CRA s Fundraising Guidance: Compliance and Concerns for Charities

Transcription

1 CRA s Fundraising Guidance: Compliance and Concerns for Charities These materials were prepared by Michael Blatchford of Bull, Housser & Tupper LLP for a conference held in Vancouver, BC hosted by Pacific Business & Law Institute, September 28, 2010.

2 TABLE OF CONTENTS CRA S FUNDRAISING GUIDANCE:... 1 COMPLIANCE AND CONCERNS FOR CHARITIES... 1 I. INTRODUCTION... 1 II. THE DEVELOPMENT OF THE GUIDANCE... 1 III. FUNDRAISING BY REGISTERED CHARITIES... 2 IV. PURPOSE... 3 V. FUNCTION... 4 VI. JURISDICTION ISSUES... 5 VII. THE GUIDANCE - BACKGROUND... 6 A. STRUCTURE OF THE GUIDANCE... 6 B. SCOPE OF THE GUIDANCE... 6 C. WHAT IS (AND IS NOT) FUNDRAISING... 7 D. PROHIBITED FUNDRAISING PRACTICES... 9 E. CONDUCTING FUNDRAISING ACTIVITIES VIII. THE GUIDANCE REGULATION OF FUNDRAISING ACTIVITIES A. ALLOCATION OF EXPENSES B. CRA S EVALUATION OF FUNDRAISING EXPENSES C. AREAS OF CONCERN AND BEST PRACTICES IX. CONCERNS AND CRITIQUES X. CONCLUSION... 19

3 1 I. INTRODUCTION For many registered charities, charitable donations from individuals and businesses make up the largest single stream of revenue. In June 2009, the Charities Directorate of the Canada Revenue Agency (the CRA ) released policy statement CPS-028 Fundraising by Registered Charities (the Guidance ). Although it purports to be a simple consolidation and publication of existing CRA administrative policies and views, for most charities the Guidance represents a dramatic change in the way that fundraising by Canadian charities is monitored and regulated. The Guidance has been in effect for more than a year now, but many registered charities are still unaware of (or at least unfamiliar with) the ways in which their fundraising practices are being evaluated by the CRA. Although only a policy statement the Guidance will be routinely and consistently applied by the CRA and may be the trigger for charity audits and, if necessary, sanctions under the Income Tax Act (Canada) (the ITA ). Because of the seriousness of the consequences, it s crucial for registered charities to review and come to an understanding of the policies and standards outlined in the Guidance. Knowledge is power, and those charities with a working knowledge of the Guidance will have the power to structure their fundraising activities so as to avoid negative CRA scrutiny and a potential audit. II. THE DEVELOPMENT OF THE GUIDANCE The Guidance is just one in a recent series of policy statements published by the CRA to improve increase awareness in the charitable sector of internal practices for regulating charities. The CRA has been issuing policy statements on topics that relate to the operation and regulation of registered charities for over 20 years. However, in the past three years the frequency of these publications has dramatically increased; it would appear that there is a concerted effort on the CRA s part to transparently communicate its views and policies and to provide consistent standards for regulating Canadian charities. In May 2008, the CRA released a draft policy statement with regard to fundraising by registered charities and requested submissions from interested parties. The number of responses was the highest the CRA has ever received for a policy statement, highlighting the fact that fundraising practices and financial accountability of charities was (and continues to be) a topic of interest not

4 2 only to the sector itself, but also to the media and the public at large. For more than a year the CRA engaged in ongoing consultation with sector representatives, after which the Guidance was released in its current form on June 11, Because of the extensive consultation process, the final version of the Guidance was released without fanfare and was received without serious comment or complaint. Many registered charities that were not involved in the consultation process may not have been aware of the release of the Guidance or of the effect it would have on their operations going forward. Others in the sector largely ignored the release and kept their attention on fighting for survival during the worst economic downturn since the Great Depression. The recession hit charities with a terrible triple-whammy of effects: the dramatic decrease of government funding, a decline in the number and amount of private donations and, perversely but not unexpectedly, an increased demand for charitable services and programmes from individuals and families who were struggling to make ends meet during times of economic uncertainty. Charities had to be very innovative and resourceful to stay afloat during the recession and it s not surprising that very few had enough time and resources to take notice of the Guidance when it was first released. Thankfully, we are seeing signs of recovery, both generally and specific to the charitable sector. Although the financial future remains uncertain, a level of stability has been reached and a degree of confidence is returning to charities and to donors. Charities are now taking stock of their situations and planning how to best carry their charitable mandates into the future. This period of reflection and resolve is a perfect time to become familiar with and implement the guidelines for fundraising set out in the Guidance. III. FUNDRAISING BY REGISTERED CHARITIES The Guidance opens by acknowledging that the majority of registered charities in Canada depend on private donations to carry out their charitable works and that, in order to secure the continued financial support of donors, most registered charities must expend a portion of their resources on fundraising activities. While these facts may appear to many in the charitable sector to be basic, even obvious, they are an improvement over previous versions of the Guidance that insinuated that fundraising was a necessary evil, tolerated only because of its

5 3 importance to the voluntary sector. Fortunately, over the course of consultation with the sector, this negative connotation was abandoned. While acknowledging that fundraising is essential to the success of registered charities in Canada, the CRA emphasizes that fundraising must be carefully conducted to avoid putting the registered charity offside with regard to the obligations that arise under the ITA. All registered charities are required by law to operate for exclusively charitable purposes. Although the term charitable purpose is not defined by the ITA, the common law has developed categories of purposes that are considered charitable at law. These are: a. the relief of poverty; b. the advancement of education; c. the advancement of religion; and d. other purposes beneficial to the community in a way the law regards as charitable. The CRA s view is that fundraising is not in itself a charitable purpose 1. According to this view, fundraising is only acceptable as a means to advance or achieve one of the above charitable purpose - not as an end in itself. Charities are directed to ensure that fundraising practices do not eclipse the charitable purposes that they are meant to support. IV. PURPOSE The primary purpose of the Guidance is to outline and explain the policies, views and standards that the CRA uses to monitor and investigate fundraising by registered charities. The CRA asserts that the publication of the Guidance does not reflect the creation of new CRA policies, nor is it the result of changes in the CRA s views on fundraising. Rather, the Guidance purports to be a compilation and organization of existing policies and practices. The claim that the Guidance contains nothing new and merely compiles existing policy is a strategic manoeuvre by the CRA. In fact, much of the Guidance is new, at least insofar as it has never before been articulated publically, applied consistently or communicated outside the 1 See Oxford Group v. IRC [1949] 2 All ER 537 and Vancouver Society of Immigrant and Visible Minority Women v. Minister of National Revenue, [1999] 1 S.C.R. 10 at para. 152.

6 4 conversation of the CRA s charity auditors. However, regardless of whether the Guidance constitutes new rules or merely a collection of existing policies, the decision to communicate it openly and transparently to registered charities is a positive sign. Ostensibly, the Guidance is intended to increase awareness of the various internal policies and practices that the CRA employs, so that registered charities can better understand the ways in which their fundraising practices are evaluated, take action where necessary to improve those practices and self-monitor to avoid future problems or conflicts. A secondary purpose is to inform registered charities about the requirements and obligations imposed by the ITA and how these statutory obligations can be affected by unsound fundraising practices, particularly the requirement to exist and operate exclusively for charitable purposes. The Guidance may also assist registered charities meet their obligation to complete the annual T3010(B) information return. V. FUNCTION It is important to bear in mind that the Guidance is not the law. It is not enacted by an elected body. It is neither legislation nor regulation. It is the internal policy of the CRA and does not (at least in theory) have the force of law. Although the central concepts are tied to the provisions of the ITA, the majority of specific guidelines are the administrative creations of the CRA and are only loosely grounded in the provisions of the ITA or in related case law. Although not law in the strict sense, the rules set out in the Guidance will be administratively applied by the CRA when reviewing information returns, considering applications and conducting audits. If the CRA is concerned that the fundraising practices of a registered charity result in a violation of the provisions of the ITA, the CRA has a wide range of sanctions available, including fines, suspension of receipting privileges and revocation of charitable status. However, it will always be open for a charity accused of wrongdoing to demonstrate that it is compliant with the provisions of the ITA, and challenge the policies set out in the Guidance as not being legally enforceable. As a policy statement, the Guidance is subject to change at any time, based on the administrative decisions of the CRA. This aspect has both positive and negative implications for charities. One

7 5 the one hand, it allows the CRA to evolve the Guidance for the better, based on continuing consultation with registered charities and representatives from the charitable sector. Conversely, the flexibility of the Guidance could conceivably allow the CRA to change its policies without consultation or advance notice, although it s very unlikely that CRA would do so. VI. JURISDICTION ISSUES Long before the CRA first announced that it would develop and publish fundraising guidelines for registered charities, there was heated debate regarding whether the CRA, as a federal agency, has the jurisdiction to regulate fundraising activities by charities at all. From a constitutional perspective, the regulation of charities falls squarely within the authority of the provinces, pursuant to sections 92(7) and 92(13) of the Constitution Act, The federal government s only jurisdiction over charities flows from the fact that it has the constitutional authority to regulate income tax and thus the power to grant tax benefits to charities that register under the ITA. In theory, the CRA (as the federal agency responsible for administering the ITA) is only empowered to regulate registered charities in relation to those tax benefits and should not purport to regulate other aspects of charities and their operations. Unfortunately, few of the provinces have elected to exercise their inherent jurisdiction over charities, leaving a regulatory gap that is filled by the policies and guidelines of the CRA. In effect, the CRA has taken upon itself to become the primary regulator of charities in Canada. However, CRA is very conscious of the delicate nature of their authority to regulate charitable operations other than tax. To avoid the appearance of conflict, the Guidance is framed as a general guideline (as opposed to binding regulations or rules) that relate only to fundraising by charities registered under the ITA. This assertion, while well-meaning, is a little disingenuous because the tax benefits created by the ITA are so attractive and valuable that virtually every organization that can qualify as a charity would choose to register. The Guidance is also careful to note that it does not derogate from the authority of a province to enact its own legislative rules regarding fundraising by charities. Several provinces have had fundraising legislation in effect for more than a decade. Registered charities in these provinces must comply with the relevant provincial legislation in addition to the Guidance.

8 6 For the most part, registered charities do not concern themselves with esoteric questions of jurisdiction and constitutionality. From a practical perspective, it is more important to know and understand all the rules by which charities are being evaluated and to simply comply with them, regardless of which power, federal or provincial, is monitoring compliance. For the majority of charities, clear and consistent regulation of their activities is a welcome change, regardless of the tenuous authority of the regulator. VII. THE GUIDANCE - BACKGROUND A. STRUCTURE OF THE GUIDANCE The Guidance adopts a puzzling two-part structure. The Guidance itself, that is, CPS-028, is approximately eight pages in length. However, it contains numerous definitions, footnotes and references, as well as expanded explanations for a number of concepts. Rather than integrate these ancillary references into the main text, the various notes and explanations are collected in a separate document. Taken together, the expanded Guidance is 30 pages in length. B. SCOPE OF THE GUIDANCE The Guidance applies to all registered charities, regardless of size, revenues or specific activities. It applies equally to public or private foundations and charitable organizations. The Guidance does not apply to not-for-profit organizations; fundraising by not-for-profit organizations is not overtly regulated by the CRA (probably because there is no tax advantage associated with donating to a not-for-profit). It should also be noted that the Guidance does not apply to activities that constitute a related business carried on by a registered charity. Related businesses are an entirely different topic and the rules regarding related businesses are set out in a separate policy statement 2. However, there are some activities (such as the sale of goods) where the line dividing a fundraising activity from a related business begins to blur. For example, Charity A operates a resource centre for parents of children with disabilities. In addition to providing services and offering programmes, Charity A has certain educational materials, such as books and DVDs, on display in the resource centre and available for sale at 2 See CPS-019 What is a Related Business?

9 7 any time to parents and the public generally. All revenues from the resource centre go to support Charity A s programmes. Charity B also assists persons with disabilities and is associated with a famous local celebrity who overcame disability and wrote a book about her life and accomplishments. When Charity B holds its annual event at which the celebrity speaks, they sell copies of the book to attendees and use the funds to support their charitable activities. In both cases, goods are sold to interested persons in order to raise funds for the organization. However, Charity A s activity would probably be classified by the CRA as being a related business, while Charity B s activity would likely be classified as fundraising. The distinction between the two activities is primarily one of frequency. Charity A is selling goods on an ongoing basis, effectively carrying on a side business. In contrast, Charity B is selling goods on an occasional basis at what is otherwise a fundraising event. Both kinds of activity are acceptable for charities to carry on, but each is subject to its own set of rules and guidelines. C. WHAT IS (AND IS NOT) FUNDRAISING An important part of the Guidance is the section that sets out CRA s views on what constitutes fundraising. Not unexpectedly, the Guidance sets out a very broad definition of fundraising, one that includes several activities that many registered charities may have considered to be administrative, rather than fundraising. The Guidance sets out three branches of activities that are considered to be fundraising. Central to each of the branches is the concept of a solicitation of support, which is an impressivesounding term that means a request for a donation. Any activity that includes a solicitation of support is fundraising. This includes most of the activities that charities consider to be fundraising, such as telephone or direct-mail campaigns, door-to-door canvassing, fundraising events, capital campaigns and planned giving initiatives. Solicitations of support are not limited to requests for cash donations; requests for gifts-in-kind, such as used clothing or specialized equipment constitute a solicitation of support, as do more complicated planned gifts such as company shares or life-insurance vehicles. Cause-related

10 8 marketing, where a charity partners with a business to create an event where a portion of the proceeds from every item sold goes the support the charity, is likewise a fundraising activity. The Guidance makes clear that if a donation receipt is issued in respect of a transaction, then there has been a solicitation of support. However, the opposite proposition (no receipt = no fundraising) is not necessarily true. The Guidance strongly suggests that a solicitation of support will constitute fundraising, even if a receipt is not issued. For example, an activity where representatives of a charity solicit cash donations from passers-by on a street corner or at the entrance to a shopping centre is still considered a solicitation for support, even though no receipts are issued for the donations. Similarlly, the sale of goods or services to raise funds is considered to be fundraising, even though no receipt is issued 3. This applies to activities such as the car-wash to raise funds or where volunteers go door-to-door selling goods. It would be very rare for a receipt to be issued in respect of such an activity, but these examples include a solicitation of support and would be classified as fundraising activities under the Guidance. However, the CRA s definition of fundraising goes beyond immediate solicitations of support. The second branch of the definition states that any activity that involves research or planning for future solicitations of support is a fundraising activity. Examples of this would include donor or market related research, fundraising feasibility studies or yield projections. In effect, any activity that is done in contemplation or preparation for a future request for donation is considered to be a fundraising activity. The third branch of the definition is perhaps the broadest. Any activity that is related to a solicitation of support is considered to be fundraising. This includes activities to raise the profile of a charity in the eyes of donors and the public generally, such as media advertisements and marketing related publications. It also includes activities related to past donations, such as donor recognition and donor stewardship initiatives. The third branch also includes the wages or salary of staff members who carry out the fundraising activities and the fees paid to third party fundraisers. 3 It is important to distinguish activities where goods or services are sold in order to raise funds from activities where goods or services are sold as part of the charitable programmes of the charity or as part of a related business.

11 9 Fortunately, the Guidance carves out several exceptions to the general principles described above. Most significantly, activities carried out to procure funding or grants from government or government agencies are not fundraising, even though the grant application process may be very much like a solicitation of support. The majority of these grants comes with specific conditions and detailed instructions, and the CRA does not wish to impose its own policies on top of those of the granting agency. Similarly, activities related to the request and receipt of funds from another registered charity are not considered fundraising activities. This includes grant applications from public and private foundations or transfers from other charitable organizations. The Guidance does not relate to transfers between registered charities; its primary concern is how money moves into the charitable sector from the private sector. Lastly, a solicitation of support in the form of a request for volunteer services is not considered fundraising. Donations of time and services are not directly receiptable and do not qualify as fundraising. D. PROHIBITED FUNDRAISING PRACTICES The Guidance lists a number of fundraising practices that are prohibited regardless of circumstance. Conduct of this nature will be investigated and will likely result in sanctions. 1. Conduct that is illegal or contrary to public policy Illegal fundraising (including fundraising practices that violate provincial or federal laws governing charitable fundraising, broadcasting, charitable gaming or the use of charitable property) is prohibited regardless of whether it is carried on by the charity itself or by a third party on behalf of the charity. Charities are responsible to ensure that third parties raising funds on their behalf are complying with all applicable laws. Fundraising that involves the issuance of improper donation receipts is illegal under the ITA and can lead to revocation of charitable status. The Guidance suggests that a charity that knowingly or negligently facilitates illegal activities (including illegal tax shelters) by its fundraising or receipting practices will be subject to sanctions, even where the charity itself has committed to illegal act.

12 10 2. Conduct that is a main or independent purpose of the charity CRA s view is that fundraising is not a charitable purpose and is only acceptable as a means of supporting a charity s legitimate purposes. If a charity is conducting fundraising that does not support a charitable purpose, but rather as an end in itself, then the CRA considers that fundraising has become a collateral purpose and may impose sanctions or act to revoke the organization s charitable registration. 3. Conduct that results in an undue private benefit As a matter of law, registered charities cannot confer any benefit on a private party, unless that benefit is an incidental and proportionate by-product of an activity undertaken to further a charitable purpose. Examples of private benefits that are incidental and proportionate are reasonable salaries for staff and fair-market value paid to suppliers for necessary goods. Any benefit that is not incidental or proportionate is an undue benefit. Fundraising practices that provide an undue benefit often involve an outside relationship (family or business) between an individual in the charity and a third-party fundraiser. Charities should ensure that relationships with a non-arms length fundraisers are carefully structured and do not compensate the fundraiser at higher than market rates. 4. Conduct that is deceptive Charities are prohibited from carrying on fundraising activities that deceive donors or potential donors. Deceptive practices mar the reputation of the charitable sector as a whole and impair the ability of honest charities to conduct their own fundraising activities. These negative repercussions outweigh any positive effect created by the charity in question raising funds for its own charitable purposes. E. CONDUCTING FUNDRAISING ACTIVITIES The Guidance provides that fundraising activities (as defined above) can be carried out by people who are internal to the charity, such as paid staff, volunteers or board members, or by people who are external to the charity i.e. third party fundraisers. Although the Guidance does not expressly state a preference, the unmistakable implication is that the CRA believes internal fundraising to be safer and will closely scrutinize expenses related to third party fundraisers.

13 11 The CRA s concern over third party fundraising arises because of the potential in such arrangements for abuse. In the past, several charities have fallen prey to fundraising scams where an unscrupulous third-party fundraiser offers to take away the administrative headache of fundraising and receipting in exchange for an agreed upon fee or commission. The fundraiser promises the charity enormous revenues based on its efficiency of operation and a proprietary marketing database of donors who have too much money. The charity, often targeted because of its small size and lack of resources for fundraising, is taken in by the too-good-to-be-true assurances and signs a contract without reading it very closely. It is only later that the charity realizes that that they have retained no control over their own finances and are paying 70% to 90% of each dollar raised to the fundraiser. To make matters worse, the CRA comes knocking over the exorbitant fundraising expenses and the charity s registration is jeopardized. Despite what the CRA might like to have charities believe, only a tiny portion of third party fundraising organizations are interested in taking advantage of charities. However, the fact remains that registered charities are accountable for their own decisions and must not enter into an agreement that creates an undue private benefit for a fundraiser. To do so is a breach of the ITA and could result in revocation of charitable registration. The Guidance, while perhaps overstating the case, correctly stresses that charities should be careful when contracting with third parties for fundraising related services and sets out some helpful principles for charities that do so. Charities should retain sufficient control and oversight so as to be able to account for every dollar donated to it. Charities should also be careful about delegating responsibility for receipts as the obligation to ensure that receipts are accurate and legitimate falls on the charity itself, not the third party fundraiser. VIII. THE GUIDANCE REGULATION OF FUNDRAISING ACTIVITIES As previously noted, the CRA s role in regulating fundraising is to ensure that funds donated to a registered charity are used to advance a charitable purpose and not squandered or used to unduly benefit individuals associated with the charity. To this end, the Guidance outlines the policies and standards that apply to registered charities with respect to fundraising.

14 12 A. ALLOCATION OF EXPENSES Each year, within six months of its fiscal year end, registered charities must file an annual information return in form T3010 (the Return ). In completing the Return, every charity must report expenses related to charitable programmes, administration and fundraising (among others). In general, if an activity meets any of the three branches of the above definition of fundraising, then all expenses related to that activity must be allocated to fundraising expenses and reported as such on the Return. This presumption applies unless the charity can demonstrate that the activity in question would have been conducted even without a solicitation of support. Put another way, the charity cannot allocate to other categories unless it can show that the activity had value outside of fundraising potential. There are two tests that a charity can use to demonstrate that it would have conducted an activity without a solicitation of support: The substantially all test and the four-part test. 1. The Substantially All Test A charity can demonstrate that an activity would have been undertaken without a solicitation of support if substantially all (90% or more) of the activity advances an objective other than fundraising. Generally the determination of what portion of an activity advances fundraising focuses on the proportion of fundraising content in relation to the total content of the activity. Content is usually measured in terms of time devoted to a specific objective. However, the proportion of resources (financial or personnel) devoted to a solicitation of support, as well as the prominence of the solicitation of support may also be relevant to the determination. By way of example, a 55 minute presentation that advances the research activities of a particular charity, followed by 5 minutes on the goals of the charity and a brief solicitation for private donations would likely meet the substantially all test. 5 minutes out of 60 is less than 10% and the resources devoted to this portion were not significant. Lastly, the solicitation was not overly prominent (delivered informally at the end of a lengthy presentation). In this situation it can truly be said that substantially all of the activity advances another purpose.

15 13 If the substantially all test is met, then 100% of the related expense is reported on the Return to the category or categories other than fundraising that are most appropriate. 2. The Four-Part Test If the substantially all test is not met, the charity can still demonstrate that the activity would have been undertaken without a solicitation of support provided that the answer to the following four questions is, in each case, no: (a) Was the main objective of the activity fundraising? (b) Did the activity include ongoing or repeated requests, emotive requests, gift incentives, donor premiums or other fundraising mechanisms? (c) Was the audience selected because of their ability to give? (d) Was commission-based remuneration or compensation derived from the number or amount of donations? If the answer to any of the above questions is yes, then the activity is deemed to be fundraising and 100% of the related expenses must be allocated to fundraising on the Return. However, if the answer to all four questions is no, then an appropriate portion of the expenses related to the activity may be allocated to the relevant category and the remainder to fundraising expenses. 3. Limited Exception Even if an activity would not have been undertaken without a solicitation of support, a registered charity may still be allowed to allocate a portion of the related expenses to a category other than fundraising if the activity clearly advances a charitable purpose. This limited exception springs from the CRA s acknowledgement that certain activities may further both fundraising and a charitable objective. Generally, the CRA will only allow this exception where the charity demonstrates that the activity is designed to prompt an action or change in behaviour other than the giving of a donation and where the activity includes persons who are not current or prospective donors. It remains to be seen how liberally these tests (and particularly the final limited exception) will be applied and enforced by the CRA.

16 14 B. CRA S EVALUATION OF FUNDRAISING EXPENSES There is a reason why the CRA places so much emphasis on the proper allocation of fundraising expenses and the accurate reporting of fundraising practices in the Return. The reason is that the information reported on the Return is the primary means by which the CRA monitors and evaluates fundraising by registered charities. Each year, upon the receipt of a registered charity s Return, a CRA agent who is tasked with monitoring fundraising compares two amounts from the Return the annual fundraising expenses and the annual fundraising revenues. A simple calculation on these two amounts and the resulting number is the CRA s test for whether a registered charity s fundraising is approved for another year or given a serious second look. The Guidance calls this number the fundraising ratio. It is calculated by dividing the fundraising expenses for the fiscal period by the fundraising revenues for the fiscal year. This calculation shows the amount of money the charity has spent on fundraising as a function of the amount that those expenses have generated. The ratio provides a means whereby the CRA can evaluate the reasonableness of a charity s fundraising expenses. The approach is refreshingly flexible and a complete departure from the stereotypical approach of one size fits all. The message behind the fundraising ratio reinforces the overall message of the Guidance fundraising is acceptable, so long as it is reasonable. The Guidance contains a table that outlines the general approach the CRA will take based on the fundraising ratio for a charity. A ratio of 0-34% (i.e. where fundraising costs are less than 35% of fundraising revenues) is unlikely to generate any concerns. A ratio of between 35% - 70% will likely result in the CRA examining the ratio of past years to see if there is a trend of high expenses to revenues. The closer to 70%, the ratio is, the more likely that the CRA will seek details about current and past fundraising activities. A ratio of greater than 70% will, the Guidance states, raise concerns for the CRA and the charity will be required to provide an explanation and rationale for its fundraising expenses. Failure to demonstrate compliance will likely lead to sanctions. There are any number of valid reasons why a charity s ratio may be higher than 35% or even 70%. The Guidance acknowledges that the charitable sector is very diverse and that fundraising practices and efficiencies vary according to numerous factors. The Guidance stresses that the

17 15 fundraising ratio is only a litmus test; that is, a first step to determine whether further investigation is necessary. The over-arching principle in evaluating a charity s fundraising expenses will be the reasonableness of the expenses in all the circumstances. Taken on its own the fundraising ration is not determinative. There are a number of factors that the CRA will consider when it investigates fundraising. The first is the size of the charity, because size might play a role in the efficiency of an organization to raise funds. Generally speaking, larger charities are better able to get more bang for their fundraising buck than small charities. The CRA will also question whether the charitable purposes of the charity make it more difficult to raise funds because the cause appeals to a very limited segment of the public. Lastly, the CRA will take into account any situation that could result in up-front costs and long-term gains, such as planned giving and donor acquisition campaigns. Where the fundraising ratio prompts further review, the CRA may exercise its discretion to investigate further, either by requesting information from the charity or, if circumstances warrant, by conducting an audit. If a charity s fundraising practices are eventually found to be unreasonable, the CRA may seek to educate the charity by the imposition of a compliance agreement or it may impose sanctions, ranging from monetary penalties, the suspension of receipting privileges or, in egregious circumstances, revocation of charitable status. C. AREAS OF CONCERN AND BEST PRACTICES The Guidance contains two useful sections for registered charities who are pre-emptively evaluating their own fundraising practices. Certain fundraising practices are identified as areas of concern that may prompt further review. Many of these relate to third party fundraising contracts. Some areas of concern for the CRA include: 1. Sole-source or non-arms length fundraising contracts Sole source contracts are those where only one party was solicited for the contract. Non-arms length means that there is a relationship between the charity and the fundraiser. In both cases, the CRA is concerned with the potential for providing an undue private benefit to a third party. The surest way to rebut this presumption is to have evidence that the fees or compensation paid to the third party are reasonable and reflect fair market value. An even better response would show that the third party was carefully selected after considering a number of alternatives.

18 16 2. Activities where most of the gross revenues do not go to the charity This situation represents the kind of exploitive fundraising scam that the Guidance was developed to eliminate. Where a high percentage of fundraising proceeds go to a non-charitable party, including the fundraiser itself, the charity must show that it has taken steps to determine the fair market value for the good or service supplied, and that it has taken adequate measures to control costs. Charities can manage this risk in various ways, such as showing that expenditures on the activity or activities represent an investment and will result in lower costs for subsequent activities and disclosing costs so that the public or attendees are not misled about the use of their donations, entrance fees, or other contributions. The charity should be able to demonstrate that it is taking steps to lower its fundraising costs over time. It should also be able to document how and when it intends to achieve a more reasonable return for its fundraising costs. 3. Total resources to fundraising exceeds resources to charitable purposes If a charity is spending more on its fundraising than it is on the programmes that the fundraising is meant to support, the CRA will be concerned that fundraising has become a collateral purpose. This concern may arise regardless of whether the fundraising is conducted by the charity itself, or by contracted third parties. The list of best practices contains a number of helpful pointers for charities. Many of the areas of concern can be diminished (or at least offset) by establishing and documenting these practices. While not all of the best practices bear lengthy discussion, a few are worthy of comment: 1. Prudent planning process The Guidance recommends that charities that are about to engage in a new type of fundraising activity research the expenses and returns that can be expected from the activity before committing to it. It may also be wise to document alternative fundraising activities that were considered and the reason why a particular activity was chosen.

19 17 2. Appropriate procurement process Suppliers of goods or services in relation to fundraising activities should be carefully selected, keeping in mind the size of the charity, its resources and the nature of the fundraising activity. Charities should solicit bids from at least three suppliers of goods or services to ensure that they are not paying higher than fair market value. For large contracts, charities should consider and implement a tender and bidding arrangement. Special care should be taken where a supplier of goods or services is related to the charity, to avoid the appearance of conferring an undue private benefit. All contracts should be carefully reviewed and charities should seek to include provision to allow the charity to terminate a contract if the supplier does not comply with applicable laws. 3. Use of volunteers The Guidance correctly points out that using volunteers to conduct fundraising may allow charities to generate comparable returns without incurring additional fundraising expenses. While this may be true for basic or routine fundraising practices, charities should be careful of using volunteers for fundraising activities where some experience or expertise is required (such as gift planning). 4. Disclosure This section lists a number of guidelines to assist registered charities in disclosing fundraising practices and relevant information to the public. A list of suggested information for disclosure before and after a major capital campaign is particularly useful to help charities to manage donor relations during these periods. IX. CONCERNS AND CRITIQUES Taken as a whole, the Guidance represents a relatively fair and rationale attempt to regulate fundraising as it relates to the CRA s mandate to enforce the provisions of the ITA. Most concerns regarding the Guidance are ideological rather than practical. For example, some charities are unhappy about the CRA evaluating fundraising and assessing penalties on the basis of an internal administrative policy, rather than in accordance with validly enacted legislation. For the most part, however, charities want clear rules and straightforward, transparent standards for fundraising, even if it comes from an agency that has only the most tenuous authority to

20 18 regulate fundraising. This is just one manifestation of the charitable sectors need for a regulator with a strong legal mandate to set policy and standards for all aspects of charitable operations, not just tax-related matters. There is some concern that the various fundraising ratios (35% and 70%, respectively) are arbitrary and do not have a basis in reality. The CRA has not made any statements indicating why these numbers were selected, but it is certainly the case that they have no basis in the ITA. The fundraising ratios are particularly a problem for foundations, charities whose sole purpose is usually to raise funds and distribute to other registered charities. These organizations have higher fundraising expenses than most operating charities because the bulk of staff salaries are allocated to fundraising (the primary activity of the organization). For example, assume a parallel foundation has 5 staff members and operational expenditures of about $600,000. The foundation allocated about $150,000 on administrative matters, with the bulk of the expenses ($450,000) being used for the day-to-day activities of the staff, which would predominantly relate to raising funds for the operating charity. This would mean that the foundation in this example would have to raise more than to $1.3 million each year to stay under the 35% level and at least $650,000 to stay under the 70% level. Many parallel foundations might have difficulty in generating these kinds of fundraising revenues every year. As a result, some charities are having to seriously rethink the usefulness of having or establishing a parallel foundation, since it would be far easier to account for fundraising expenses in the operating organization as opposed to in its parallel foundation. Lastly, there are significant questions regarding the interaction between the Guidance and the newly revised disbursement quota for charities. As most charities are aware, the federal budget released in March 2010 proposed changes to the ITA that significantly reduce the amount that registered charities must disburse each year on charitable activities. The preamble for the budget notes that recent administrative initiatives (referring to the Guidance and other, similar administrative policy statements) have strengthened the Canada Revenue Agency s ability to ensure that a charity's fundraising and other practices are appropriate. This strengthened administrative position is given as one reason why a complex and comprehensive disbursement quota was no longer necessary.

21 19 The concern is that the disbursement quota and the Guidance do not cover the same ground. The disbursement quota legislatively mandates how much a charity must spend on charitable activities. In contrast, the Guidance administratively restricts how much a charity can spend on fundraising and how expenses related to fundraising should be allocated on the T3010 Return. The Guidance only indirectly relates to money spent on charitable activities and does not provide any requirement that charities must spend the majority of their funds to further charitable purposes. To use an analogy, employing the Guidance as a disbursement quota replace i.e. to ensure that charities spend money on charitable programmes is like trying to use a screwdriver to pound a nail; any positive progress is as much a function of luck as it is design. Only time will tell how the CRA will rely on the provisions of the Guidance to regulate charitable spending in place of the diminished disbursement quota. X. CONCLUSION The importance of fundraising to the charitable sector is unquestionable. In a very real sense, fundraising is the heart of charity the means of harvesting philanthropic goodwill of donors and the public. Although fundraising shows no signs of playing a diminished role in either the finances or the operations of charities, its days as an unregulated aspect of the sector are over. While its authority to regulate may be questioned and the enforceability of the Guidance challenged, the CRA has stepped up to answer public and media demand for accountability and transparency from the charitable sector. Fundraising is allowed, but only as a means to an end and never as an end in itself. For the most part, the Guidance is good news for the charitable sector, providing a degree of certainty and clarity that did not exist previously. Fundraising is broader than many charities thought it was and includes both the before and the after of the request for a donation. Unless a charity can demonstrate otherwise using one of two prescribed (but flexible) tests, all expenses related to an activity that includes a solicitation for support must be allocated to fundraising expenses. On a positive note, there is no one size fits all approach to fundraising. There is no maximum cap on fundraising expenses. Large expenses are acceptable, provided that a) they produce even larger revenues or b) there is a valid justification for the expense in the circumstances. However,

22 20 the newly established fundraising ratios may be difficult for certain foundations that are focused on fundraising or small charities that have difficulty achieving economies of scale in fundraising activities. The relatively low bottom ratio of 35% means that many charities would be wise to review and update their fundraising practices before being contacted by the CRA. Fortunately, there is every indication that the CRA will take into consideration all relevant circumstances when investigating fundraising expenses in excess of the suggested ratio. Above all else, fundraising must be reasonable and rational. It should be well thought out, researched if possible, carefully conducted and documented and accurately reported. Regardless of size or sector, all registered charities should make the time to review the Guidance in light of their current fundraising practices. Even if you decide not to implement them, at least you will know what to expect. As the old saying goes it always pays to know where you stand.