Canada: CRA Releases Final Guidance On Qualifying Disbursements: Key Highlights

On December 19 2023, the Canada Revenue Agency released its final administrative guidance on qualifying disbursements.

Guidance Document CG-032 ("Registered charities making grants to non-qualified donees") first appeared in draft form a little over a year ago, on November 30 2022.

The CRA issued the most recent version of the Guidance after a yearlong consultation and drafting process, which included a two-month period in which the CRA received comments from the public (including this submission from Miller Thomson).

Miller Thomson's Social Impact Group will have more to say about the latest Guidance in the new year. For now, we wish to highlight a few points that will be of interest to charities:

1. MAKING A QUALIFYING DISBURSEMENT TO A NON-QUALIFIED DONEE? A STANDALONE GRANTMAKING PURPOSE IS NOT ENOUGH (SS. 25-34)

There was an open question—left unanswered in the draft Guidance—as to whether a charitable foundation with a standalone grantmaking purpose (e.g. "making qualifying disbursements" or "making grants") could make a qualifying disbursement to a non-qualified donee, without doing more.

The latest Guidance clarifies that foundations with a standalone grantmaking purpose will not be able to make qualifying disbursements to a non-qualified donee without first amending their governing documents to add a relevant "active" charitable purpose (e.g. relieving poverty, advancing education, advancing religion, or bettering the community in ways the law regards as charitable).

It is not enough for a charity to make a qualifying disbursement to a non-qualified donee for any charitable purpose; the disbursement must further a specific purpose in the charity's governing documents that falls under one of the four categories of charity described above. Here, the CRA states that a standalone purpose of "making qualifying disbursements" or "making grants" would not fit within one of these categories.

2. THE CRA PROVIDES CLARIFICATIONS, BUT NO MAJOR CHANGES, TO THE ANTI-DIRECTED GIVING RULE AND ITS EARLIER GUIDANCE (SS. 75-81)

The anti-directed giving rule prohibits a charity from accepting or soliciting a gift on the explicit or implicit condition that the charity will gift it to a specific non-qualified donee. Many sector observers feared that such a rule would have a chilling effect on certain fundraising activities or on donor-advised accounts.

The draft Guidance indicated that, so long as the charity retains authority over the use of its resources, it will not be considered to be engaged in directed giving. Many in the sector considered this assurance insufficient and inconsistent with the text of the actual rule in the Income Tax Act.

The latest Guidance cleans up earlier language in the draft and provides some clarifications, including two examples of explicitly and implicitly conditional gifts. However, charities that were hoping for a tectonic shift in the CRA's administrative position on the anti-directed rule (or even in the rule itself) will be left wanting more from the latest Guidance.

The latest Guidance does suggest that any charity that includes the name of a non-qualified donee in its own name, purposes or other formal documents may be at risk of revocation if it receives gifts, as those gifts could be implicitly conditional on the charity granting it over to the specific non-qualified donee.

The CRA further clarifies that the anti-directed giving rule does not prohibit a charity from using a donation to carry on its own activities through a non-qualified donee intermediary, so long as the charity exercises direction and control over the intermediary's use of the charity's resources.

3. THE CRA TELLS US HOW IT WILL INTERPRET AND APPLY SPECIFIC PROVISIONS OF THE QUALIFYING DISBURSEMENTS RULE (SS. 7, 13)

Charities would be well-advised to review section 13 of the latest Guidance, which sets out how the CRA will interpret and apply the specific provisions of the qualifying disbursements rule, as set out in the Income Tax Act.

For example:

• The CRA will "aim to adopt a reasonable, flexible, and proportionate approach" to grants and to documentation.
• Despite a charity's best efforts, a charity may not be able to "ensure" or guarantee that a grant will be applied exactly as it was intended. The CRA recommends that charities use the accountability tools and perform its due diligence over the life of a grant.
• The CRA recommends that charities maintain documents that show (1) the grant's purpose; (2) the non-qualified donee exclusively applied the resources to that purpose; and (3) the charity exercised due diligence to meet this requirement when making the grant.

Additionally, in section 7 of the latest Guidance, the CRA defines the term "risk", which the CRA used throughout the draft Guidance without a definition. The term "risk" now refers to "conditions that could compromise the charity's registration or the public's trust in the charitable sector." The Guidance recommends charities to apply its due diligence to mitigate or reduce the risk that qualifying disbursements are misused.

4. THE CRA ADJUSTS CERTAIN RISK THRESHOLDS (S. 36)

The CRA has sprinkled many other changes in the latest Guidance, but two that caught our eye concerned the risk levels that the CRA assigned to grants of certain sizes and durations:

• Grant amounts – Under the draft Guidance, grants that are more than $25,000 were 'high risk'.
• Under the latest Guidance, grants that are more than $5,000 and up to $50,000 are 'medium risk', while grants that are more than $50,000 are now considered 'high risk.'
• Grant duration – Under the draft Guidance, grants that are less than 1 year in duration were low-risk; grants that are longer than 1 year but shorter than 2 years were medium-risk, and long term grants with no end dates were high-risk.
• Under the latest Guidance, grants that are less than 2 years in duration are low-risk; grants between 2 and 5 years are medium-risk, and grants over 5 years, including grants with no end date, are high-risk.

These changes will reduce the levels of risk and, by extension, the accountability requirements associated with grants of a certain size and length.

NEXT STEPS

We will be providing more detailed commentary on qualifying disbursements and the new CRA Guidance early in 2024. Ultimately, all Canadian registered charities that fund activities of non-qualified donees in Canada or elsewhere should consider whether they should transition their funding approach to the qualifying disbursement approach. We look forward to advising the charitable sector on this transition and helping to implement new qualifying disbursement arrangements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.