( Disponible en anglais seulement )
As we reported in the July 2010 issue of this Newsletter, the Charities Directorate has issued its “Guidance for Canadian Registered Charities Carrying on Activities Outside Canada”, replacing Guide RC4106. However, some may overlook that the Guidance also applies to charities which engage “intermediaries” which are not “qualified donees” to carry out activities for them within Canada. Indeed, the Directorate is expected to issue a specific Guidance early in the new year for charities working with domestic intermediaries, which will likely mirror the Foreign Activities Guidance.
Although the Guidance does not have the force of law, it sets out what the Directorate expects from charities, or from organizations applying for registered status. While the legal basis for some aspects of the Guidance may be questioned, charities should still pay attention to the Guidance so as not to encourage threats of deregistration.
A Charity Must Conduct Its Own Activities
As did its predecessor, the Guidance insists that a charity must conduct its own activities. This requirement must be viewed in the context of the prohibition of grants to any entity that is not a “qualified donee”. That expression is defined in the Income Tax Act, and is limited for the most part to Canadian registered charities. Canadian charities – wherever they wish to carry on activities – cannot give monies to a non-qualified donee without “direction and control” over what is done with those monies.
Thus, all activities – in Canada or abroad – are required to be conducted either by the Canadian charity directly using its staff, volunteers and directors, or through an “intermediary”. The Guidance provides detail on different forms of intermediary relationships. An intermediary could, for instance, be a company hired specifically to do the particular charitable work, under the direct control of the charity. It could be a “joint-venturer” – another organization, not a registered Canadian charity – where there would be a pooling of resources to carry out the charitable activity and an agreement on how that is to be run, with substantial input from the Canadian charity.
The most common intermediary relationship into which charities enter is that of agency. In an agency relationship, the Principal, (here, the charity) enters into an agreement – preferably, by far, a written agreement – with a person or organization (the Agent), by which the actual activity is to be carried out. That agreement appoints the Agent – within very specific guidelines and requirements – to conduct the activities on behalf of the charity and in the charity’s name. One expects – and the Guidance requires – that the Agent has experience in the area of work involved and that the charity should have appropriate expectation that the Agent chosen will, indeed, carry out that work properly. Legally, the activities so conducted by the Agent are the activities of the Principal itself – just as if the Principal had carried out the activities using its own staff or volunteers.
The Guidance states, citing three cases decided by the Federal Court of Appeal, that if any “intermediary” which is not a qualified donee is retained, the Canadian charity must maintain “direction and control” of the activities carried out on its behalf, and over its resources. The cases cited all dealt with overseas activities, but would appear to apply equally to activities carried on domestically. Thus, says the Directorate, even in a true agency agreement, the charity must establish detailed requirements for how the work is to be carried out by the Agent, require strict periodic reporting and regular accounting, and have little substantive delegation.
The Guidance sets out detailed requirements of what should appear in an agency agreement when used by a registered charity so as to demonstrate the required degree of direction and control. Arguably, these requirements go beyond what is legally necessary to establish an agency relationship which permits the Principal, the charity, to be regarded as carrying on the charitable activities itself, including for the purposes of the Income Tax Act. The legal nature of an agency relationship should permit greater scope for a registered charity to delegate activities than is explicitly contemplated in the Guidance (which only discusses delegation of day-to-day operating decisions, such as hiring staff and buying supplies). However, while there is some basis to question whether the cases cited by the Directorate require “direction and control” as categorically as the Directorate states, charities must bear in mind that the Directorate enforces these requirements strictly. Until there is an appropriate case before the courts which clarifies these issues, charities should do everything possible to comply, whether operating outside or inside Canada.
Transferring Resources to Non-Qualified Donees
The Guidance expands on the prior RC4106 commentary on when a charity can turn over the title to “resources” to a non-qualified donee. In principle, this commentary should apply to transfers of resources inside as well as outside Canada.
When the resources in question are not real estate and the property can reasonably only be used for charitable purposes, the “charitable goods” policy may permit an outright transfer from the charity to the not-qualified donee. The charity and the non-qualified donee must understand and agree that the property can only be used for specific charitable activities, and the charity must conclude reasonably that the non-qualified donee will use the property only for the intended charitable activities.
The Guidance has a much less onerous requirement than RC4106 with respect to transfers of real property to non-qualified donees in foreign countries. The Guidance states that if it is not “practical” for the Canadian charity to own the property, arrangements can be entered into with a local organization or government, to transfer it. However, there have to be assurances that the property will be used only for charitable purposes and the charity has to assess the risk that the property might be used inappropriately and be satisfied reasonably that such will not be the case. It is not clear whether this approach can be used in Canada.
Overall, the Guidance maintains the main thrust of RC4106. It does provide some clarification and, perhaps, some certainty for charities dealing with the Directorate. However, it is clear that the Directorate continues to insist on its own views of how a charity should conduct its activities whenever an “intermediary” is used, whether outside, or within Canada. Despite lawyers’ opinions about what is and what is not legally correct, to avoid conflict with the Directorate – which is what most charities want – charities should be reviewing the Guidance with great care.