified donees (draft)” (November 30, 2022), at s. 5.0, online: Government of Canada, <https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/policies-guidance/charities-making-grants-non-qualified-donees.html> [“CRA, ‘Registered charities making grants to non-qualified donees (draft)’”].

[5] CRA, “Registered charities making grants to non-qualified donees (draft),” supra note 4 at s. 5.1.

[6]CRA, “Registered charities making grants to non-qualified donees (draft),” supra note 4 at 5.0.

[7] Ibid.

[8] Canada Revenue Agency, “What’s new: January 2023, Reporting grants to non-qualified donees” (January 26, 2023), online: Government of Canada, <https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/whats-new.html> [“CRA, ‘What’s new: January 2023, Reporting grants to non-qualified donees’”].

[9]Ibid.

[10]CRA, “Registered charities making grants to non-qualified donees (draft),” supra note 4 at s. 6.0.