Canada: CRA Releases Draft Guidance On New Qualifying Disbursements Rules, Invites Feedback

The CRA's Charities Directorate has issued its long-awaited draft guidance on "Registered charities making grants to non-qualified donees".

The Income Tax Act was amended on June 23, 2022 to include new rules on "qualifying disbursements" (Read our previous article on the new rules). Registered charities continue to be permitted to make disbursements to qualified donees (i.e. other registered charities). They can now also make gifts or transfer their resources to non-qualified donees in one of two ways:

• by having the non-qualified donee carry out the charity's own activity and by exercising direction and control over the non-qualified donee's use of the charity's resources; or
• by making a qualifying disbursement to the non-qualified donee.

Until now, there has been no administrative guidance from the CRA on how charities can make qualifying disbursements to non-qualified donees. Released on November 30, 2022, Guidance CG-032—though in draft form—fills that void.

To help charities apply the new qualifying disbursements rules, the CRA's draft guidance provides examples and risk assessment tools, sets out what the CRA could look for in an audit, and covers special topics such as gifting real estate, making pooled grants, and dealing with donor preferences on gifts.

Public comment period

The guidance is not in its final form. The CRA is accepting feedback on the draft guidance until January 31, 2023.

Interested parties can submit their comments to the CRA by email, mail or fax.

Miller Thomson LLP's Social Impact Group will be preparing its own submission to the CRA. Our Social Impact Group will also be available to provide feedback and comments to any charity or association looking to make a submission to the CRA.

Notable guidance

Our lawyers will also have more to say about the draft guidance in the coming weeks. For now, we note the following highlights from the draft guidance that may be of interest to charities:

• Anti-Directed Giving (s. 7.4). To avoid being offside the new anti-directed giving rules, charities should clearly communicate to donors on its website and in its fundraising materials that (1) donors can express their preference for how a charity will apply their gift, but the charity has final say on how it uses its resources; and (2) if the charity does not use the gift in the way the donor prefers, the charity will not return the gift to the donor.
• Qualifying Disbursement Limits (s. 7.3). Charitable organizations disbursing more than half of their income by way of gifts to qualified donees will be at risk of being redesignated as public foundations. However, charitable organizations will have no limit when making grants to non-qualified donees. Making such grants will not affect the charitable organization's designation.
• Accountability Tools (s. 5.0). The CRA recommends that charities use a set of "accountability tools" to meet the qualifying disbursements requirements and to minimize the risk that a donee will not apply the disbursement exclusively in furtherance of a charitable purpose of the charity. These tools are: (1) a due diligence review of the grantee; (2) a description of the grant activity; (3) a written agreement; (4) monitoring and reporting; (5) a transfer schedule; and (6) separately tracked funds. Although these tools mirror some of the mandatory accountability requirements for charities that carry out their own activities through intermediaries in Canada or intermediaries abroad, the CRA will try to "adopt a reasonable and flexible approach when determining whether a charity has met the accountability requirements" for qualifying disbursements. The CRA provides a series of tables for what each accountability tool requires in low-risk, medium-risk, and high-risk situations. The CRA also gives specific guidance on how charities can use these accountability tools effectively when granting charitable goods (a low-risk activity; see s. 7.8), granting real estate (a high-risk activity; see s. 7.9), and making pooled grants (a potentially high-risk activity; see s. 7.7).
• Reporting and Disclosure (s. 7.5). Under the new Regulations, charities that disburse more than $5,000 in total to a non-qualified donee in a year must report the name of the donee, the purpose of each grant, and the total amount granted to the grantee in the year. The draft guidance does not say what information will be publicly accessible or will be included in the confidential section of the T3010 but clarifies that charities can apply to the CRA to make a special request that certain information not be made available to the public if the release of such information would place the charity, the donee, their staff or volunteers in danger.
• What is not covered. Notably absent from the draft guidance is any specific comment about whether a charitable foundation with a sole grant-making purpose would be able to make grants to non-qualified donees. We understand that the CRA's intended position on this issue is that the qualifying disbursements rules apply to all three designations of charities. As stated in the Act, to be a permissible disbursement to a non-qualified donee, the disbursement must first further a "charitable purpose of the charity". Although there remain questions as to whether from a corporate law perspective the objects need to be amended for such a foundation to proceed with qualifying disbursements to non-qualified donees, we understand that CRA has looked at the question and has concluded that an amendment may be necessary. We understand that there will be further discussions on this issue and we do not yet know what exactly the CRA will require. Miller Thomson LLP intends to consider options to resolve this issue and to make submissions to CRA on this topic. At this time, we think grant-making foundations that are interested in funding non-qualified donees should consult us before proceeding.

Going forward

Canadians can expect to see a final version of the guidance after the CRA has had a chance to review and process the feedback that it receives during the public comment period.

Until the final guidance is released, charities can look to the draft guidance as a "preview" of what the CRA might be expecting them to do before, during, and after making a qualifying disbursement to a non-qualified donee. Until the CRA resolves any outstanding issues and provides more certainty, charities seeking to take advantage of the new qualifying disbursements rules to make grants to non-qualified donees should proceed cautiously and obtain advice before doing so. Members of Miller Thomson's Social Impact Group would be pleased to assist and to advise.