Fundraising Guidance - June 16, 2010

Transcript

Slide 1

Presenter:

Welcome to the Canada Revenue Agency's Fundraising Guidance webinar. This webcast is a recording of a webinar that occurred in June, 2010. This session is no longer live, so if you have questions or require additional information, please contact our Client Service Section at 1-800-267-2384. Thank you very much and we hope you enjoy the presentation.

Slide 2

The guidance on fundraising. Now, one reasonable question to ask right at the beginning of everything would be, “Why have guidance on fundraising for charities?” And certainly, one of the major issues, one of the major reasons why the CRA has policies and guidance on fundraising is that it has been identified as a compliance concern for the media, for the public, and for the CRA.

And, indeed, the CRA has developed policies and guidance for quite some time now. Some of our earliest products were created back in 1989. The most recent item that we've developed is CPS-028, Fundraising by Registered Charities, which was released about a year ago in June of 2009. That's available on our Web site at www.cra.gc.ca/charities.

Now, in releasing this guidance, the CRA hasn't changed its position on fundraising, but certainly wanted to provide some additional direction and advice on issues related to fundraising and to take into account changes in the law and changes in the sector that have occurred, certainly over the past 20 years or so, as it relates to fundraising.

It is also an important goal for us to be more transparent about the decision-making process that we go through when we are evaluating a charity's fundraising, and what we consider to be acceptable, or prohibited, or areas of concern.

It's difficult to summarize the fundraising guidance in a short statement, but I suppose it would be reasonable to say that one of the major themes in the guidance, and certainly one of the major themes in this webinar would be that charities, of course, can fundraise in order to support their operations. But, the CRA expects that fundraising to be reasonable, and proportionate to the amount of charitable work that is being carried out.

Slide 3

Charities and Fundraising. And, I'm going to back up for a step and just put forward the framework a little bit about the Canada Revenue Agency and fundraising. Now, charities in Canada are registered at the federal level under the Income Tax Act, the federal piece of legislation.

The Canada Revenue Agency is the federal body that is responsible for applying and enforcing the provisions of the Income Tax Act. In turn, the Charities Directorate is a relatively small portion of the Canada Revenue Agency and the Charities Directorate is the body that is responsible for applying and enforcing the provisions of the Income Tax Act, as they relate to charities.

I'll just make a note here, I tend to use the phrase "Canada Revenue Agency" and "Charities Directorate" interchangeably in this webinar. The CRA is the larger organization, the Charities Directorate is a relatively small component. The Charities Directorate is really the main author of these policies and guidance, but just out of habit, I tend to use the two terms interchangeably.

Now, in terms of registering charities in Canada, one of the requirements of the Income Tax Act is that all of the charity's purposes must be charitable. Now, a challenge in applying this requirement for the Charities Directorate is that the Income Tax Act does not define what is charitable. There is no list of charitable purposes in the Income Tax Act or anything like that. So what the Charities Directorate does is we look at the common law and what that is, is it is the body of court decisions as they relate to charity over the past 200 or 300 years, or so.

There have been many, many court cases about what is charitable, what isn't charitable and we take those court decisions as guidance in evaluating whether a purpose is charitable or non-charitable. One thing the courts have been relatively consistent about is that fundraising is not a charitable purpose. So, what that means is, of course, since the Act requires a charity to have exclusively charitable purposes, and fundraising is not a charitable purpose, a charity cannot have fundraising as a purpose. So, a charity could, of course, say that it has as its purpose “to relieve poverty, say by operating a soup kitchen in a particular city”, but it could not also have “and to fundraise.”

Fundraising, however, can be an activity that supports a charity's purposes. Now, this calls into question the difference between purposes and activities. Generally speaking, purposes are the aims or the objects or the main intent of an organization. What it wants to do, like "to relieve poverty by operating a soup kitchen." Activities are the ways, how the charity will actually achieve its purpose. So, for example, "to relieve poverty by operating a soup kitchen." And then the activities are, "to buy food, to rent a hall, to advertise the service, and to fundraise to pay for everything." So, fundraising can be a means to an end. It can be an activity that supports a purpose. It can be a means to an end, but it cannot be an end in itself. And that's certainly a major theme of the fundraising guidance and that's something we'll come back to again later in the webinar and it's obviously a major theme of this webinar, as well.

Now, it sometimes, and I'll mention briefly here, that it can be difficult, at times, to tell when fundraising has become more than an activity and has become a purpose for a charity. One of the general rules that the CRA follows is that if a charity is devoting more of its resources, consistently, to its fundraising activities than to its charitable purposes, that's usually a strong indicator that the charity has adopted fundraising as a purpose. It always depends on the facts of the situation, and there can be good reasons why charities, for example, over the short-term, have to spend more on their fundraising. But, from our perspective, we want to see the majority of a charity's resources going to its charitable purposes.

 Slide 4

This is just a little more about the background to charities and fundraising. I've been talking about fundraising as an activity and not a purpose and I just want to be clear. The CRA certainly acknowledges and recognizes that charities have to fundraise in order to carry out their activities and their purposes and the Income Tax Act certainly does not prohibit fundraising itself. The important thing is that the CRA generally expects charities to devote reasonable resources to their fundraising. And, that's not only to comply with the Income Tax Act, which is certainly important. But, also to help maintain the integrity of the charitable sector in Canada itself, which is certainly important to the CRA and the Charities Directorate as the federal regulator for charities.

Slide 5

We are just going to discuss, What is fundraising? What does the CRA mean when it talks about fundraising? Generally speaking, the CRA and the Charities Directorate have a very, very broad definition of fundraising. We tend to say that fundraising is anything that involves solicitation of support. That is to say that something that is a solicitation of support, is part of a solicitation of support, or is related to a solicitation of support.

A solicitation of support is, basically, asking for money or some other form of property from a person or a company. So, asking for money or a gift-in-kind. A gift-in-kind is a non-cash gift, that is, a form of property that is not cash: stocks, bonds, real estate, a car, anything like that.

So, that's the solicitation of support -- very broad meaning. Now, a solicitation of support can also be part of the research and planning for future solicitations of support. Now, an example that we can use is, say a charity is planning to do a door-to-door canvassing fundraising campaign. So, perhaps as part of the research for that campaign, they might purchase data on the various demographics of the neighborhoods of the city in order to figure out which are the best prospects for their fundraising campaign. So, the cost of that data would be a fundraising cost because it is research related back to the solicitation of support.

Similarly, planning for the solicitation of support, if you had a staff member and part of their salary represented the work that they were doing in terms of organizing the volunteers, planning out the shifts, how are the volunteers going to get to the neighborhoods to knock on doors to ask for donations? That portion of the salary would represent a fundraising expense or a fundraising cost.

And then, of course, we have costs that are related or directly the result of a solicitation of support. For example, if after a door-to-door canvassing campaign were concluded, a charity might send thank you gifts to everyone who gave $100 or more to a charity at the door. So, the cost of that little thank you gift and getting it to the people that made the donations, that would also be a fundraising expense.

Slide 6

One thing we'll also mention, and this is particularly in the context of completing the form T3010B, the Registered Charity Information Return. Basically, from the CRA's perspective, when a tax deductible receipt is issued for any part of a transaction, the entire activity is deemed to be or to include a solicitation of support and therefore, when a charity is filling out its T3010B, the cost associated with that entire activity must be allocated to fundraising cost. So, as a general rule, and we will get much more into allocation of expenditures later in the presentation, but as a general rule, if the costs to get a donation that appears on line 4500 of the T3010B, total tax-receipted gifts received during the fiscal period -- so cost associated with getting an amount on that line 4500 have to be reported on line 5020, the fundraising expenses for the fiscal period. And, as I say, we'll get more into this later.

Slide 7

What is not fundraising? Now, fundraising does not include some things which are technically a solicitation of support, but the Charities Directorate considers them so different in terms of their nature from asking a person or company for something that they own that we don't really consider it to be fundraising.

So, for example, requests for funding from government or other registered charities, presumably, in the form or grants or something like that. Any expenses related to requesting those grants, that would not be a fundraising expense. We don't consider that to be a fundraising activity or a fundraising expense.

Also, the operation of a related business is not a fundraising expense, any costs associated with that. Now, related business is a really big topic, we could have a webinar just on related businesses. But for now, what we'll just say a related business is a business activity that is related to a charity's purposes and that is in support of those purposes. 

And, I just want to distinguish those a bit. Often you see charities that are selling chocolate bars or t-shirts or doing a carwash or something like that once or twice a year. That is different than a related business. That is a fundraising activity. It's occasional and doesn't really amount to the same as carrying on a business. I don't want to go too far into that. We have a policy on our Web site, What is a Related Business?, I believe the number is CPS-019, What is a Related Business?. Certainly, if you want to know more about related business, you can go look at that policy. But, for now, for the purpose of this webinar, we'll just say if it's a related business, it's not fundraising.

And then, finally, we come to the third bullet that we have here, the recruitment of volunteers; costs associated with recruiting volunteers for the charity. And, to be a little bit more specific, I guess we would say volunteers who are going to carry out the general operations of the charity or volunteers who are not dedicated specifically to fundraising activities. If a charity technically just went out to recruit a volunteer for their fundraising activity, presumably, if that volunteer was just doing fundraising, the costs associated with that would be strictly speaking, a fundraising expense, but generally, if it's just volunteers to help out with the charity, all the aspects of the charity, then we don't consider that to be a fundraising activity.

Slide 8

Fundraising activities. And, here on the next two slides we just have some examples of what the Charities Directorate considers fundraising activities. We've broken it into categories of external and internal activities. But, these are just for the convenience of the webinar. It's not in the guidance and certainly not in the Income Tax Act. Just, when we're talking about fundraising activities and external activities we'd be talking about what I suppose one might traditionally think of fundraising activities: telemarketing, direct mail campaigns, door-to-door canvassing, putting on events, that would be gala dinners, benefit concerts, car washes, anything like that. Distributing information through the media, or the charity's publications, a charity might place an advertisement in a newspaper soliciting donations, maybe talking a bit about the charity, that would generally be a fundraising activity. Charity's publications, a charity might publish a newsletter a few times a year, maybe a quarter of that newsletter is taken up with soliciting donations, so that would be the cost associated with that portion of the newsletter would be a fundraising expense or a fundraising activity.

Slide 9

There's also internal activities related to fundraising. These would generally not, usually what we would consider to be activities that actually raise money, but are usually part of the administration and support for raising money, for soliciting support. Researching prospective donors, hiring fundraisers, that sort of thing.

Now, also, a related point. Who can carry out a charity's fundraising? And really the answer is just about anyone. The staff or the volunteers of a charity can fundraise or a charity can contract or form an agreement with a third party to carry out the fundraising. Now, it really could be anyone that the charity works with and one thing that needs to be kept in mind is that if a charity has an agreement or a contract with a third party to do fundraising on its behalf, that third party -- that whole fundraising activity is still subject to the agreement, to the fundraising guidance and all the requirements of the Income Tax Act. There isn't a way to get around the fundraising guidance or anything like that by contracting with a third party.

Slide 10

I'm just going to talk a little bit more about third party fundraisers. Usually, when we talk about third party fundraisers, the Charities Directorate, we're talking about professional fundraisers, people or individuals or companies whose job it is to raise money for charities. And, certainly a charity can contact a third party fundraiser, there's nothing in the Act that prohibits that, but we would certainly encourage charities to be careful when they're entering into these types of contracts.

The CRA has certainly seen circumstances where the large majority of the funds go to the private company that is raising the funds rather than the charity, so 70% or upwards are going to the private company. And the problem with situations like that is it can raise the question, is the fundraising campaign being carried out primarily for the benefit of the charity or for the private fundraiser? And, that can lead to a problem with private benefit, and we'll get into private benefit later in the presentation, but it can be an issue. Again, it comes back to the facts of the situation. It's possible there may be a good reason for the professional fundraiser to be receiving a larger portion of the proceeds, but in general, we would certainly encourage charities to be careful about those types of contracts.

Additionally, when the charity is entering into an agreement or contract with a third party fundraiser, the charity should be about to provide a full accounting of the monies raised and particularly if they are allowing the fundraiser to issue tax-deductible receipts on their behalf, they should be very careful to monitor the receipting process and that receipts are only issued for the eligible amounts -- for the correct amounts.

Slide 11

Collaboration with third parties. Now, here we're getting away from third party fundraisers, specifically, and we're getting more into probably what you might call cause-related marketing or something like that. Usually, when we talk about this we're thinking about situations where you have a business, for example, that is going to donate a portion of its proceeds to a charity and advertises this fact and says on this particular day we're going to give all our profits to the charity or all the profits from the selling of this particular product is going to go to a particular charity. If the charity happens to incur funded costs related to this activity, those are generally fundraising costs, fundraising expenditures. For example, if a charity puts a Web page up on its Web site where it says that this is the relationship that we have with this private industry, these are the terms and promoting that relationship. Then, generally speaking, the cost of that Web page would be a fundraising expense.

Slide 12

Now what we're going to do is have a short pause in the presentation itself, and I'm going to turn things over to Adrianna, who will be answering some questions that have come in on the chat window.

Adrianna:

Hi there, good morning. We have received one question, so far.

If fundraising is not a charitable activity, how can entities like hospital foundations, whose primary purpose is to raise money for an associated hospital, receive charity status?

Most foundations' primary purpose is, in fact, gifting to a qualified donee and a qualified donee is generally another registered charity. So, in this case, the hospital is the registered charity and the hospital foundation would be set up to gift money to that particular qualified donee. The fundraising activity itself is, in fact, a means to carry out the charitable purpose. Foundations, you will note, are still subject to the fundraising guidelines, though.

And, we're going to read one more question and it's a question that comes from our Qs and As in the guidance itself, but I think it's a relevant question at this point in the presentation.

Our charity has hired a telemarketing firm to raise funds, however, when the firm contacts potential donors, it will convey information that will raise awareness of our cause. We consider this part of our efforts to advance the charitable purpose. Can we report a portion of the cost of the telemarketing initiative as a charitable expenditure?

And the answer to this question is no. All fundraising requires a certain amount of communication about the cause for which the funds are being raised. If the communication is undertaken for the purpose of fundraising, then all costs should be reported as fundraising expenditures.

We'll turn it back over to Zach.

Slide 13

Presenter:

And here, I'm going to talk a little bit more about regulating fundraising and I'd like to give you the Canada Revenue Agency's perspective on that. And then also, we'll talk a little bit, we'll go on to talk a little bit about charities and particularly self-assessment of their own fundraising. So, before we get into any kind of assessment, I just want to talk about how the CRA itself assesses fundraising.

Now, the Income Tax Act, it really contains very little in it about fundraising and it certainly doesn't regulate in any way, I suppose what you might call the technical details, or the mechanics of fundraising which is to say the what, the when, the how, the where of fundraising.

The Income Tax Act has nothing to say about whether a charity uses telemarketing or direct mail or lotteries, bingos, casinos, anything like that, those specific details. I think it's probably fair to say that certainly a major, major interest of the Income Tax Act and therefore, of course, for the Charities Directorate is, are a charity's resources being used appropriately, that is to say, for its charitable purposes. And that is, more or less, then lens or the perspective through which we look at fundraising.

Having said that, the provinces and the territories often do regulate the mechanics, or the technical details of fundraising. Many provinces, territories, municipal governments have rules, laws about carrying out of lotteries, bingos, charity casinos, when they can be carried out, whether one needs to have a license, or anything like that. So, we would certainly encourage any charity that is going to be operating fundraising activities in a province to make sure that it contacts the province or the territory and is complying with all of the local regulations. Alberta, for example, in some situations, requires charities to register with the province before they carry out, or sometimes after they carry out their fundraising activities.

Slide 14

What is the fundraising ratio of cost to revenue? And this table, or chart, is directly out of the fundraising guidance, itself. Now, this isn't in the Income Tax Act by any means. What this is, is this is a tool that the CRA developed collaborating with the charitable sector on this, as well, and we intend this as a form of assessment for a charity to self-assess and also for the CRA to look at a charity's fundraising practices. And, the idea is that the charity is going to get a picture of essentially how much they're spending and how much they're making in the form of a ratio or a percentage.

The actual calculation is done by looking on the form T3010B, taking the amount on line 4500, total tax-receipted gifts in a year, everything on there, adding it to line 4630, total non-tax-receipted fundraising revenue, adding those lines together and then dividing it into line 5020, the total fundraising expenses for the year. And then, of course, the charity will have a percentage out of that.

If the percentage is under 35%, the charity's fundraising is unlikely to generate questions or concerns on the part of the CRA if the CRA were to examine the charity's fundraising, for example, in the course of an audit or another investigation.

Above 35%, and especially above 70%, the higher you go, the more likely it is that the CRA is going to take a look at the ratio over the course of a few years and is going to be concerned about potential problems or issues with the fundraising practices. And when I say problems or issues, I mean, whether there is a practice that conflicts with the Income Tax Act, that violates a provision of the Income Tax Act. That is something that we'll go into a bit later.

The ratio itself, of course, it's not in the Income Tax Act, so the CRA can't specifically sanction a charity based on this ratio alone. The ratio is a first step in terms of determining whether a closer look is generally warranted. Having said that, there are absolutely situations where a charity might have a very high fundraising ratio for a particular activity, or a particular year, or potentially perhaps even for a few years, and have a very good reason or reasons for that high fundraising ratio. An example would be if there is a small charity that perhaps has just been formed and is just starting its activities and its fundraising activities, it may have much higher fundraising costs than a larger charity that's well-established and can take advantage of economies of scale. Alternately, you might have a charity that is in a remote geographical region and they have a smaller local pool to draw donations from, or they might be working with purposes that are more difficult to attract charitable donations. And then, of course, it's possible that a charity that is under 35% may still have some fundraising practices that are questionable.

So, this is certainly an important tool and hopefully a helpful tool, but it certainly doesn't tell the whole picture in itself. We'd certainly encourage any charity to take a look at their fundraising ratio and from there go into an examination of their fundraising activities, especially if their ratio is above 35%. And we'll get into that a bit more, the examination of the fundraising activities and practices.

Slide 15

Before we do that, I just want to look a little more closely at allocation of expenditures for the purposes of the form T3010B. As I'm sure that you're all aware and familiar with form T3010B requires a charity to allocate its expenditures between different categories: charitable programs, administration, fundraising, political activities, and so on.

Now, of course, if a charity is going to calculate its fundraising ratio, it needs to make sure it can allocate its expenditures properly between those categories. At the very beginning of the presentation, or earlier in the presentation, we talked about how if a tax receipt is issued then the activity is considered to have involved a solicitation of support and generally, it is a fundraising activity. I mentioned that line 4500, everything on there has to go on to the costs associated with, those donations have to go on to line 5020. However, having said that, although issuing a receipt does mean that generally, we consider it to involve a solicitation of support, there are a couple of what we call tests that a charity can do. If it's looking at a fundraising activity to see if it can allocate any of those expenses of the activity away from fundraising and into other categories. So, it's a way to sort of, for the purpose of the ratio, in particular, to bring down their fundraising expenses side of it because they can allocate expenses away from fundraising into charitable programs, administration, or whatever is appropriate.

Slide 16

Which is the first of the two tests. Now, of the two tests, I should mention, this is a relatively involved portion of the guidance. So I would certainly encourage you, if you have any questions, please do look at the guidance. It goes into a fair amount of detail and gives a lot of examples on this section, so we may not be able to go through every issue right now, but hopefully, if you need additional information you can find it there.

So, the first test is the substantially all test. What this means is if substantially all of a particular activity advances one of the charity's purposes, then any cost that might be related to fundraising, we don't worry about them, we don't allocate them to fundraising, we allocate all the costs to charitable activities.

Now, when I say “substantially all,” I mean 90% or more. Generally speaking, when you see “substantially all” in relation to a CRA policy or document, that means 90% or more. So, to use an example, let's say -- this example is pretty much out of the fundraising guidance. If you have a charity whose charitable purpose is to carry out research say in a field of health of some sort and one of the directors of the charity goes to a conference or a forum where there is stakeholders who are interested in the charity's research and that director gives a speech on the charity's research, on the charitable work that they are doing. And let's say the speech is an hour long, 60 minutes, and for 5 minutes of that speech, say the last 5 minutes, the director gives a pitch for donations. The director explains what the donations are used for, how useful they are and asks everyone to please give money to the charity. So, obviously, 5% is less than 10% of the 60 minutes. So, if the charity were filling out its T3010B, looking at the expenses associated with that activity of sending the director to give the speech and saying, “Do we need to allocate these expenses to fundraising because there was a solicitation of support?” What they could say is, “Well, you know, about 5 minutes were just given to solicitation of support, so that means that we meet the substantially all test, 90% or more of it was for the charitable purpose that our charity does, we actually can forget about allocating any expenditures to fundraising and we're just going to put all the expenditures down as a charitable expenditure.”  So, that's the substantially all test.

Slide 17

Now, if a charity fails the substantially all test, it can move on to the four part test. So, let's just say, we'll take the same example. Research charity, director giving a speech for an hour, and let's say the director, just to pick a relatively easy example, spends 20 minutes on a request for support. So, 20 minutes, just explaining the facts of the situation, how useful donations are, requesting that the audience members make a donation. So, obviously, the charity, when they're filling out their T3010B, they can't meet the substantially all test, because we're now over 10% being devoted to fundraising.

So, what they can do, is they can look at the four part test and in order to pass the four part test they have to answer “no” to each of the four questions and if they're able to do that, they pass the four part test and they can pro-rate -- they can basically divide out the costs between fundraising and any other categories such as administration, political activities, charitable purposes, and so on.

So, in this case, we've got 20 minutes, which is about one-third of the presentation, so if they pass the four part test they can put one-third of the activity's cost into fundraising, and about two-thirds, 66% or so, into charitable purposes, in this particular case.

So, for the four part test, the first part is, “Was the main objective of the activity fundraising?” And, there are certainly a lot of factors that go into this. We're using a relatively simple example without a lot of details. What we can look at with this example is two-thirds of the activity is still carrying out the charitable purpose, so I think we can probably be pretty comfortable saying that the main objective of the activity is the charitable purpose and not fundraising so we can answer no to the first part, was the main purpose fundraising.

Second one, “Did the activity include ongoing or repeated requests for donations, emotive requests, gift incentives and so on?” So, just assuming there are no gift incentives or anything like that, it can be tricky in terms of repeated requests or emotive requests. It's really going to depend on the particular case or scenario that we're examining. Let's just say that it isn't an emotive request, let's say that the director didn't provide a very heart-wrenching story of someone who suffered a particular illness or something like that, but focused on the results that the donations helped the charity achieve. I suppose it might be fair to say, the facts of the situation, and we'll say that it's “no” to question two, as well.

Question three, “Was the audience selected because of their ability to give?” So, if, by chance, the charity had specifically invited people with a long history of philanthropy and with a high net-worth, then probably, we would have to answer “yes” to that. But, if we can assume that the audience was actually people composed of other people working in the health field, like people who were interested in the charity's results and their research, we could answer “no” to that.

And finally, commission-based remuneration, compensation from the number of donations -- basically, “Did the fundraiser make money off of the fundraising, itself?” is perhaps another way to phrase that. Generally speaking, in this case, no.

So if we're able to answer no to all of these questions, which in this example we'll say that we can, then when the charity is filling out its T3010B, it can pro-rate these expenses and do two-thirds to charitable purposes and one-third to fundraising.

Now, I should mention, and this part can be a little bit tricky, in the fundraising guidance, there is also a further exception to these two tests. And what the CRA is trying to do with this exception is recognize there are cases where a charity can't meet the substantially all test, it can't meet the four part test, but the activity still very much carries out the charity's purpose. There is a few examples in the guidance and the example that I'll just take out right now is, let's say a charity is doing a marathon race for cancer survivors. And, I have to be a little bit careful here, because I don't work in the section that evaluates applications or anything like that, so I'm not saying this is absolutely a charitable purpose, but let's say, for the sake of this example, that the charity holds a marathon race to build the stamina and endurance of cancer survivors and this has been proven to be an effective compliment to the treatment of cancer. So, let's say they do this race and the racers are sponsored, just like a fundraising race and let's say there are emotive requests or emotive appeals all over the place and it's a little hard to distinguish whether the main objective is fundraising or whether it's the stamina, so they wouldn't pass the four part test. But the point is, they're still very much carrying out their charitable purposes. In this case, we would say, okay, even though you can't meet the substantially all test, even though you can't meet the four part test, you can demonstrate that this activity definitely carries out the charity's purposes, so we're going to say you can pro-rate your activity as if you were carrying out the four part test. So the charity would have to do a reasonable estimation of how much of the activity was fundraising, how much was charitable purposes and then place that on the T3010. So, needless to say, something of a challenging, potentially, situation, but certainly, I would encourage you to refer to the guidance or call our Client Service section, as required.

So, I'm just very quickly going to go through slides 18 and 19.

Slide 18

Slide 18 is talking about fundraising and the form T3010B and, of course, fundraising activities are reported on the T3010B. Section C6 discusses the types of fundraising activities that are carried out. Telemarketing, whether an external fundraiser has been contracted, that's also Section C7. In the new T3010B, charities, if they hire an external fundraiser, they must also complete Schedule 4 which is confidential information, it won't be released to the public, it will be kept on the CRA's records.

Slide 19

Specific lines, we've already discussed this a little bit, but related to fundraising, lines 4500 and 4630 are generally considered fundraising revenues, particularly in connection with calculating the fundraising ratio. And fundraising expenditures are reported on line 5020, which is a breakout of the line 4950, which is essentially a sub-total of the charity's expenditures for the year. On the new form T3010B it's the Schedule 6 where this detailed financial information is captured.

Slide 20

So, now what I'm going to do is I'm going to turn things back over to Adrianna, who is going to answer some questions from the chat window.

Adrianna:

Thank you. The first question:

Why doesn't the CRA consider getting grants from other charities as fundraising and how should we report expenditures related to this activity?

So, revenue received from other registered charities, by definition is recorded as a gift from another registered charity and should be recorded as an amount received from other registered charities. The expenses incurred as part of the grant application process would then subsequently be recorded as an administration expense.

Second question:

We have a concert put on by Haiti children coming up next year and we were wondering how much of the associated activities would be considered fundraising expense? For example, could we consider some of this activity raising awareness of the need in Haiti, and if so, how much?

So, the purpose of this particular event is to raise funds and to solicit support for this particular cause and therefore, all of the associated expenditures associated with this particular event should be reported as a fundraising expense.

Thank you very much.

Slide 21

Presenter:

Thank you, Adrianna.

Those of you who have seen our Gifts and Receipting webinar may be familiar with some of this already, but I'll just mention that, generally speaking, when a charity holds a fundraising event and there is attendees or participants going there, those attendees or participants may be eligible for an official tax-deductible receipt. It depends a little bit on how much, of course, they pay to attend the event and what the amount of the advantage is, as we call it. If they get anything back in the forms of a gift back, dinner, entertainment, and that sort of thing. Generally speaking, the rule is that that amount has to be deducted from their donation, the amount that they paid to attend the event.

Now, needless to say, there's a lot more to it than that. If you want to find out more about that, the amount of the advantage, the amount of the eligible amount, you can see our webcast on Gifting and Receiving in the Webinars, information sessions, and other news section of the Charities Directorate Web site: www.cra.gc.ca/charities or our Income Tax Technical News Number 26 at www.cra.gc.ca/e/pub/tp/itnews-26.

Slide 22

Prohibited fundraising conduct. Now this is conduct that is definitely a problem for charities. These are conduct or practices or activities that actually violate the Income Tax Act and that could result in sanctions for a charity. We'll also discuss the types of sanctions that are possible a little bit later. So, if, for example, CRA is conducting an audit of a charity, they examine the fundraising ratio and find it's very, very high, look a bit closer. The higher the ratio, the more the CRA would expect to find problematic conduct like this, although, not necessarily, it would depend on the facts of the situation.

So, in terms of prohibited conduct, the first one we have here is activities that are illegal or contrary to public policy. Obviously, this is a problem. For example, in terms of illegal, if a charity were to hold a lottery without a lottery license from its province, that would clearly be illegal and could be a problem.

Now, the second point is one that we've talked about a little bit already, about which is fundraising that has become a main or independent purpose of the charity. And, of course, since fundraising is not a charitable purpose itself, that would mean that the charity is no longer operating exclusively for charitable purposes, as the Act requires, and that would mean that the charity no longer meets the definition of a charity and would be subject to sanctions up to and including revocation.

The third one is activities that result in a more than incidental or proportional private benefit. Now, private benefit basically means that a person or a company is benefitting personally from the charity's resources. Now, private benefit in and of itself is not necessarily inappropriate. Private benefit occurs all the time. For example, if a charity were to purchase fundraising supplies of any type -- fundraising supplies or services from a company. If they pay market rate for those supplies or services, the market rates generally have a profit component, of course, built into those prices for the company that is offering them. Strictly speaking, that profit is a private benefit for the company, but because it's market rate, it's appropriate and it's all just part of the charity carrying out its fundraising activities. So, that would be an example of essentially acceptable private benefit.

Where it would start getting unacceptable is, let's say a charity is buying its fundraising supplies and services and it only goes to a company that is owned by, let's say a brother-in-law of one of the directors of the charity and the brother-in-law charges them twice market rate. Clearly, that would be an inappropriate private benefit because they're going well and beyond what the market would normally charge for the supplies and services and that would definitely be a problem. Basically, under the Income Tax Act, charities have to be formed for the public benefit. They have to operate for the good of all Canadians or certainly a sufficient segment, as we call it, within Canada. They have to operate for the public benefit and not for a private benefit, it's just part of the nature of being a charity.

And then, finally, we get to point number four: fundraising activities that are misleading or deceptive to donors. We'll go into this a little bit more on the next slide.

Slide 23

Deceptive practices. Generally speaking, registered charities must not misrepresent, for example, which charity will receive a donation. A charity cannot fundraise on behalf of another charity saying, "We're going to give to Charity X" and then actually turn around and give the donations to Charity Y. For example, knowing all that time that they were going to give the donations to another organization entirely.

They can't misrepresent the geographic area in which they operate. They can't say, “We operate our programs in Country A” when they actually work in Country B.

They can't misrepresent the amount or type of work that they conduct or the percentage of funds that will go to the charitable cause. They can't say “100% of everything we raise is going to go the carrying out our charitable activities” and then actually turn around and maybe 20% goes and then the other 80% goes to, for example, a for-profit fundraising company.

The problem with deceptive and misleading practices is again, a public benefit issue. The CRA generally says that if a charity is going out and misleading the public, deceiving the public, they're not meeting the public benefit requirement of being a charity and of course, could be subject to sanctions.

Slide 24

What are some of the CRA's fundraising concerns? Now, here we're moving more out of the prohibited conduct. We're not necessarily talking about activities or conduct that violates a provision of the Income Tax Act, we're talking about more what the CRA is concerned about when it looks at fundraising activities, and you'll find these in the guidance, but not necessarily in the Income Tax Act.

The first one is sole-sourced or non-arm's length contracts without proof of fair market value, and this gets back a little bit to the private benefit issue we were talking about before, which is to say that if a charity just goes to one company, and especially if that company is owned by somebody who is related to a director of the charity, I should add, non-arm's length means that you've got a relationship between two people where they are related either by blood or for example, a close business connection, if they're business partners or something like that. If you're arm's length, you're basically not related by blood or otherwise have a close business connection. So if you have a sole-sourced or non-arm's length contracts there is definitely concerns about private benefit and if a charity can't demonstrate that it has only paid fair market value, essentially market rates for the goods and services it received, that could be a problem.

Now, the second point: total compensation to fundraisers that exceeds the compensation to charities. We've talked about this a bit before, it gets back, again, to private benefit and fundraising as a purpose. So here's a situation, for example, where more of the fundraising proceeds are going to the fundraiser than to the charity to carry out their charitable work, it raises the question of what is the purpose of the actual fundraising.

Misleading public disclosures of information on cost revenues or practices: this is again, getting back into the territory of misleading or deceptive, but the CRA certainly expects charities to be open and transparent about the fundraising costs and practices. The T3010B is certainly one tool in that regard. As you may well know, the T3010B is mostly public information, there is some confidential sections on there, but for the most part, it's public information as are the financial statements that charities submit with their T3010Bs, so that's certainly one tool of disclosure.

Paying fundraisers by commission or payment based on amount of number of donations. Again, nothing that's prohibited in the Income Tax Act, but that is an area of concern for the Canada Revenue Agency. And, part of that is that it is possible that this may result in windfall amounts for fundraisers, say for private companies. For example, if a fundraiser contracts with a company and says, we will raise you $1,000,000, for example, and we'll keep 10% of that. For example, 10 or 20% or something like that, that might be good, in some ways. But, let's just say that the fundraiser happens to already have a number of highly philanthropic contacts who the fundraiser knows it can get the money very quickly and easily from so they very rapidly get the million dollars and they've got $100,000 or $200,000 profit out of that with little effort, in that respect, and then they turn the rest over to the charity. So, it becomes an issue getting back to private benefit about that. Generally speaking, the CRA would prefer to see fundraising contracts where it's more based on the time and the effort, the number of calls completed, for example, if it's a telemarketing program by the fundraising company. The CRA is a little more comfortable with that.

Finally, we get to inadequate documentation of fundraising arrangements. Just generally, of course, a charity has to have the paperwork to substantiate their expenses and their position should the CRA conduct an audit or another investigation and also to supply with their financial statements with their T3010B. So, not having that is certainly something the CRA would be quite concerned about.

Slide 25

Here we get into, what are the consequences? Particularly if a charity carries out, we mention excessive resources here, but really, if a charity carries out any kind of prohibited conduct or conduct that violates a provision of the Income Tax Act. What might result? First of all, it really depends on the facts of the situation again, of course. It depends on the severity of the problem, how long it's been going on, and the intent. And, the CRA will look at all of the factors when it's doing an audit or an investigation. So, certainly, if it's a small matter and it's unintentional on the part of the directors, it's much, much less likely to result in compliance than if it's deliberate fraud or something like that.

So, for example, the CRA may start with an education letter, which is just a letter to the charity saying, “this is what you're doing that we find inappropriate, here's what we would prefer for you to do instead.”

We could go from there to a compliance agreement, which is essentially a contract drafted by the Canada Revenue Agency and that the charity could sign agreeing that they will change a particular practice say in two to three years or so, the time-frame will depend a lot on the circumstances. And then the CRA would come back and check to make sure that that was implemented.

From there we can get into monetary penalties. The Income Tax Act allows essentially for sanctions or fines on a charity based on the severity of the situation and the practice involved. A charity's tax-receipting privileges could be suspended.

And then finally, of course, we get to revocation of a charity's registered status. Certainly, there's a continuum of actions that can be taken there.

Slide 26

Best Practices: and again, these are sort of in contrast to the areas of concern. Similarly, they're not in the Income Tax Act, as well. The Charities Directorate cannot mandate a charity to do these, specifically, but in the Charities Directorate's perspective and experience, these are the sort of practices that tend to reduce the chance or the possibility that a charity might violate the Income Tax Act.

The first one is prudent planning process and by that, what we mean, is essentially that the charity is looking ahead and trying to match its fundraising activities to its fundraising needs. It's looking at the programs that it's going to be trying to deliver in the near and presumably in the long-term future and then trying to match its fundraising activities to that and isn't just jumping into any activity without any thought beforehand. So, ideally, a charity should be able to show the CRA that it has thought about its fundraising activities and has chosen them for a good reason.

And then we get into appropriate procurement processes. And this would generally be not just, for example, hiring the first company that comes along to provide a service, but presumably doing some research to find out the market rates, what they should be paying. Depending on the actual fundraising activity, there might be a competitive bidding process that the charity could enter into. But just making sure that it's paying fair market value and doing everything above board.

Now, good staffing processes, that generally means that the charity -- what we mean when we talk about this and you'll see if you look in the guidance, is making sure that people who are doing fundraising, staff members, for example, are basically being paid appropriate amounts, so are not being over-compensated, but are getting market rates for the work that they're doing.

Ongoing management and supervision of fundraising practices; basically, that the charity is keeping tabs on what it's doing, it's keeping an eye on what is going on. And this is particularly important if it's formed a contract or an agreement with a third party to carry out fundraising activities on behalf. Hopefully, the charity is also monitoring and keeping tabs, for example, through whatever provisions are in its contract with the third party in order to make sure it knows what's happening with its fundraising activities.

Slide 27

This is just continued best practices. Adequate evaluation processes. Ideally, a charity, after a fundraising event is over, stops and looks at how it did. What were the results? And, from there it can make a decision about whether this was a good fundraising practice to continue or whether it should move on to something else. So, ideally there would be some thought beforehand and some thought afterwards, after a fundraising activity has occurred.

Use made of volunteer time and volunteered services or resources. Generally, it certainly keeps fundraising costs and expenses down if a charity is able to use volunteers.

And then we get into disclosure of fundraising costs, revenues and practice. Basically, if the charity is putting forward its costs and practices, for example, posting them on its Web site, certainly some of that will go on the T3010B, that is certainly something that the Canada Revenue Agency approves of and a practice they'd like to see. I should add that we certainly do have this list of best practices, but they aren't necessarily going to be appropriate for every charity and every fundraising activity and the CRA acknowledges that. For example, if you've got a church that holds annual bake sales or something like that, the CRA is not necessarily going to be looking at that to make sure that they've done an adequate evaluation process and they have a perfect staffing process for that, or something like that. Not to say that bake sales and that sort of, I suppose you might call smaller, or lower risk activities are exempt from the guidance, that is to say. But, generally speaking, I suppose it might be fair to say that the higher the risk level of the activity, the greater the risk of the charities resources, the more we're going to be interested in seeing the best practices applied. Again, they're not part of the Income Tax Act, but the more we would certainly encourage and hope that the charity would apply those practices.

Slide 28 

We're going to move on to the final question presentation by Adrianna, thank you.

Adrianna:

Hi there, we just have two questions. The first:

In my experience, I have seen some charities/foundations exclude planned giving programs from fundraising costs arguing that the building endowment is part of the objects of the foundation. Is this a reasonable argument?

So, in this case, planned giving programs are considered fundraising activities in support of the charitable purposes of the foundation. Any cost associated with the planned giving programs themselves should be reported as fundraising expenditures. Now, the foundation, or the organization that has these planned giving programs could report in the notes of their financial statements that the revenue should accrue in future years.

And our second question:

If you have two employees that do fundraising and also grant processing as fund development, would you be able to split their compensation between both charitable and fundraising activities based on time spent on both?

You can pro-rate the salaries for this particular individual or individuals. You would pro-rate those between fundraising and likely, administration expense if it's for the grant processing and perhaps, and then for a further pro-rate into some charitable expenditures, if they are performing charitable activities, as well, for your organization.

Thank you very much.

Slide 29

Presenter:

Thank you Adrianna.

I'm just going to move on to slide 29, which is essentially our conclusion. Thank you and we hope that you enjoyed this webcast. If you would like more information on our future live webcasts, you can visit the Charities and Giving Web site and select Webinars, information sessions, and other news.

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If you would like any more information on fundraising, please contact our Client Service section at 1-800-267-2384. Thank you.