The CRA’s draft guidance on granting to non-qualified donees could open the door for a host of collaborations between charities and non-charitable organizations and, for most charities, this is great news!
Changes to the Income Tax Act allowing charities to make grants to non-qualified donees were announced last fall. Prior to this change, a charity could only gift funds to qualified donees (i.e., registered charities and other organizations that can issue official donation receipts) or carry out its own charitable activities using intermediaries, provided it could demonstrate direction and control over the use of its resources.
There are myriad benefits to the new rules: charities can now work with grassroots organizations or local community groups without charitable status through balanced and trusting partnerships instead of through the top-down relationships created by the former paradigm. Non-charitable yet benevolent organizations looking to finance their programs will face fewer barriers when seeking charitable funding.
For the benevolent sector as a whole, the new rules on granting could set the stage for a more equitable space — giving the opportunity for marginalized communities, under-represented in charity leadership, to access the sector’s vast financial resources to fund non-profits and grassroots initiatives.
But before you jump at the opportunity to work with your favourite peer organization, we’ve put together a series of questions to consider.
1. What is your risk tolerance?
CRA’s guidance on the new granting rules are still technically a draft. The CRA is using this time to collect feedback from charities and nonprofits on the guidance. It doesn’t intend to formalize the guidelines until sometime in 2024. In this window, it’s important to consider your risk tolerance.
On the one hand, there may be added leeway on grant agreements from the CRA since the guidance is only a draft. The CRA has stated their goal is to establish “accountability tools that are reasonable and flexible” and, assuming this is true, charities may feel they can enter into grant agreements during this window, trusting that any missteps will be forgiven by CRA.
On the other, the guidance may change in the short term, forcing adjustments to your agreement. Without a finalized policy from the CRA or example cases to refer to and learn from, you may wade into these agreements with some level of uncertainty. How much risk and complexity are you willing to navigate during this window?
2. How much is your grant?
This is an important consideration when it comes to the new rules. If you send more than $5,000 to a single grantee in a tax year, additional reporting requirements kick in. This doesn’t mean you need to limit your grants to less than that amount, but before you commit to those larger amounts, we recommend becoming familiar with the reporting requirements—and ensuring you have capacity to fulfil them.
3. Does the grant align with your mission?
According to the new draft guidance, any grant must be used for activities that are in line with your charitable purposes. Your job will be to demonstrate that the project or program the grant supports furthers your charitable purposes, and that the grantee organization uses the funds to further those purposes. When you’re drafting your grant agreement, you will need to state your purposes explicitly, and confirm that all funds granted will be used solely for that purpose.
4. What kind of collaborator are you?
The new granting rules remove the hierarchy between charities and partners. The CRA’s draft guidance notes that “a charity does not need to otherwise ‘direct and control’ the grantee,” allowing flexibility for the granter/grantee relationship to become a collaboration.
There are, of course, pros and cons to consider in this kind of relationship. Less ongoing direction will allow the grantee to carry out the work with more autonomy and less handholding from the charity. But for this to work, the charity will need to give up some control in the relationship.
A New Collaborative Landscape
Overall, we’re hopeful that the new rules for granting will benefit the benevolent sector in Canada. The changes to the Income Tax Act show that our government is attuned to sector needs and willing to offer greater flexibility to registered charities that wish to fund non-charitable endeavours. However, as the CRA works to firm up their policy, charities should proceed with care and in consideration the questions posed above.
Not sure where to begin? We’re always here to help charities consider their options and provide consultation on new granting agreements. Drop us a line!
