The English Approach to Payments Made to a Foreign Charity – A Cause for Jealousy?

October 12, 2011 | Robert B. Hayhoe

Canadian charities that spend money outside Canada will be well aware of the restrictive nature of the Canadian rules on foreign charitable expenditure. Interestingly, HMRC, the English tax authority, has just released its new and slightly more restrictive policy on the same issue.  The sensible English policy is an interesting contrast with the Canadian policy.

A Canadian registered charity may only spend its money on grants to qualified donees (essentially other Canadian registered charities) or on its own charitable activities. A Canadian registered charity that makes a grant to a foreign charity (for example its English or US sister organization) can have its charitable registration revoked and all of its assets seized by the Canadian government for making that grant, even if it is entirely uncontroversial that the funds were all spent on charitable activities by the recipient. While it is possible for a Canadian charity to fund an activity of a foreign charity by entering into an agreement whereby it adopts some activities of the foreign charity, this approach is relatively complex and results in many opportunities for non-substantive non-compliance that may nonetheless be attacked by the Canada Revenue Agency (for more detail on the CRA’s approach, see its policy CG-02 Canadian Registered Charities Carrying Out Activities Outside Canada).

Of course, the Canada Revenue Agency has a role to play in ensuring that tax exempt registered charities are not able to send money out of Canada for activities that are clearly not charitable. Our objection is to the form-over-substance means – i.e., the “own activities” requirement described above – by which it accomplishes this goal.

The approach of HMRC is surprisingly practical.  As described in its policy:

When a payment is made or is to be made to a body outside the UK, this will only be considered charitable expenditure if:

  • the payment is made to a foreign supplier of goods or services in the ordinary course of the charity’s activities; or
  • the charity takes steps that the Commissioners for HMRC consider are reasonable in the circumstances to ensure that the payment is applied for charitable purposes, including where the payment is made to an overseas branch or office of the charity to be applied for charitable purposes.”

The HMRC policy goes on to provide considerable guidance on the types of steps that a domestic English charity must take in order to be behaving reasonably in paying amounts to a foreign charity. While the details are not relevant to Canadian charities, HMRC will consider various factors in assessing reasonableness, such as:

  • the charity’s knowledge of the overseas body
  • previous relations with the overseas bodypast history of the overseas body
  • the amounts given in both absolute and relative terms

The examples given by HMRC make clear that it is only in the case of a large and complex project that it will require the degree of reporting and oversight that the CRA requires of all payments of any size. It is a pity that the CRA believes that it cannot take this approach with Canadian charities.


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