(Disponible uniquement en anglais)
Via email: minister-ministre@fin.gc.ca
The Honourable François-Philippe Champagne, P.C M.P.
Minister of Finance and National Revenue
555 Mackenzie Ave., 7th Flr.
Ottawa, ON K1A 0L5
Dear Minister Champagne:
Re: Anti Directed Giving Rule
On behalf of the Canadian Bar Association’s Charities and Not for Profit Law Section (CBA Section), we are writing to request action be taken to remedy problems created by amendments to paragraph 168 (1)(f) of the Income Tax Act ((ITA), that came into force June 23, 2022 (Anti-Directed Giving Rule). We provided earlier feedback in 20231 on the issues created by the Anti-Directed Giving Rule to the Ministry of Finance (Ministry) and the Canada Revenue Agency (CRA). Both the Ministry and CRA are aware of the issues. CRA has asked the CBA Section to make recommendations to the Department of Finance Canada to address the issues created by the amendments to par. 168(1)(f) of the ITA.
The CBA is a national association representing over 40,000 jurists, including lawyers, notaries, law teachers and students across Canada. We promote the rule of law, access to justice, effective law reform and provide expertise on how the law touches the lives of Canadians every day. The members of the Charities and Not for Profit Law Section practice in all areas of charities and not-for-profit law and in every size of practice
The CBA Section is requesting that the amendment to par. 168(1)(f) of the ITA either be deleted or amended to address the problems.
The reasons for this request are as follows:
- Registered Charities historically collaborate on projects and funding for smaller grass roots organizations and organizations that provide public benefit but may not be qualified donees under the ITA. The language of the Anti-Directed Giving Rule makes these efforts cumbersome and unrealistic, which is not consistent with the intended objective of the qualifying disbursement legislation that was introduced at the same time as this rule. The Anti-Directed Giving Rule makes it very challenging for registered charities to accept gifts or grants that are intended to support specific projects or programs where it is publicly known that the charity works with non-qualified donees to carry out the projects or programs. For example, we’ve observed a number of instances where charities receive funding, including donations or grants from other charities, where the direction on the donation or grant is that the funds are to be used with or for a non-qualified donee that is involved in the charitable activity with the charity (e.g. “This grant is for [name of non-profit organization], in support of the [charitable program].”). The amendment to par. 168(1)(f) exposes these charities to risk for accepting funds, even when they have properly structured their funding relationship with the non-qualified donee so that the funding is being provided as a qualifying disbursement exclusively to support a bona fide charitable activity.
- The qualifying disbursement regime was introduced by Parliament to enable registered charities to provide funding to organizations that are not registered as charities or qualified donees themselves, but that carry on activities that are charitable at law. This enhancement was long sought by the charitable sector because the prior regime made it very challenging for registered charities to do their work, including work being carried out internationally and/or to support Indigenous organizations in Canada that are not qualified donees. The technical notes that were tabled with the amendments to paragraph 168(1)(f) stated:
- To prevent organizations from acting as conduits in the making of a directed gift, paragraph (f) provides that the registration of a registered Canadian amateur athletic association or registered journalism organization may be revoked if it accepts a gift which was expressly or implicitly conditional on making a gift to another person, club, society, association or organization. Paragraph (f) is amended to extend the application of paragraph (f) to registered charities. Paragraph (f) is also amended to exempt gifts accepted on condition of making a gift to a qualified donee but not gifts that are accepted on condition of making disbursements to grantee organizations (i.e. entities or natural persons other than qualified donees).
The problem with the provision as drafted is that it clearly takes away the enabling benefit of the new qualifying disbursement rules that were added in the same amending bill as the changes to par. 168(1)(f). If the intent of the Department of Finance was to address registered charities acting as conduits, a section could be drafted to clearly penalize or propose revocation of registered charities that fund organizations that do not pursue activities that further the charitable purposes of the funder. This kind of provision would target the specific concern identified by Finance.
Paragraph 168(1)(f) was originally introduced into the ITA to prohibit registered Canadian Amateur Athletic Associations (RCAAA) from engaging in activities that could be seen as abusive. Unlike RCAAAs, registered charities are subject to significant restrictions on how to use their resources under the common law and the ITA. By extending paragraph 168(1)(f) to registered charities, a provision originally aimed at curbing abusive donation receipting practices where no genuine gift was made to the RCAAA, the Department of Finance Canada has unintentionally restricted legitimate and long‑standing methods of structuring charitable programs within the sector. - The provision is unworkable; the CRA guidance on the Anti-Directed Giving Rule, included in “CG-032 Registered charities making grants to non-qualified donees,” is evidence of this. CRA has clearly acknowledged that, as worded, the provision would prevent many funders from participating in the type of granting that the qualifying disbursements are intended to promote and has included suggestions for work arounds for charities in certain situations. These workarounds come close to crossing a line into suggesting the Rule would not be enforced. This creates an unacceptable level of uncertainty for registered charities that are trying to further their missions in the most efficient, impactful and cost-effective manner possible. CRA has gone so far as to say that a charity that is concerned could opt to enter into its relationships under the intermediary direction and control regime in order to avoid concern about par. 168(1)(f). It was exactly this unworkable and awkward regime that Parliament intended to supplement and move away from when it introduced the qualifying disbursement rules.
Deletion
For the reasons detailed above, the CBA Section recommends deleting the references that extend the application of par. 168(1)(f) to registered charities be deleted.
There are numerous policy and guidance documents issued by CRA which state that a registered charity acting as a conduit contravenes the ITA. For example, CRA’s guidance CG-004 on “Using an intermediary to carry on a charity’s activities within Canada” indicates that CRA will determine that a charity is acting as a conduit when it funnels its resources to a non-qualified donee without direction and control. In our view, the existing rules are sufficient to address the concerns outlined in the technical notes that were tabled with the amendments to paragraph 168(1)(f). The addition of the Anti-Directed Giving Rule creates unnecessary confusion and uncertainty, and in some instances prevents charities from distributing resources in support of legitimately charitable activities.
Alternative
While the CBA Section believes that deleting the amendments is the best way to address the issues and problems created by the Anti-Directed Giving Rule, in the alternative, we propose an amendment to par. 168(1)(f). Specifically, we propose adding an exception for grants made by a registered charity that are “qualifying disbursements” as that term is defined under the Act.
In this regard, par. 168(1)(f) would be amended as follows:
- 168 (1) The Minister may, by registered mail, give notice to a person described in any of paragraphs (a) to (c) of the definition qualified donee in subsection 149.1(1) that the Minister proposes to revoke its registration if the person
- applies to the Minister in writing for revocation of its registration;
- ceases to comply with the requirements of this Act for its registration;
- in the case of a registered charity, registered Canadian amateur athletic association or registered journalism organization, fails to file an information return as and when required under this Act or a regulation;
- issues a receipt for a gift otherwise than in accordance with this Act and the regulations or that contains false information;
- fails to comply with or contravenes any of sections 230 to 231.5;
or in the case of a registered charity,in the case of a registered Canadian amateur athletic association or registered journalism organization, accepts a gift the granting of which was expressly or implicitly conditional on thecharity, association or organization making a gift to another person, club, society, association or organization other than a qualified donee; or- in the case of a registered charity, accepts a gift the granting of which was expressly or implicitly conditional on the charity making a gift, other than a gift that is a qualifying disbursement, to another person, club, society, association or organization.
These amendments would provide the government with a tool to use in the rare circumstances of a registered charity fundraising and acting as a conduit and flowing the funds to non-qualified donees for a non charitable purpose. It likewise enables registered charities to continue to pool funds, work together and provide support for the organizations which are intended to benefit from the qualifying disbursement regime that was introduced at the same time as the amendments to par. 168(1)(f).
Many have commented that the amendments introduced in 2022 were enacted so the charitable sector could move forward out of the paternalistic, outdated regime of exercising ‘direction and control’ over non charitable organizations, but at the same time charities were hampered by this prohibitive rule. It gives benefits with one hand and takes them away with the other. The CBA Section is firmly of the view that the CRA has the compliance tools available under the ITA without needing to require the amendments made to par. 168(1)(f). While we believe any rule to this effect is unnecessary, the alternative we have suggested would go a long way to resolving the problems that have been created by this unfortunate provision.
Thank you for considering our submission.
Yours truly,
(original letter signed by Julie Terrien for Kristina Graburn)
Kristina Graburn
Chair, Charities and Not-for-Profit Law Section
Cc.
Blaine Langdon
Chief, Charities, Department of Finance Blaine.langdon@fin.gc.ca
Sharmila Khare
Director General, Charities Directorate sharmila.Khare@cra-arc.gc.ca