PFC Policy Analysis: Final guidelines on new rules for granting to nonqualified donees

In 2022, the Canada Revenue Agency (CRA) shared draft guidelines on new rules introduced by the Government of Canada through changes to the Income Tax Act, permitting granting to non-qualified donees – organizations in Canada and internationally that contribute to charitable activities, but do not have registered charity status.

Now, to collaborate with another organization, charities have three pathways:

a gift to a qualified donee (e.g. another charity)
by carrying on its own activities, working with an intermediary
a grant to a non-qualified donee (which the legislation, somewhat confusingly, calls a “grantee”)

CRA drafted the recommendations to help charities understand and implement the new rules. PFC provided substantial feedback, based in large part from feedback and comments from the PFC network. In late December 2023, the guidelines were finalized.

PFC staff have reviewed the final guidelines closely. Overall, PFC believes that they represent a significant improvement over the initial draft. It is clear that the CRA considered our recommendations and incorporated important elements for improvement in their finalization. We provide the following analysis.

Guidelines are just guidelines

The first section of the final guidance outlines the background and key rules and principles relevant to the ways in which charities can partner with non-qualified donees – as intermediaries, maintaining direction and control of the activities that the non-qualified donee performs on its behalf, and through grants, via the new rules on granting to non-qualified donees.

Notably it makes clear the relevance of the set of guidelines itself – in that “the guidance is not law” but rather a set of non-compulsory recommendations created to support charities to meet the Income Tax Act requirements, in taking reasonable, flexible, and proportionate measures and due diligence based on the nature of each grant. The key is that charities need to be able to show in their records that they have used measures to meet the accountability requirements of the law.

Basic accountability requirements

The guidance helpfully includes a chart that spells out the accountability components specified in the legislation, along with how CRA interprets them, and its recommendations. This transparency is very helpful.

In essence, a charity needs to ensure that the activities of the grant are:

charitable activities
that the activities further the charity’s own charitable purposes
that the charity maintains documentation to ensure accountability

To this end, the CRA recommends that the charity apply due diligence and maintain documentation commensurate with the grant and situation.

The final guidelines clarify a key question we raised in our feedback on the draft, regarding the issue of whether charities will need to change charitable objects (sometimes called purposes) to be able to grant to NQDs. The guidelines make clear the legal relevance of charitable objects in relation to practices involving partnerships with NQDs. In essence, grants must be made to advance a charity’s own charitable objects, and if it seeks to grant to non-qualified donees, it’s important that its objects are reviewed to ensure alignment.

In some cases, it may well be necessary for charities to amend their objects. If a foundation has objects specific to making gifts to qualified donees, it may need to revise them to use this new pathway. Doing so is relatively straightforward but it is an exercise nonetheless that requires legal support and the use of charity resources. PFC had suggested and was hopeful that an easier process to make changes to objects would be proposed by the government. We are disappointed such a process has not yet been proposed.

Risk assessment

The focus on risk has been tempered in the final guidelines compared to what we saw in the draft, to better reflect the wide diversity of realities facing charities making grants, and to make clearer that suggestions will not be relevant for all situations. However, the examples provided for risk assessment remain imperfect, such as the suggestion that grants $5,000 to $50,000 be assessed as medium risk. In grantmaking all risks are contextual, which other elements of the risk assessment grid better reflect.

Directed giving

PFC continues to be concerned by the directed giving issue from the legislation, which specifies that a donor cannot make a gift to a charity with the stipulation that the gift goes to a specific non-qualified donee. The guidelines spell out and clarify the directed giving issue in detail quite well, but it nonetheless remains problematic.

Many charity boards are risk adverse, and the directed giving element undermines the message that partnerships between charities and NQDs are legitimate. That said, we understand the concerns the government has to ensure true gifts are made and that each charity demonstrates its accountability vis a vis its own charitable objects. Foundations can still encourage other charities to support NDQs as long as they do not specifically identify which ones.

Conclusions

Overall, we believe these guidelines will prove to be helpful for foundations in Canada as they plan their partnerships with organizations that do not have charitable status but that provide a significant public benefit.

The new law and guidelines represent a historic evolution in charitable regulation in Canada that show non-qualified donees as the important actors in civil society they are. The guidelines provide flexible and principles-based pathways for genuine partnerships between foundations and NQDs, without being overly prescriptive.

PFC strongly recommends that all grantmakers review the new guidelines. They are a relatively easy read, and clarify many of the potential concerns and questions that foundations will have.

But in a nutshell, foundations should ensure:

grants to NQDs fall within their own charitable objects
they have in place a reasonable due diligence process
an agreement of some sort with each NDQ grantee about the grant is in place
they are using accountability mechanisms appropriate to the context, including the level of their perceived risk and the size of their investment

We will continue to share emerging good practices on partnerships and grantmaking from across our network, and monitor the impact of these new guidelines on capacity of the sector to support the public good.

Read the final guidelines here.