Charity Law Information Program (CLIP) CRA’s Foreign Activities Guidance and Dealing with Non-Qualified Donees September 15, 2009 Mark Blumberg, Blumberg Segal LLP (mark@blumbergs.ca) Production of this workshop and materials was made possible by a financial contribution from the Canada Revenue Agency

Introduction Legal information not legal advice Views expressed are my own Questions during and at end Review of handout – evaluation form Logistics and timing 2

Overview Who we are Work outside charitable area Charitable Sector and international activities Income Tax Act rules and CRA guidance on foreign activities Discussion on new consultation document on foreign activities 3

Who We Are – Capacity Builders The Charity Law Information Program (CLIP) provides training, workshops, webinars to charitable organizations to enhance their understanding of their obligations under the Income Tax Act as well as improve governance and ethics Capacity Builders is a division of the Ontario Community Support Association (OCSA) and it runs CLIP http://www.capacitybuilders.ca/clip CLIP Communiqué 416-256-3010 x 232 or 1-877-484-3030 clip@capacitybuilders.ca 4

Who We Are - Blumbergs Blumberg Segal LLP is a law firm based in Toronto, Ontario Mark Blumberg is a partner at Blumbergs who focuses on non-profits and charities Assists charities from across Canada with Canadian and international operations and foreign charities fundraising here www.canadiancharitylaw.ca and www.globalphilanthropy.ca Free Canadian Charity Law Newsletter: http://www.canadiancharitylaw.ca/index/php/pages/subscribe/ 416-361-1982 / toll free 1-866-961-1982 / mark@blumbergs.ca 5

Charities Directorate of CRA Regulates registered charities Based in Ottawa and other offices throughout Canada Website: www.cra.gc.ca/charities E-mail list: www.cra-arc.gc.ca/esrvc-srvce/mllst/sbscrbchrts-eng.html Webinars: www.cra-arc.gc.ca/tx/chrts/cmmnctn/sssns/wbnrs-eng.html Telephone: 1-800-267-2384 (English) 1-888-892-5667 (Bilingual) Provided funding for the Capacity Builders’ Charity Law Information Project 6

Good Work Outside Charity Realm 7

Carrying on Good Works Abroad Outside the Charity Sphere Personal donations of cash or in kind items to foreign charities, no tax receipt Doing business in developing countries Corporate social responsibility (CSR), donations, sponsorship, advertising, etc… For-Profit “non-profit” – google.org, micro-loans Non-profit without charitable status – if no need to issue tax receipts Avoiding abusive transactions and paying fair share of taxes 8

Carrying on Good Works Abroad Outside the Charity Sphere Volunteering – at home and abroad Remittances – gifts to family, friends, former employees abroad Encourage Canadian government to fulfill commitment of 0.7% of GNI Encourage Canadian companies operating outside of Canada to do so legally and ethically Our own actions – the goods we consume, environmental footprint, what we buy 9

Charitable Sector in Canada 10

Voluntary Sector in Canada 161,000 non-profits in 2003 (federal and provincial and unincorporated) 83,500 Registered Charities (as of 2008) 2 million on payroll $112 Billion in revenue, 49% from Government, earn 35%, 13% donations 2/3 have revenue under $100,000 11

Variety of Charities 12,000 carried on ‘programs’ outside of Canada – humanitarian assistance, development, education, religious, arts, etc… 4000 spent funds outside Canada Every charity is different – objects / areas of charitable work / philosophy / risk tolerance / public profile / donors / level of government support / independent vs. international affiliations / resources / knowledge / local vs. international activities 12

Importance of Global Philanthropy 13

Importance for our Planet Great Challenge – 1.2 billion people live on less than a $1 per day, 11 million children under 5 die each year, 1 billion people lack access to clean water, neglected diseases, HIV/AIDS, natural disasters etc… World is getting smaller – SARS, Tsunamis Effect - $1 in Canada achieves $20-$40 in India 14

Importance for Organization Fulfills objects of charity Win/win (Canadian charity and foreign charity) Staff morale and retention Donor and stakeholder interests Excellence 15

Canadian charities by $ spent outside of Can. WORLD VISION CANADA $287,877,830.00 CARE CANADA $187,223,833.00 3. INT. DEVELOPMENT RESEARCH CENTRE $97,565,681.00 4. HAMILTON HEALTH SCIENCES CORP. $92,855,349.00 5. PLAN INTERNATIONAL CANADA INC. $54,146,626.00 6. THE CANADIAN RED CROSS SOCIETY $48,245,075.00 7. UNITED ISRAEL APPEAL OF CANADA INC $40,726,294.00 8. THE SAMARITAN'S PURSE ‐ CANADA $35,955,229.00 9. CHRISTIAN CHILDREN'S FUND OF CANADA $33,644,359.00 10. MENNONITE CENTRAL COMMITTEE CANADA $32,159,078.00 16

Canadian Charities Foreign Expenditures - $1.4 Billion - $1.8 Billion - $2.1 Billion 2006 - $2.3 Billion 17

Some statistics Philanthropy $2.3 billion Philanthropy (development) $1.1 billion (Hudson) Philanthropy (development) $0.7 billion (CCIC) ODA (“foreign aid”) $3.68 billion Remittances $8.9 billion Canadian investment $ ? 18

Income Tax Act and CRA Guidance on Foreign Activities 19

CRA General Considerations Objects exclusively charitable Activities within objects Only undertake charitable activities (relieve poverty, advance education, advance religion, other purposes beneficial to the community that the law considers charitable) Cannot violate Canadian public policy or be illegal under Canadian law 20

CRA General Considerations (cont.) Adequate books and records in Canada Disbursement quota (“80/20 rule”) No partisan political activities, only limited allowable non-partisan political activities (10% rule) No unrelated business activities 21

Canadian Charity World Divided in Two Qualified donees – can issue official donation receipts for Income Tax Purposes Non-qualified donees – cannot issue official donation receipts 22

List of Qualified Donees Registered charities; Registered Canadian amateur athletic associations; Registered national arts service organizations; Housing corporations in Canada set up exclusively to provide low-cost housing for the aged; A municipality; A municipal or public body performing a function of government in Canada; The United Nations and its agencies; 23

List of Qualified Donees (cont.) Universities outside Canada with a student body that ordinarily includes students from Canada (these universities are listed in Schedule VIII of the Income Tax Regulations); Charitable organizations outside Canada to which the Government of Canada has made a gift during the donor’s taxation year, or in the 12 months immediately before that period [IC 84-3R5];  and The Government of Canada, a province, or a territory. 24

What is a Non-Qualified Donee? All organizations other than qualified donees They cannot issue official donation receipts Examples include: Foreign charities Canadian non-profits with no charitable status Businesses Bono, Obama, Angelina Jolie 25

RC4106 Registered Charities: Operating Outside Canada The Canadian Income Tax Act allows charities to conduct their charitable purposes by: 1) giving monies to another "qualified donee" (usually a Canadian charity but also includes the United Nations, some foreign universities with Canadian students and a small number of foreign entities); or 2) expenditures on their “own activities” (at home or abroad) No third option - A Canadian charity cannot just transfer money or gift/grant funds to a non- qualified donee (including a foreign charity)

Canadian Registered Charity Qualified donee Gift to “Own Activities” [Direction and Control] Structured Arrangement -Written agreement Qualified Donee, eg. Canadian registered Charity, UN, prescribed University, Canadian Municipality, etc Employee Volunteer Intermediary – agency, JV, partner, contractor

CRA Consultation on Foreign Activities Consultation on the Proposed Guidance on Activities Outside of Canada for Canadian Registered Charities http://www.cra-arc.gc.ca/tx/chrts/cnslttns/ccrc-eng.html Sets out CRA views on foreign activities and dealings between Canadian Registered charities and non-qualified donees Period for comments ended September 30, 2009 28

Why Deal with a Non-Qualified Donee? Foreign Activities You don’t have people in Malawi You don’t have road building equipment in Haiti Local people or organizations sometimes can do it quicker, better and more cost effectively Canadian Activities The best organization to implement charitable project may be a non-profit (non-charity) or a business and not another registered charity 29

“Own Activities” or “Direction and Control” When not working with qualified donee or own staff: Investigate Intermediary (due diligence) Written agreement Detailed description of Activity Monitoring and Supervision Ongoing Instruction for changes Periodic Transfers Separate Activities and Funds Books and Records showing above 30

Amount of Direction and Control Less direction and control when sending certain types of ‘inherently’ charitable goods like blankets to a trusted relief agency in a disaster Most direction and control when sending cash If in doubt have more, rather than less, direction and control to protect your charity’s reputation, charitable status and the resources entrusted to you. 31

Structured Arrangements Employee or volunteer in foreign country 2) Agency agreement 3) Contractor 4) Joint venture agreement/joint ministry agreement 5) Cooperative participant agreement 32

Written Agreements Appendix E of Guidance – Checklist of the elements of a written agreement For example: Are the legal names and physical addresses of all parties provided? Is a clear, complete, and detailed description of the activities to be carried out by the intermediary provided? Do the activities further the charity’s purposes? 33

Capital Property When acquiring, constructing, or improving any immovable property be careful – high value title of the property should vest in the name of the charity certain exceptions for development work and when reasonable assurances obtained discussed in Appendix D 34

Conduit vs. Structured Arrangement Conduits – gifting resources to non-qualified donee, no direction and control, no description of activities, simply forwarding money, no monitoring, no reporting, no instructions Structured Arrangement – relationship with adequate direction and control –agreement, description of activity, progress payments etc. See Structured Arrangement versus Conduit for Canadian Charities and Foreign Activities by Mark Blumberg http://www.globalphilanthropy.ca/images/uploads/Structured_Arrangement_versus_Conduit_for_Canadian_Charities_and_Foreign_Activities.pdf 35

Books and Records Not good enough to do good work Must be able to show you do good work English or French preferred Have books and records in Canada CRA discusses difficulty getting records – make “reasonable efforts” 36

How do I know if it is a Qualified Donee? If in doubt check CRA’s listing of charities, call CRA, or treat organization as a non-qualified donee. 83,000 registered charities listed at CRA site: http://www.cra-arc.gc.ca/tx/chrts/menu-eng.html Prescribed foreign universities at Schedule VIII of the Canadian Income Tax Regulations, as provided in section 3503 http://laws.justice.gc.ca/en/showdoc/cr/C.R.C.-c.945/sc:8/20090629/en?noCookie#anchorsc:8 A few Charitable organizations outside Canada to which the Government of Canada has made a gift in last 2 years [IC84-3R5]; http://www.cra-arc.gc.ca/E/pub/tp/ic84-3r5/ 37

What is “new” in draft Guidance 2000 - 2009

Summary of Guidance Consolidates Updates Clarifies More flexibility Provides more guidance (23 pages) Minimum standards for charities Reminder to charities that there are rules for Canadian charities operation abroad 39

1) Non-Qualified Donees in Canada and Abroad Policy applies to dealings between registered charity and non-qualified donee, whether non-qualified donee is in Canada or abroad Replaces RC4106 40

2) Applies from date of application for charity status Applicants for charitable status that intend to carry on activities outside Canada are also subject to this policy 41

3) Application and Written Agreement Applications for registered charity status in Canada for organizations that will use intermediaries in foreign activities should include copy of draft or executed written agreement 42

4) Importance of Foreign Activities “Canadian registered charities make important and valuable contributions throughout the world.” 43

5) Three Cases The Canadian Committee for the Tel Aviv Foundation v. Canada (2002 FCA 72), 2002-03-01 Canadian Magen David Adom for Israel v. Canada (Minister of National Revenue) (2002 FCA 323), 2002-09-13 Bayit Lepletot v. Canada (Minister of National Revenue) (2006 FCA 128), 2006-03-28 44

6) Don’t Reinvent the Wheel CRA reminds charities that foreign activities are difficult and that working with existing charities may be preferable to creating your own charity or to using your charity to conduct direct foreign activities 45

7) Complying with Foreign Law While the Income Tax Act does not require that registered charities comply with laws in foreign jurisdictions, being registered in Canada does not exempt a charity from the laws in the jurisdiction where they operate. The CRA strongly suggests that all charities make themselves aware of local laws, and how they are applied, prior to carrying out their charitable programs abroad. 46

8) Avoid Terrorism April 2009 – “Checklist for Charities on Avoiding Terrorist Abuse”: http://www.cra-arc.gc.ca/tx/chrts/chcklsts/vtb-eng.html 16 Steps for Canadian charities and non-profits to avoid involvement with Terrorism at: http://www.globalphilanthropy.ca 47

9) Violating Public Policy The court’s have also established that a charity’s purposes and activities must not violate officially declared and implemented Canadian public policy 48

10) Reminder re: PGT in Ontario CRA reminds Ontario established and based charities that “charity” as defined under the common law and enforced by the PGT in Ontario for purposes of gifting is not the same as ‘qualified donee’, under the Income Tax Act. 49

11) Type of Intermediary The type of intermediary that a charity needs to carry out an activity will depend on the facts of any given situation. The CRA does not recommend using one type of intermediary over another. Agency, JV, Partnership, Contractor No preference for agency 50

12) Structured Arrangement (good) vs. Conduit (bad) Conduits – gifting resources to non-qualified donee, no direction or control, no description of activities, simply forwarding money, no monitoring or reporting Structured Arrangement – relationship with adequate direction and control Structured Arrangement versus Conduit for Canadian Charities and Foreign Activities: http://www.globalphilanthropy.ca/images/uploads/Structured_Arrangement_versus_Conduit_for_Canadian_Charities_and_Foreign_Activities.pdf 51

13) Tithes and Royalty Payments Charities may not simply send tithes, royalties, membership fees, or similar payments to head bodies, affiliates, or other member organizations without receiving goods or services of equivalent value in return. 52

14) ‘Charitable Goods Policy’ If: 1) The resources transferred can, because of their nature, likely only be used for charitable purposes; [insulin, bibles] and 2) Based on an investigation into the status and activities of the intermediary, there is a reasonable expectation the intermediary will use the resources solely for charitable purposes then less measures of control. Money = most measures of control. 53

15) Written Agreement not good enough …, simply entering into an agreement is not enough to prove that a charity meets the own activities test. The charity must also be able to demonstrate to the CRA that it has a real, ongoing, active relationship with its intermediary, whereby it actually directs and controls the use of its resources by that intermediary. 54

16) One time transfers under $1,000 No De Minimis Rule but relaxed rules for one time transfers under $1,000 Do not require “full, formal written agreement” for one time activity of $1,000 or less but still need communication and direction and control over the use of resources by intermediaries May affect 1300 of 4435 charities spending funds abroad 55

17) Description of Activities* Clear, complete and detailed description of activity Document nature, scope and complexity 56

18) Agency Relationships Don’t Use An Agency Agreement if you don’t want an agency relationship Agency – no limited liability, need segregation of funds Contractor agreements are often preferable 57

19) Books and Records Not good enough to do good work Must be able to show you do good work English and French preferred Books and Records must be kept in Canada 58

20) Concession on Receipts With agency agreements need original receipts If prohibited by law to send originals to Canada then send copies and have right of inspection Contractor agreement is different – but always good idea/standard to get receipts or copies of receipts 59

Why Obtain Receipts Yes receipts do not guarantee that funds actually spent or that project was effective and efficient Not all receipts are created equal But requiring receipts is a good idea because: Makes fraud less likely; Provide proof of expenses/backup; May be helpful for warranties/returns or exchanges or proof of ownership; Helps with budgeting and planning for next project; Helps with finding errors; May be required by CRA for direction and control, compliance and books and records; May be required by funder (Foundation, CIDA) for reimbursement; Reduces use of underground or black market economy which may tax evasion or be criminal activity Provides local employment for copying/scanning. 60

21) CIDA and Canadian Government Funding A charity must ensure that all activities it carries on further its charitable purposes, regardless of the source of funding. In addition, a charity must still satisfy all its monitoring and reporting requirements. Canadian government funding does not mean exemption from rules including direction and control 61

22) Disaster Relief by New Charity Can be priority to applications when disaster But same requirements as other charities Need to show direction and control Disasters can be volatile and dangerous Do they have capacity? Local authorities may limit access to experienced charities 62

Some Ethical Issues in Foreign Activities Equal partnerships, promote sustainability not dependency Gift acceptance issues – type of gift, restrictions on use of gift Governance and finances Transparency and accountability Effectiveness Fundraising images Do no harm – be careful who you support Cultural, Religious and Gender issues 63

Some Ethical Issues in Foreign Activities Use of resources, sustainability, coordination Advocacy Sexual exploitation Child Sponsorship NGO-Military ties Pharmaceuticals and gifts in kind International affiliations Employee/Independent contractors Compliance with Foreign Laws, payment of taxes 64

Further Information www.globalphilanthropy.ca www.capacitybuilders.ca/clip 65

Evaluation Your feedback is important to the Charity Law Information Program Please complete the Evaluation Form and add any comments that will help improve our program If you have any additional feedback, contact mark@blumbergs.ca or clip@capacitybuilders.ca Thank you for your participation today! 66