On December 19, 2023 Canada Revenue Agency (CRA) released its final grant guidance, CG-032 Registered Charities Making Grants to Non-Qualified Donees.

Just over a year ago, on November 30, 2022, the draft version of the guidance was released for public feedback.

So, What’s Changed?

In sum, the new guidance is better organized, provides some clarifications, makes clearer links between the guidance and the Income Tax Act requirements it is meant to reflect, and confirms the scope or limits of the guidance.

Let’s look at a few of the key changes.

Scope & Limits of the Guidance

The guidance is very clear about what it is and what it is not:

“This guidance is not law.”

This seems to directly address concerns that the guidance was creating obligations or expectations of charities that went beyond the scope of the ITA requirements. It does not create legal obligations but “recommends ways a charity can meet the Income Tax Requirements” [emphasis added].

Or, as the guidance states elsewhere:

“A charity does not have to follow our granting recommendations. It can show in its books and records that it has used other measures to meet the accountability requirements.”

This position is reflected in small, but important word changes throughout the document. For example, many “shoulds” are now “coulds” and “The grant-making process” is now “CRA’s recommended grant-making process.”

Similarly, the guidance repeats in several places that it tries to take a “reasonable, flexible, and proportionate” approach toward charities meeting the ITA requirements.

Clearer Links Between Guidance and ITA

Another concern was that the draft guidance used terms and ideas not contained in the ITA.

The final version does not eliminate the phrases and terminology that were at issue (e.g. “risk”, “accountability tools”, etc.) but it does better explain why and how CRA uses them and better links them to the ITA requirements.

For example:

• “Accountability requirements” means ITA requirements for making a grant
• “Accountability tools” means CRA recommended tools to meet the requirements
• “Due diligence” means steps taken to satisfy legal requirements for grants under the ITA
• “Grant” means a qualifying disbursement to a grantee organization as defined in the ITA
• “Risk” means the risk of grant resources being misused – misuse could compromise the charity’s registration and the public’s trust in the sector

Before getting into CRA’s recommendations, the guidance sets out the ITA accountability requirements. The key is that a charity ensures that the grant is exclusively applied to activities in furtherance of a charitable purpose of the charity and that the charity maintains documentation sufficient to demonstrate those requirements are met.

Next, the guidance includes a chart that lists ITA requirements, CRA’s interpretation of the requirements, CRA’s application and recommendation and where to find more details about each topic.

First requirement: disbursement (grant) furthers a charitable purpose of the charity

CRA interprets this to mean that charities can only make grants that further one or more of their own stated charitable purposes that fall within the four recognized categories (relief of poverty, advancing education, advancing religion, other purpose beneficial to the public).

Second requirement: the charity ensures disbursement (grant) exclusively applied to charitable activities

CRA interprets this to mean a charity must make sure the resources are used only for charitable activities that further its charitable purpose(s). CRA recommends charities use various accountability tools in a way that responds to the level of risk that the resources could be misused.

Third requirement: the charity maintains documentation sufficient to demonstrate the requirements are met

CRA interprets this to mean a charity must keep adequate books and records, and specific document for disbursements (grants). CRA recommends charities maintain documentation for each of these requirements in a way that responds to level of risk that the resources could be misused.

What is the Recommended Process?

These are essentially unchanged from the draft version, but the organization and flow of the guidance makes them easier to follow. Paraphrased, the steps are as follows:

How does the grant further your charity’s purpose?

• What are your charity’s purposes?
• What is the grant activity?
• What is the link between the two?
• Does the activity comply with the law?
• Does the activity meet the public benefit test?
• Does the activity provide unacceptable private benefit?
• Does the activity support terrorist activities? Does it fall within the humanitarian exemption in the Criminal Code?

With the exception of “what is the grant activity” and “what is the link between the two” the other questions are ones that charities need to ask of any new activity they undertake, whether the activity is their own, done with intermediaries, or through grant activities.

What is the grant’s risk level, based on factors impacting your charity’s ability to meet ITA requirements?

This means asking what risks exist that would impact your charity’s ability to ensure the grant resources are exclusively applied to charitable activities that further your charity’s own purposes.

Factors include:

• Your charity’s experience
• Grantee’s experience
• Purposes and governing documents of grantee organization *NEW*
• Governance structure of grantee organization *NEW*
• Grantee’s regulation and oversight *NEW*
• Private benefit concerns
• Grant activity *MODIFIED* (was Grant Activity Location)
• Grant amount
• Nature of resources granted
• Grant duration *MODIFIED* (low risk was defined as less than 1 year; now less than 2 years)

How much due diligence needs to be applied based on the risk?

This section first explores each accountability tool – what it is and how it helps a charity meet its requirements. For more information on each of these tools, see the heading “What are the Accountability Tools?”, below. It then sets out the level of work (“due diligence”) that CRA recommends for each tool, based on the level of risk attached to the particular grant.

Apply the relevant accountability tools in collaboration with the grantee

This section provides an example of how a charity and grantee work together so that the charity can meet its accountability requirements.

Document your due diligence

This section explains the general ITA requirement for charities to maintain adequate books and records. When it comes to grants, books and records need to allow CRA to determine whether they meet the accountability requirements, the grantee’s use of the resources can be verified, and that the resources were and continue to be used for purposes and activities set out in the grant’s terms.

What are the Accountability Tools?

Again, these are essentially unchanged from the draft version, but they have been slightly revised and reorganized. This section begins with an explanation of each accountability tool, noting how each is intended to help a charity meet accountability requirements. This is an update from draft language that said the tools helped to “manage” or “mitigate” risk.  Risk is addressed more fully in a chart that explains how the tools would apply to different levels of risk; the risk being that the grant would not be applied exclusively to activities that further charitable purpose(s).

Research and review of the grantee

This was called “due diligence review” in the draft. The substance has not changed. It refers to assessing and documenting information about the grantee and how that can be done.

Description of grant activity, including intended outcome and charitable purpose

Written agreement, including minimum standards, milestones, outcomes and budgets

Reporting plan, including final reports and interim reports (if suitable)

This was called “monitoring and reporting” in the draft. The intention behind a plan is to help a charity track and document whether the resources were used for the intended purpose.

Transfer schedule for longer-term or higher-risk grants (if suitable)

Separately tracked funds such as a separate ledger

Clarifications & Special Topics

Foundations

Foundations with a purpose only to make gifts to other qualified donees cannot make grants. Grants must further a stated common law charitable purpose within one of the four categories of advancing religion, advancing education, relieving poverty or other purpose beneficial to the public.

A standalone grant-making purpose would not fall within one of the four categories.

This means that foundations may need to amend their purposes in order to make grants.

Directed Gifts

The ITA (s 168(1)(f)) prohibits charities from accepting gifts that are expressly or implicitly conditional on the charity transferring it to anyone other than a qualified donee.

The guidance now provides separate examples of explicitly and implicitly conditional gifts. The implicitly conditional example is:

A charity includes the name of a non-qualified donee in its own name, purposes, or other formal documents, indicating this would be the sole recipient of any grants the charity makes. Any funds the charity receives from a donor could be implicitly conditional on the charity granting it over to the specific non-qualified done, and could jeopardize the charity’s registration.

CRA’s recommendation to avoid concerns about directed gifts remains the same:

• Donors can indicate program preferences, but ultimate authority on use of resources must rest with the charity
• Donors do not receive their donation back if the charity does not use it in the donor’s preferred way

Pooled Grants

Most of this section remains the same, but with slight language edits. For example, regarding written agreements the draft preferred “a written agreement be in place with all parties when charities engage in pooled grants.” The final version recommends “the charity sign onto at least one written agreement with all parties.”

Another revision is that the special accountability considerations for pooled grants no longer contains instructions that when “a written agreement is not feasible [for pooled grants] a charity should document the reasons in its books and records.”

Grants of Real Property

This section no longer starts with the presumption that a “grantee may .. transfer [the property] to another non-qualified done.” It also replaces references to generic risk with a focus on potential non-charitable uses and unacceptable private benefit.

The special accountability considerations for real property grants no longer contains a section for a transfer schedule or separately tracked funds. There is a new section for a reporting plan and more detail about the written agreement.

The reporting plan is meant to confirm that the grantee is using (and continues to use) the real property for the agreed upon charitable activities and purposes.

The written agreement elements were (sort of) addressed in the draft’s example but are clarified in the special accountability considerations in the final version.

The written agreement should include provisions:

• That if activities furthering the charity’s purpose no longer possible, grantee must get instructions from the charity to either:
  • Sell the property and return the proceeds; or
  • Transfer ownership to another party that can continue the activities
• That require the grantee to track profit from the real property
• That require profits earned are spent on the charitable activities

Grants and Anti-Terrorism Considerations

This section has been updated to include the humanitarian exemption and authorization framework recently added to the Criminal Code. These changes allow certain humanitarian activities in geographic areas that are controlled by terrorist groups.

What’s Next?

Now that we have the final guidance, we’ll update our Member Knowledge Base resources to reflect these changes.

It’s also important to remember that this guidance, while “final,” is not forever written in stone. It will be periodically reviewed and CRA always invites comments or suggestions on existing guidance.