The “no gifts to non-qualified donees” rule - LawNow Magazine

The “no gifts to non-qualified donees” rule

Not for Profit Law ColumnThe registered charities provisions of the Income Tax Act (ITA) feature a number of obscure terms. That makes registered charities vulnerable to inadvertent non-compliance. It means prudent organizations need to keep a keen eye on regulatory trends and emerging issues. Looming regulatory concerns with making gifts to groups that are not qualified donees are a case in point.

Eligibility for charitable status under the ITA is based on the common law, which uses the Preamble of the Statute of Elizabeth (1601) and the famous classification from Income Tax Commissioners v. Pemsel as its touchstones. In addition, tax authorities have modified – some might argue clarified – what is permissible for Canadian registered charities by introducing certain concepts and language not found in the common law.

Thus, in Section 149.1(6.4) of the ITA we have National Arts Service Organizations, which create a special category of charity with objects and activities supportive of the arts and with certain other characteristics. More broadly, in addition to registered charities, it designates a number of kinds of bodies as “qualified donees” for donation purposes and as a mechanism through which charitable and certain other public benefit work can be carried out.

Specifically, qualified donees include:

  • registered charities and Canadian amateur athletic associations;
  • federal and provincial governments;
  • the United Nations and its agencies;

and, where registered with the Canada Revenue Agency:

  • certain housing corporations;
  • municipalities;
  • bodies performing functions of government (such as aboriginal bands);
  • foreign organizations; and
  • prescribed foreign universities.

The regulatory regime  varies according to what kind of organization or body they are. For donation purposes, however, they are all treated the same. As well, a specific provision of the ITA defines charitable purposes as including “disbursement of funds to a qualified donee”.  So gifting funds to such a group (so long as it is within the objects of the registered charity giving the funds) is permissible under the ITA. Similarly, disbursements made by a charitable organizations to qualified donees as a means of devoting their resources to charitable activities are provided for in the legislation.

All this is important because, a few years back – in conjunction with modification of disbursement quota rules – provisions were added to the registered charity revocation sections of the ITA . These  stated that making a gift to a body other than a qualified donee is grounds for a charity losing its status.

Audits for the years in which the new measures have been in place are percolating through the system. So, this type of conduct is likely to be under increasing scrutiny in the coming years. Indeed, gifting to groups that are not qualified donees has been identified as one of the key non-compliance issues revealed by the Political Activities audits undertaken over the past three years pursuant to the direction included in the 2012 Federal Budget.

As well, the issue has the potential to arise in the context of registered charities undertaking program-related investments. So long as this type of investment is made in a registered charity or other qualified donee, there is no need for concern over whether the terms of the arrangement are at fair market value. In those circumstances, an investment at a discounted rate of return or even one where the instrument went bust and there wasn’t any return could be acceptable as a gift or part gift.

However, investments made in social purpose businesses or in non-profit organizations could, if they underperform or are undertaken with terms that are below what would be considered fair market value, may be seen as effectively being a gift to an entity other than a qualified-donee. Such a transaction, therefore, could be grounds for revocation.

All this is important because, a few years back – in conjunction with modification of disbursement quota rules – provisions were added to the registered charity revocation sections of the ITA .Lastly, the Public Television Association of Quebec case described in my last column may have tightened even further the direction and control obligations that registered charities need to meet if they want (or need) to work through intermediaries. In most instances, such groups would not be considered a qualified donee.  (As an aside, the Public Television Station with which the Public Television Association of Quebec worked likely would have been a qualified donee when it was affiliated with the University of Vermont earlier in its history. Qualified donees include “a university outside Canada that is prescribed to be a university the student body of which ordinarily includes students from Canada”. When the U.S. station became independent from the university, however, it was no longer eligible for the status.)

Ignoring the irony of that circumstance, it remains true that when registered charities fail to meet the direction and control obligations currently required by the courts (and the Canada Revenue Agency), they can be characterized as having made a gift to the intermediary that is not a qualified donee.

There is certainly merit in the government seeking to prevent resources that receive preferential tax treatment from being used for work that has not been demonstrated to further charitable or other public benefit purposes. That said, the current provisions of the ITA intended to check funds flowing outside the system are potentially tremendously powerful.

The practical reality is that, to be efficient and effective, it is typically necessary for charities to engage or collaborate with a diverse array of partners and associates. As well, the terms in the ITA and their relationship to the common law are frequently less than self-evident. In that context, you are likely to see some inadvertent leakage from the tax system. As well, the occasional player may set out to deliberately game the system. It is to be hoped that the CRA and courts recognize these possibilities in the enforcement of these far-reaching provisions. That hope aside, registered charities need to become better attuned to these requirements – obscure though they may be – so regulatory intervention will not be necessary.


Peter Broder
Peter Broder is Policy Analyst and General Counsel at The Muttart Foundation in Edmonton, Alberta. The views expressed do not necessarily reflect those of the Foundation.

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