June 20, 2011
According to the Income Tax Act, [Footnote 1] a registered charity can only use its resources (for example - funds, personnel, and property) in two ways, whether inside or outside Canada:
A charity usually carries on its activities using its staff (including volunteers, directors, or employees), or through an intermediary (for example - an agent or contractor). However, when using an intermediary, it must still direct and control the use of its resources, [Footnote 3] although it may generally delegate authority to make day-to-day operating decisions. A charity cannot merely be a conduit to funnel money to an organization that is not a qualified donee.
For this guidance, an intermediary is a person or non-qualified donee that the charity works with to carry out its own activities.
The Canada Revenue Agency (CRA) requires that a charity take all necessary measures to direct and control the use of its resources when carrying out activities through an intermediary. When carrying out activities through an intermediary, the following steps are strongly recommended:
A charity must maintain a record of steps taken to direct and control the use of its resources, as part of its books and records, to allow the CRA to verify that all of the charity's resources have been used for its own activities.
This guidance does not have the force of law. It is intended to help registered charities and applicants for charitable registration carrying on activities within Canada through an intermediary to understand the CRA's interpretation of, and expectations related to, the provisions of the Income Tax Act concerning charitable registration. To establish whether an activity complies with the Income Tax Act, the CRA will have to examine the facts of the situation.
For this guidance, charity means a Canadian charity that is registered under the Income Tax Act. Applicant means an organization applying for registered charity status, and which intends to carry on activities through an intermediary.
This guidance generally assumes that a charity working with an intermediary is doing so to carry on charitable activities within Canada. The requirements in this guidance about working with intermediaries also apply to all charitable activities carried on outside Canada. For more information on this topic, see Guidance for Canadian Registered Charities Carrying Out Activities Outside Canada.
For information on registering a charity, see the Charities Directorate's Web page on applying for registration. If you have questions about this guidance or need more information, you can call the Charities Directorate at the following telephone numbers:
The Charities Directorate's fax number is 613-954-8037.
Charities must remember their obligations under Canada's anti-terrorism legislation. As with all individuals and organizations in Canada, charities are responsible for making sure that they do not operate in association with individuals or groups that are engaged in terrorist activities or that support terrorist activities.
The CRA has produced a checklist to help Canadian charities identify vulnerabilities to terrorist abuse.
Under the Charities Registration (Security Information) Act and the Income Tax Act, a charity's status may be revoked if it operates in such a way as to make its resources available, either directly or indirectly, to an entity that is a listed entity as defined in subsection 83.01(1) of the Criminal Code; or to any other entity (person, group, trust, partnership, or fund, or an unincorporated association or organization) that engages in terrorist activities or activities in support of them.
There are other prohibitions on funding or otherwise facilitating terrorism. For more information, see the Criminal Code, the Regulations Implementing the United Nations Resolutions on the Suppression of Terrorism, and the United Nations Al-Qaeda and Taliban Regulations, as well as the Charities Directorate's Web page Charities in the International Context.
The Income Tax Act allows a charity to operate in only two ways:
Charitable activities are those that further a purpose recognized as charitable under common law, such as providing housing to the homeless, scholarships to students, or medical care to the sick.
Apart from making gifts to qualified donees, the Income Tax Act requires a charity to devote all its resources to charitable activities carried on by the organization itself. [Footnote 4] This requirement is referred to as the own activities test.
A charity's resources include all physical, financial, and material resources (for example - buildings, money, or donated goods), intellectual property, and its staff. [Footnote 5]
A charity may use its own staff (including volunteers, directors, or employees) to carry out its activities. Assigning the charity's staff to carry out its activities is typically the easiest way for a charity to meet the own activities test.
A charity may use an intermediary to carry out its activities. For this guidance, an intermediary is an individual or non-qualified donee [Footnote 6] that the charity works with to carry out its own activities. For example, a charity might do one of the following:
In certain limited circumstances, the CRA may consider a charity to be carrying out its own activities by transferring certain resources to a non-qualified donee. The CRA will take into account all relevant circumstances when determining this, but at a minimum, the following three conditions must all apply:
Investigating the status and activities of an intermediary would typically include examining details such as the intermediary's stated goals and purposes, any previous relationship with the charity and other charities, its history and general reputation, and relevant media reports.
If any of the above three conditions do not apply, then a charity will only be able to meet the own activities test by directing and controlling the use of its resources as otherwise stated in this guidance. [Footnote 8] If a charity does not direct and control the use of its resources as required, it risks sanctions under the Income Tax Act. This includes financial penalties and revocation of its status as a registered charity.
Examples of a transfer of resources to a non-qualified donee where the above conditions could apply include the following:
A charity cannot transfer any kind of property if it knows, or ought to know, that the property will be used either for non-charitable purposes [Footnote 9] or to circumvent the provisions of the Income Tax Act.
If a charity intends to build or buy capital property in partnership with an intermediary, the charity must retain ownership of its share of this property. In exceptional cases where it is impossible for the charity to retain ownership of its share of the property, the charity should consult with the CRA to consider the available options.
A charity does not have to adopt measures to direct and control the use of its resources when transferring property to the proper beneficiaries of its charitable activities. For example, a charity could give school supplies, such as books or writing instruments, to impoverished students without having to direct and control how the students use those resources.
The Federal Court of Appeal has rendered three decisions concerning charities using intermediaries to carry out their activities. Each case was an appeal of a revocation of charitable status by the CRA, and the Federal Court of Appeal dismissed each appeal.
The Federal Court of Appeal's decisions confirmed that a charity working with an intermediary must control the activities carried out on its behalf and maintain direction and control over the use of its resources. Charities or applicants for charitable status may find it useful to review these decisions, which are as follows:
A gift to a qualified donee is a transfer of money or any other property to a qualified donee. [Footnote 10]
Under the Income Tax Act, qualified donees are organizations that can issue official donation receipts for gifts that individuals and corporations make to them. Some examples of qualified donees include other registered Canadian charities, the Government of Canada, prescribed universities outside Canada, the United Nations and its agencies, and charitable organizations outside Canada that have received a gift from Her Majesty in right of Canada.
For the purposes of this guidance, a conduit is an organization that accepts donations for which it typically issues tax-deductible receipts and then funnels the money, without maintaining direction and control, to a non-qualified donee. Acting as a conduit violates the Income Tax Act and could jeopardize a charity's registered status. [Footnote 11]
A charity is registered to protect the environment. A non-profit organization with identical purposes approaches the charity, and explains it has submitted an application for charitable status, but has not yet been registered.
The non-profit asks if the charity will accept donations on its behalf, issue receipts, and then forward the money to the non-profit. The charity agrees to the non-profit organization's request.
The charity has no direction or control over how the receipted funds are used, and no say in where, when or how the activity is carried out. In this case, the charity is simply funding the non-profit's own activities, and therefore, even though the activity itself may be charitable, the charity is acting as a conduit.
To avoid acting as a conduit, the charity must have real and demonstrable control over the use of its money, so that the carrying out of that activity by the intermediary amounts to the charity carrying on its own activity itself.
A charity may also be acting as a conduit when it transfers resources to a head body or umbrella organization that is not a qualified donee. In such cases, a charity and its head body may create a written agreement that gives the appearance that the head body is the charity's intermediary.
To determine if a charity is acting as a conduit, the CRA will look at the following types of facts:
A charity typically uses an intermediary when unable to carry out its own activities through its staff. The intermediary usually has resources that a charity needs, such as particular skills, resources, knowledge of a region, or specialized equipment.
Before deciding to work with an intermediary, and during the course of any such arrangement, a charity should investigate its status and activities to assure itself of the following conditions:
When working through an intermediary, a charity must direct and control the use of its resources. [Footnote 12] A charity that does not direct and control its resources when working through an intermediary risks sanctions under the Income Tax Act, including the revocation of charitable status.
An intermediary can sometimes also be a beneficiary of a charity's activity - for example, acquiring skills and expertise - while carrying out the activity. For more information on this type of situation, see Appendix A.
Any private benefit provided to an intermediary by a charity must be incidental and proportionate to any work being done. For example, a charity should ensure it pays a contractor only fair market value for any work done on its behalf.
The structure of an arrangement with an intermediary may have important implications for a charity. In particular, the charity can be exposed to liability for the acts of the intermediary. In the case of an agency agreement, even if there is no formal agreement in place, a court can attach liability to the charity if the court decides that there is an implied agency relationship.
Following are descriptions, provided for the purposes of this guidance only, of the four most common types of intermediaries a charity might use to carry out its own activities.
The type of intermediary that a charity needs to carry out an activity will depend on the facts of any given situation. The CRA does not recommend using one type of intermediary over another.
An agent is an intermediary that agrees to carry out specific activities on a charity's behalf. A charity often uses an agent when the charity cannot send its staff to a region to carry out an activity.
A charity is registered to provide psychological counselling services to people in under-served northern communities across Canada. None of the charity's staff has any training in providing counselling. Instead, the charity locates a number of professional psychological counsellors with their own independent practices who agree to act as the charity's agents in carrying out the activity.
The charity and the counsellors create and sign an agreement describing the details of the activity and their respective roles and responsibilities. The agreement states that the charity will pay all travel and operating expenses, and the counsellors will volunteer their time and make typical day-to-day operating decisions, such as renting offices, notifying the communities of their services, and hiring local support staff.
The counsellors provide regular, detailed reports on the use of the charity's resources, according to the terms of the agreement. The charity intervenes as required to provide ongoing instructions on the use of its resources to make sure that the activity continues to be carried out according to the agreement, and that the activity is achieving the charity's own charitable purpose.
A joint venture participant is an organization that a charity works with to carry out a charitable activity. The charity and one or more joint venture participants pool their resources to accomplish their goal under the terms of a joint venture agreement.
A joint venture participant differs from an agent in that the charity is not relying entirely on the joint venture participant to carry out activities for the charity. Instead, the charity works with a joint venture participant to further the charitable activity.
Typically the charity has members sit on the governing board for the entire project, letting the charity make decisions on the use of its resources for the project. The structure of a joint venture varies from case to case.
A charity must be able to establish that its share of authority and responsibility over a venture allows the charity to dictate and account for how its resources are used. If a charity does not have enough decision-making authority to make sure that its resources are used as it directs, it may have difficulty establishing that it is carrying on its own activities.
A charity is registered to relieve poverty by providing small business loans in areas of social and economic deprivation. The charity collaborates with a for-profit bank to design an activity that will provide entrepreneurial training, support services, and start-up loans to hard-to-employ people.
The charity and the bank form a governing body to operate the venture. The charity provides roughly 40% of the funding for the project and its representation on the venture's governing body is approximately 40% of the decision-making power. As long as the venture only uses the charity's resources for the charity's own activities, the arrangement should be acceptable.
However, with only 40% of the decision making power, it is possible the bank could decide to use the charity's resources inappropriately, such as carrying on different activities that are not those initially agreed to. Therefore, the arrangement should include a provision that allows the charity to discontinue devoting its resources to the venture under such circumstances.
The CRA will look at any venture as a whole, and a charity's participation in a venture, to make sure that the charity's resources are only furthering its charitable purposes. If the purpose of an overall project is not charitable, such as providing excessive or undue private benefit to an individual or company, a charity's own activities on behalf of that project may not be acceptable, even if those activities would normally be considered to be furthering its charitable purposes if carried out on their own.
For a list of the factors the CRA looks at when examining joint venture arrangements, see Appendix B.
A co-operative participant is an organization that a charity works side by side with to complete a charitable activity. Rather than pooling their resources and sharing responsibility for the project as a whole, as in a joint venture, the charity and other organization(s) instead each take on responsibility only for parts of the project.
A charity and a non-profit corporation have a common object to assist youth at risk in a major city. The charity specializes in helping teens recover from substance abuse. The non-profit provides academic assistance to teens with learning disabilities. They decide to lease a space jointly to run a new program, aimed at helping youth at risk complete high school.
Each organization operates its particular program out of its half of the leased space, using its own staff and resources. While they co-operate by, for example, sharing information and recommending potential candidates for each other's programs, each organization retains ownership of its assets and carries out its responsibilities independently, without oversight or control from the other body.
A contractor is an organization or individual that a charity hires to provide goods and/or services. For example, a charity might hire a for-profit construction company to build temporary housing for homeless individuals.
A contractor is an intermediary with whom direction and control is usually exercised through the terms and oversight of the contract between the charity and the person or business providing the goods or services.
A charity is registered to carry out research into a particular disease. As part of its activities, it contracts with a private medical laboratory to test new compounds for their disease fighting properties.
The charity and the laboratory draft and sign a contract that outlines all the terms and conditions of their relationship. The contract is the instrument through which the charity directs and controls the use of its resources, monitors the use of its resources as the laboratory carries out the activity, and ensures that only fair market value is paid for any work done.
A charity must direct and control the use of its resources [Footnote 13] when transferring them to an intermediary. The charity must be the body that makes decisions and sets parameters on significant issues related to the activity on an ongoing basis, such as the following:
Maintaining direction and control does not mean a charity cannot accept advice from its intermediaries, or that a charity must make every decision involved in the carrying out of an activity, although it must have the ability to intervene in any decision. Typically, the types of decisions listed above would describe the overall framework of an activity.
An intermediary that carries out the work in the field is often in a better position to make day-to-day operational decisions. A charity can delegate the responsibility for such decisions to an intermediary, although this is not required under the Income Tax Act. For example, a charity might delegate the authority to make the following kinds of decisions:
The intermediary should report back to the charity on any decisions made, so that it can make sure that the intermediary continues to comply with the Income Tax Act. For example, an agent awarding scholarships for a charity should be able to provide a list of recipients. This will let the charity make sure the agent is not awarding scholarships only to friends and family of the agent. The charity can veto awards that are not appropriate, and so continue to meet the public benefit test.
Generally speaking, the nature and the number of measures a charity adopts to direct and control the use of its resources should correspond to the circumstances of the activity, such as:
The CRA recommends adopting the following types of measures to direct and control the use of a charity's resources:
A charity must record all steps taken to exercise direction and control as part of its books and records, to allow the CRA to verify that the charity's funds have been spent on its activities.
A charity is registered to assist refugees, and it begins an activity to help refugees in Canada from a foreign country that recently suffered a civil war. However, the charity's staff has little expertise in the language and culture of the foreign country, and encounters difficulty when trying to contact people it can help.
The charity finds a Canadian, non-profit organization that welcomes newcomers to Canada, and that by coincidence happens to have several members who immigrated from the same country some time ago. The non-profit agrees, and has the capacity, to act on the charity's behalf in carrying out the activity of providing housing, interpretation, language training, social services, and employment preparation.
The charity and the non-profit meet to plan the activity. The charity takes the non-profit's advice and experience into account as they plan the activity, although it has final authority over the use of its funds. Both parties are satisfied with the activity, and the non-profit agrees to act on the charity's behalf.
The charity adopts as many measures to direct and control the use of its resources as is practical, including developing a written agreement with its agent, implementing the terms of the agreement, monitoring the activity, and providing ongoing instruction when required.
In this case, the CRA will likely consider that the charity is directing and controlling the use of its resources.
The facts of every situation will differ, and it is not possible to give precise guidelines to cover all situations in advance. If a charity plans to start a program that requires the transfer of property to an intermediary, or has questions about these types of transfers, we recommend contacting the CRA for advice.
A written agreement is a document that helps establish the relationship between a charity and its intermediary. The agreement should provide the authority and means for the charity to meet the own activities test, including by maintaining direction and control over its resources and over its intermediary's actions as they relate to the charity's activities. [Footnote 14]
The CRA recommends that a charity enter into a written agreement with any intermediary. Although there is no legal requirement to have a written agreement, and the same result might be achieved by other means, [Footnote 15] a properly executed written agreement is an effective way to help meet the own activities test.
However, signing an agreement is not enough to prove that a charity meets the own activities test. The charity must also be able to show the CRA that the charity has a real, ongoing, active relationship with its intermediary. [Footnote 16]
Entering into a written agreement and implementing the terms of that agreement is usually an effective way to meet the own activities test. However, the CRA acknowledges that in situations where the amount of resources involved is minor, and is a one-time activity, the complications of developing a full, formal, written agreement may outweigh the benefits. In situations where the money spent on a one-time activity is $1,000 or less, other documentary means might be used to show direction and control over the use of resources by intermediaries.
If a charity has concerns or questions about this type of arrangement, it should contact the CRA.
On occasion, applicants for charitable status intend to carry on activities through an intermediary. In these situations, a copy of a written agreement included with the application is often a good way to show the CRA that the relationship the applicant will enter into with its intermediary will enable the applicant to meet all requirements for registration.
Although there is no established template for written agreements, acceptable agreements would normally contain the elements listed in Appendix C.
Before starting an activity, the charity and its intermediary should agree on a clear, complete, and detailed description of the activity. The charity should be able to document its exact nature, scope, and complexity.
Depending on the type, complexity, duration, and expense of an activity, the charity should be able to provide documentary evidence that shows:
Monitoring and supervision is the process of receiving timely and accurate reports, which allows a charity to make sure that its resources are being used for its own activities. Depending on factors such as the size, nature, and complexity of an activity, the reporting methods (as stated in any written agreement) can take many forms, including the following:
Ongoing instruction is the process of providing any necessary additional instructions or directions to an intermediary.
Records of any ongoing instructions help to show that the charity is carrying out its own charitable activities in accordance with the provisions of the Income Tax Act. Minutes of meetings or other written records of decisions are one way to show that a charity has given instructions. The CRA recommends using written instructions (for example - letters, emails, or faxes) to communicate with an intermediary whenever possible.
Charities and organizations acting as intermediaries occasionally arrange to have a director/trustee, volunteer, or employee work for both bodies. Although this type of arrangement may make it easier to pass along reports and ongoing instructions, it is not likely to be enough to show that the charity maintains direction and control over the use of its resources by the intermediary.
For example, if a staff member from the charity serves on the board of an intermediary, his or her control over the charity's resources may be limited to one vote among many. The intermediary's board could potentially decide to use the charity's money for activities other than those of the charity's own, despite the staff member's objections.
Making periodic transfers is the process of sending a charity's resources to an intermediary in instalments, based on demonstrated performance, rather than in one transfer.
When appropriate, a charity should keep the right to discontinue the transfer of money and have unused funds returned if it is not satisfied with the reporting, progress, or outcome of an activity. This will allow the charity to stop funding an activity if the charity's resources are being misused or for any other valid reason.
When carrying on an activity through an intermediary, a charity has to make sure that it can distinguish its activities from those of the intermediary. [Footnote 18] A charity cannot simply pay the expenses an intermediary incurs to carry on the intermediary's own programs and activities. Doing so draws into question whether the activity is truly that of the charity.
In any situation where an intermediary is managing an ongoing activity on the charity’s behalf, the money received from the charity should be kept in a separate bank account. It should be withdrawn only after receiving authorization from the charity, or after the intermediary meets certain performance benchmarks. The charity’s funds should also be reported in books and records separately from those of the intermediary.
If it is impossible to keep funds separate, then a charity must provide other evidence to distinguish its own resources and activities from the intermediary’s, and to show the charity’s direction and control over them.
Books and records must enable the CRA to check the following:
Also, books and records must contain enough information to allow the CRA to determine if the charity is operating in accordance with the Income Tax Act. [Footnote 21]
All the amounts a charity spends on directly carrying out its charitable activities will go towards meeting its disbursement quota, whether the activities were carried out by the charity's staff or an intermediary.
When reporting expenditures on Form T3010, Registered Charity Information Return, a charity should report all amounts spent by its intermediaries on its behalf as if they had been spent by the charity itself.
Amounts that are considered to have been spent on charitable activities include, but are not limited to:
If a charity is working jointly with other organizations, it must account for all charitable and other expenditures it incurs when carrying on an activity, or that an intermediary has spent on its behalf.
For more information on the disbursement quota and its calculation, see Guide T4033, Completing the Registered Charity Information Return.
If you have comments or suggestions that would help us improve this guidance, we would like to hear from you. Please email your comments to firstname.lastname@example.org.
You can also mail comments to the following address:
Canada Revenue Agency
Ottawa ON K1A 0L5
The Charities Directorate's fax number is 613-954-8037.
A charity can carry out capacity-building activities, as long as it continues to meet all requirements of the Income Tax Act. For example, a charity must, among other requirements, make sure that its activities only further its own charitable purposes, keep direction and control over the use of its resources, meet the public benefit test, and not confer undue private benefit.
For the purposes of this guidance, capacity building is working in partnership with an organization, community, other group of people, or any other non-qualified donee to develop the skills, tools, and resources necessary to address their own problems. Capacity-building activities may be charitable if they relieve poverty or advance education, or further another recognized charitable purpose.
One of the principles behind capacity building is that simply transferring money to a group or community, without providing ongoing support, rarely leads to long-term solutions. Instead, a long-term relationship can ultimately lead to ownership of the program by the charity's partner, such that the charity may be able to withdraw its resources from the project entirely, and leave its successful operation in the hands of its former partner.
In these cases, the line between intermediary and beneficiary may become harder to distinguish. Although this guidance typically assumes intermediaries are a medium or means for a charity to carry out its own activities, in some cases they may also be a beneficiary of the charity's activities, such as by receiving training or operational resources.
Before starting capacity-building programs, charities should make sure that their objects and activities as registered with the CRA allow them to carry out the charitable activities they anticipate will be required.
The following are the type of factors the CRA looks for when determining whether a charity directs and controls the use of its resources in a joint venture:
For joint ventures, the charity should make sure that it regularly receives complete financial information for the whole venture. It should also have enough documentation to show how its contribution fits into the overall undertaking, and how its resources have been devoted to activities that further its charitable purposes.
Below is a list to help charities create a written agreement. However, charities should be mindful that their relationship with their intermediaries is not only judged on how well their agreements are written but, more importantly, on their ability to show that they direct and control the use of their resources through active, ongoing, sustained relationships.
Even when a charity and intermediary create an agreement that contains the elements contained in the checklist, either the charity or the CRA can refer to and rely on other relevant evidence to establish the nature of the relationship between the parties to the arrangement.