Canadian Charities
Canadian foundations have been making grants to other Canadian charities for many years. But, until June 2022, Canadian charities were prohibited from making grants to foreign organizations. The Canada Revenue Agency, in its interpretation of the new legal provisions has provided the framework for their expectations of Canadian charities. This framework requires charities to conduct a risk analysis to protect the charity from the possibility the funds will not be misused. And once risks are identified, to formalize mechanisms to minimize those risks (assuming that can be done).
Amongst our council are people who have studied these new rules, prepared agreements and are amongst the most educated in Canada on this topic.
Risk Analysis
The Canada Revenue Agency’s guidance on the new Qualifying Disbursement rules (that’s where our name comes from ‘QUALI’fying ‘DI’sbursements) requires charities to ‘ensure’ that the funds being sent abroad are used for the purposes they are sent. To do this they require the charity to engage in a risk analysis which not only looks at the ability of the recipient charity to engage in the operation from both technical and practical perspectives, but even requires the charity to look deeply at the social and political environment in which the recipient operates.
Given that the entire regime is new for Canadian charities, and that the type of analysis required is really outside the internal expertise of most charities to even conduct (i.e. measuring the risk imposed by political / social instability or the impact of local laws and banking infrastructure) charities wishing to comply with the CRA’s view of the law should speak to those that have been involved in this type of work prior to it being required of charities.
The risk analysis itself is critical to satisfy the CRA that the charity is trying to ensure that its resources are properly used. And so, resources should be expended to make sure the analysis fully displays the charity’s desire for proper stewardship over its resources. To use a rough analogy, imagine a small business engaging with a foreign supplier for the first time. The business will want to make sure that the foreign business is both capable of delivering the product, and will in fact do so. An analysis of capability will include an understanding of the group’s hierarchy and management, it’s operational capacity, local laws and political stability and any factors unique to operating in that country. Once the decision to do business with the supplier is made, the relationship will move into the operational phase which, in our analogy, is the due diligence and grant agreement.
These steps are necessary because businesses want to protect their money and their reputations. Because charity dollars are partly subsidized with tax credits, the CRA has created a regime which effectively puts the charity in the same position of the small business in stewarding its resources when operating with a foreign partner.
Grant Agreements
The result of the risk analysis and discussions between the grantee charity and the potential recipient should, if successful, result in the creation of an agreement between the parties. Obviously, the specific intent of the agreement will be for the charity to provide the funds for a specific purpose and the recipient will promise to use the funds in that way. Critical to the agreement will be the provision of paperwork illustrating the use of the funds. But the agreement will also contain a number of other critical factors that the Charity may consider important in meetings its obligations under the law, to its donor or to its overall mission.
At a minimum, the grant agreement will likely include significant descriptions about the use of the funds so that there is no room for ambiguity, restrictions in who might be able to access the funds, details on how (as yet) unspent funds should be kept secure, and then reporting on the use of the funds back to the granting organization – including the ability to obtain any necessary documentation to show the use of the funds. Charities must also consider what will happen if it becomes apparent that the grant recipient is not meeting its obligations and how to end the agreement while protecting the charity.
The grant agreement may well contain other provisions such as recognition to the grantor (or donor) for the funds, and special provisions to ensure that the Canadian charity’s reputation is protected should the particular project encounter unexpected problems. Along these lines, charities will also want to consider special provisions (both legal and practical) for special situations. For example, some grants will take place in areas where banking facilities are not sophisticated and transactions are cash based, or receipts are not business standard. Some grants will take place in war zones or areas where bribes are common (even necessary), but against Canadian law. In all of these cases, the CRA will expect to see particular care to ‘ensure’ that the charity’s assets are being used only for approved purposes.
Due Diligence
Given the role charities have in stewarding charity funds, the CRA has made clear that they expect the risk analysis to be conducted in a thorough and professional manner. The CRA’s view is that the level of diligence required in ensuring that the charity’s funds are properly used, should rise as the level of risk that they will not rises. But, on a practical level, charity’s that provide multiple grants will want to standardize their mechanisms rather than sustain different administrative procedures depending on the grantee. Furthermore, all charities have an interest in ensuring that their funds are used as intended. And, if funds do go ‘awry’ in the case of a low risk assessment the CRA may well question the appropriateness of all risk assessments. For all of these reasons charities may want to tend to more, rather than less, strict procedures.
The CRA has provided a non-exhaustive list of procedures charities may wish to consider as part of their granting procedures. Of course, each charity will have to consider its particular operations when designing a method of operation. Members of our council are experienced in all of these and happy to help you in developing or fine -tuning your own procedures to satisfy CRA.
- The purposes and mission of the proposed recipient
- Its programs, history, reputation and staff.
- Any associated individuals or entities
- Its experience and capacity to carry on the grant activity (for example, personnel and equipment)
- And the potential use of the Canadian charity’s resources