DOCUMENTING TRANSFERS OF FUNDS
OUTSIDE CANADA
By Jacqueline M. Demczur, B.A., LL.B. and Terrance S. Carter,
B.A., LL.B., Trade-mark Agent,
Assisted by Paula J. Thomas, B.A., LL.B., Student-at-Law
A. INTRODUCTION
A registered Canadian charity can use its finances
and other resources to carry out charitable activities both
within Canada and overseas. However, there are occasions where
a charity has neither the employees nor the volunteers to
carry out a desired project. This Charity Law Bulletin
("Bulletin") addresses the capacity of a registered
charity to carry on its charitable purposes through structured
arrangements with other organizations that are not registered
charities.
In this regard, a registered charity may choose
to work through an intermediary, such as an agent or a contractor,
or by working with others in the form of a co-operative partnership
or a joint venture. Any of these arrangements will necessitate
entering into a formal agreement; otherwise the charity risks
losing its registered charitable status. This Bulletin highlights
some of the advantages of each type of arrangement, as well
as some of the risks involved.
With reference to the Canada Revenue Agency's
("CRA") guidelines set out in Registered Charities
Operating Outside Canada,1
this Bulletin also discusses the structuring of arrangements
with third parties, such as the specificities of a written
agreement. A major requirement is a clear description of the
activities for which funds or other resources have been transferred,
outlining the limits of the authority given to the third party
to act for the Canadian charity or on its behalf.
B. CARRYING OUT CHARITABLE PURPOSES
The Income Tax Act ("ITA")2
permits a registered charity to carry out its charitable purposes,
both inside and outside of Canada, in one of only two ways:
1. Gifts to Qualified Donees
A registered charity can make gifts to other organizations
that are on the list of qualified donees as set out in the
ITA. Qualified donees include other Canadian registered charities,
registered Canadian athletic associations, certain corporations
resident in Canada, Canadian municipalities, the United Nations
and its agencies, certain universities outside Canada, a foreign
charity that the Canadian government has made a gift to in
the preceding twelve months, and the Canadian government or
a province.3
2. Carrying on Its Own Charitable Activities
The carrying on of its own charitable activities requires
a charity to be actively involved in programs and projects
that are intended to achieve its charitable purposes. This
can be done by the charity directly funding its own employees
and/or volunteers in carrying out its programs. It is not
permissible for a registered charity to carry out its charitable
purposes by merely giving either monies or other resources
to an organization that is not a qualified donee, regardless
of whether the donee is inside or outside Canada.
However, where a registered charity does not
have its own employees or volunteers to carry out a project,
it can work with other organizations regardless of whether
that organization is a Canadian registered charity. In order
to comply with the ITA, the registered charity must use structured
arrangements which allow it to retain direction and control
over the program, as well as the resources that it contributes
to the program.
C. CARRYING ON CHARITABLE ACTIVITIES THROUGH
INTERMEDIARIES AND WITH OTHERS
1. Overview of Options
There are two ways that a registered charity can work with
other organizations to achieve its charitable purposes: (1)
working through intermediaries, such as an agent or contractor;
or (2) working jointly with others. These arrangements will
require the registered charity and the other organization
to enter into a formal agreement. It is also important for
the registered charity to ensure that it complies with the
terms of the agreement. Failure to do so could potentially
constitute grounds for charitable deregistration.
2. Co-operative Partnership
Co-operative partnerships are used where a registered charity
wishes to work alongside other organizations and with beneficiaries
for the purpose of all the parties carrying out a specific
project. The partner organizations do not have to be qualified
donees under the ITA. Each organization would be a partner
- equal or otherwise - in the establishment, implementation
and conducting of the project. Provided that the registered
charity is actively involved in one or more elements of the
project (i.e. as opposed, for example, to merely contributing
monies), it is considered to be carrying on its own charitable
activities.
There are some downsides to such an arrangement,
such as joint and several liability for all partners involved
in the co-operative partnership. As well, there might be disbursement
quota issues where the Canadian charity makes contributions
to that portion of a project that is administrative as opposed
to charitable, such as providing administrative services only.
3. Joint Venture
A registered charity and other organizations can pool together
their resources to establish and operate a charitable program
or project as a joint venture. The organizations participating
in the joint venture with the charity do not have to be qualified
donees under the ITA. For example, the registered charity
could contribute 20 percent of the funding to build an orphanage
in a foreign country, together with the four other related
charities located in different countries that each contributes
an additional 20 percent to the joint venture.
The registered charity will be considered to
be carrying on its own activities if it is an active participant
exercising a proportionate degree of control in the joint
venture program. It can also evidence that its share of responsibility
for long-term planning, day-to-day decision-making and financial
commitments is proportionate to the level of financing that
it contributes to the joint venture.
Generally, a joint venture management committee
is required to establish, conduct and oversee the joint venture.
For example, where the registered charity contributes 20 percent
of the total monies and the committee is comprised of ten
people, the registered charity should then have two of its
own representatives as members of the joint venture management
committee.
A joint venture arrangement allows a smaller
charity to participate with other, sometimes larger, charities
in a charitable project through the pooling of monies and
resources. Provided that the smaller charity has proportionate
input into all of the planning, decision-making and oversight
of the project, its monies do not have to be segregated from
those of the other joint venture participants (as is the case
with agency relationships), but instead can be pooled together
and used for the joint venture.
Where pooled monies from the joint venture are
used to purchase real estate or other tangible assets, ownership
of the said assets does not have to be retained by the Canadian
registered charity. However, it is often the case that the
joint venture committee required to be established under the
joint venture is either never established, or, if it is initially
established, then it is not properly maintained for the full
term of the joint venture. Where this occurs, then the transfer
of monies by the Canadian charity to the joint project may
be found to be offside the requirements of the ITA, which
could lead to loss of charitable status.
4. Agency Relationships
In an agency agreement, a registered charity appoints an agent
to act as its representative in carrying out specific tasks
on behalf of the charity, and in doing so, transfers some
of its charitable monies to the agent on its behalf. Agents
can be either organizations or individuals. As well, they
do not need to be either qualified donees under the ITA or
registered charities in their own countries. Provided that
the registered charity in Canada retains direction and control
over the tasks being carried out by the agent, as well as
the monies or other resources transferred to the agent, those
tasks are considered to be the charitable activities of the
registered charity itself.
Appropriate agency agreements are required to
be entered into between the registered charity (known as the
principal) and the agent setting out the terms of the relationship.
Agency agreements can be one-time agreements or, alternatively,
can be master agreements establishing a longer term relationship
between the parties, which are then supplemented by letter
agreements accompanying each transfer of monies to the agent
pursuant to the terms of the master agreement.
Agency agreements are the most common method
used by registered charities to carry on activities outside
of Canada where it does not have its own employees and volunteers
to do so. However, one of the practical difficulties with
agency arrangements is that in order for the registered charity
to retain control over the project or tasks being carried
out by the agent, the monies or resources transferred to the
agent need to be segregated from the funds of the agent. There
are also strict reporting obligations by the agent to the
registered charity.
In addition, there are liability concerns arising
from an agency arrangement. That is, the actions of the agent
are deemed to be actions of the principal. As a result, the
principal is vicariously responsible for the actions of the
agent. This vicarious responsibility for the acts of its agent
can expose the registered charity (as principal) to significant
liability, both civil and criminal (e.g. anti-terrorism legislation),
for the actions of the agent. This concern is identified by
the CRA in its guide entitled Registered Charities Operating
Outside Canada.4
In relation to insurance matters, insurers for
a charity may express concerns about the vicarious liability
risks associated with agency relationships. The liability
risk of a charity that is associated with any of its agency
relationships may not be covered by the charity's insurance
policy unless fully disclosed to the insurer and confirmed
in writing. It is important for a charity to advise its insurer
in writing of the nature and extent of its agency relationships
to ensure there is proper insurance coverage for the agent's
activities, particularly where they take place outside Canada.
There are also concerns involving financial
statements arising from the utilization of agency arrangements.
By appointing agents to carry out a registered charity's charitable
work, the assets provided to the agents for the identified
projects would continue to be assets of the registered charity
and would need to be reflected in its financial statements.
It is for this reason that CRA requires agents to segregate
funds provided to the agent by the Canadian registered charity
from the agent's own funds, and to keep separate books and
records, among other requirements. However, in leaving these
monies on the financial statements of the charity, it might
result in a negative impact on future fundraising by the charity,
as it could lead donors to believe that the charity has more
funds available to it than it in fact has.
In relation to the registered charity's disbursement
quota, it must comply with the normal requirement under the
ITA to expend 80 percent of its receipted income in the previous
year on charitable activities in the current year. In addition,
it must expend 3.5 percent of its assets that are not used
directly in its charitable activities or administration for
taxation years that begin after the year 2008. Similar to
the financial statement concerns, the assets provided by a
registered charity to agents for the identified projects will
not be considered to have been expended for the purpose of
its disbursement quota until such time as they are actually
spent on direct charitable work by the agent. Where there
is a delay in the agent expending monies received from a registered
charity, i.e. monies received in 2006 that are not expended
until 2007, then such monies cannot be used to meet disbursement
quota obligations that the registered charity may have for
the 2006 fiscal year.
5. Contract for Service
A registered charity can also carry out its charitable activities
by contracting with an organization or individual in another
country to provide specific goods and/or services. Contractors
can be organizations or individuals and do not need to be
either qualified donees under the ITA or recognized charities
in their own countries. For example, a Canadian registered
charity with charitable purposes to advance religion may contract
with organizations located outside Canada to conduct religious
activities in designated countries in accordance with the
terms of the contract.
The registered charity is required to give precise
instructions to its contractors. This necessitates that a
written contract be entered into between the parties which
clearly sets out what the contractor is to do in return from
the payment being received from the charity and the reporting
obligations that the contractor has back to the charity.
With regard to liability concerns, the vicarious
liability that exists between a registered charity and its
agent in an agency relationship does not generally exist with
a contract for service between a registered charity and the
third party organization with whom they contract to provide
services. This is because the vehicle being utilized to effect
the relationship is different, i.e. a contract versus a principal/agent
relationship. Instead, any liability associated with the work
being carried out by the third party contractor under the
contract for service is generally limited to the said contractor
under the contract and, therefore, should not extend back
to the charity. However, it is open to a plaintiff in a lawsuit
being brought against a third party contractor and the charity
to argue that the charity exercised too much day-to-day control
over the activities of the contractor and, therefore, has
liability for the actions of the contractor.
With regard to financial statements, in a contract
for service, the assets that are transferred to the third
party organization in exchange for services are no longer
the assets of the registered charity and therefore do not
need to continue to be reflected in its financial statements.
With regard to the disbursement quota, similar
to the financial statements, once assets have been transferred
to third party contractors under a contract for service for
goods or services that are an integral part of the registered
charity's work, they are considered to have been expended
for the purposes of the registered charity's disbursement
quota. This is the case even where the third party organization
has not expended the said monies itself within the applicable
fiscal year of the registered charity.
With respect to insurance, in contrast to an
agency relationship, a contract for service may be more attractive
to the insurer. This is because a contract for service does
not generally involve vicarious liability for the actions
of the third party contractor as is the case with an agency
relationship.
D. STRUCTURING OF ARRANGEMENTS WITH THIRD PARTIES
1. General Guidelines
By working with third parties using one of the above-referenced
legal relationships, a registered charity can use its monies
or other resources to carry out charitable activities both
inside and outside of Canada. However, for these types of
arrangements to be accepted by CRA as the registered charity's
own activities, the following must take place as set out in
CRA's Guide RC4106:5
