Guidance

Fundraising by Registered Charities

Reference number
CPS – 028

Effective date
June 11, 2009

Table of contents

1. Introduction
2. Application and Jurisdiction
3. Scope
4. Fundraising and charitable purposes
5. What is fundraising?
6. Definitions
7. Prohibited fundraising conduct
8. Allocation of fundraising expenditures
9. Evaluation of fundraising activities
10. Indicators of best practices
11. Areas of concern that could lead to further review
12. Questions and answers

1. Introduction

The Canada Revenue Agency (CRA) recognizes that registered charities in Canada often depend on charitable donations and other sources of revenue to carry out their charitable works. For many charities, this means that a proportion of their resources will be used for fundraising to support their charitable work. While recognizing the necessity of fundraising, the CRA expects charities to be transparent and to not devote excessive amounts of time and/or resources to fundraising as opposed to fulfilling their charitable purposes.

This document replaces Policy Statement CPS-001, Applicants that are Established to Hold Periodic Fundraisers, and provides information for registered charities on the current treatment of fundraising under the Income Tax Act and under common law. This guidance offers direction on issues such as the following:

• distinguishing between fundraising and other expenditures;
• allocating expenditures for the purposes of reporting them on Form T3010, Registered Charity Information Return;
• dealing with activities that have more than one purpose; and
• understanding how the CRA assesses what is acceptable fundraising activity, what may preclude registration, or what may result in a sanction, penalty, or revocation.

The document outlines policies and practices that the CRA uses when it reviews annual information returns filed by registered charities and explains the CRA’s views on issues relevant to fundraising expenditures. This information should help to ensure that registered charities are aware of the CRA’s perspective on fundraising in general and the appropriate treatment of fundraising expenditures. The CRA’s auditors use this guidance as a tool when they review Form T3010, or visit a registered charity for an audit. It also confirms to the public that fundraising expenditures are appropriate and in fact necessary for the sustainability of the sector.

2. Application and Jurisdiction

This guidance applies to all registered charities.

Under section 91(3) of The Constitution Act, 1867, the federal government is empowered to establish the federal tax system. The Income Tax Act (Canada) exempts registered charities from tax on their income and entitles them to issue official tax receipts. The CRA is responsible for administering the Income Tax Act and, therefore, for regulating registered charities in Canada.

Since the Income Tax Act does not contain a definition of "charity," eligibility for registration is based on meeting the common law meaning of the term and compliance with the Income Tax Act. Although common law requires that registered charities have exclusively charitable purposes, and the Income Tax Act requires a registered charity to devote all of its resources to charitable purposes and activities, it is permissible for a charity to use some resources for fundraising without breaching common law or statutory rules.

Under sections 92(7) and 92(13) of the Canadian constitution, the regulation of most aspects of charities' operations falls within provincial jurisdiction. This guidance deals only with issues related to the federal regulation of fundraising by charities registered under the Income Tax Act, as derived from the authority described above, and is not intended to address the various provincial obligations. Charities, whether federally registered or not, are subject to provincial requirements with respect to fundraising and other aspects of their operations.

This guidance provides general advice only. Individual cases will be decided based on the facts of a specific situation.

Note: This guidance does not relieve charities from having to meet all other requirements of the Income Tax Act, including, for example, the obligation to meet the disbursement quota.

3. Scope

This document does not address whether the activity of a charity amounts to the carrying on of a business. The CRA publishes specific policy guidance on this topic, and registered charities should refer to Policy Statement CPS-019, What is a Related Business? and Policy Commentary CPC-002, Related business, to make sure that any commercial or trading activities they carry out do not constitute an unrelated business.

In addition, this guidance does not address fundraising to support terrorism. Registered charities that do so are subject to immediate revocation of their registration and other penalties. See Registered Charities Newsletter No. 12, and Registered Charities Newsletter No. 20 for additional information. The CRA Web site also has information for charities working in an international context.

4. Fundraising and charitable purposes

All registered charities are required by law to have exclusively charitable purposes, which are set out in the charity's governing documents. The CRA’s position is that fundraising (whether undertaken as a purpose or activity) is not in-and-of-itself charitable. [Footnote 1]

5. What is fundraising?

As a general rule, fundraising is any activity that:

• includes a solicitation of support for cash or in-kind donations (solicitations of support include sales of goods or services to raise funds);
• is part of the research and planning for future solicitations of support; or
• is related to a solicitation of support (efforts to raise the profile of a charity, donor stewardship, donor recognition, etc.).

Fundraising includes activities carried out by the registered charity, or someone acting on its behalf.

6. Definitions

For the purposes of this guidance, the following definitions apply:

1. Ancillary and incidental purpose
2. Arm’s length / non-arm’s length
3. Cause-related marketing / social marketing
4. Disclosure
5. Fundraising activity
6. Resource(s)

7. Prohibited fundraising conduct

Certain types of prohibited conduct related to fundraising may result in the revocation of a registered charity's status, imposition of compliance measures, or denial of charitable registration. This would include fundraising conduct that:

1. is illegal or contrary to public policy;
2. is a main or independent purpose of the charity;
3. results in more than an incidental or proportionate private benefit to individuals or corporations; and
4. is misleading or deceptive.

8. Allocation of fundraising expenditures

Registered charities must report fundraising expenditures on their annual Form T3010. As a general rule, fundraising expenditures include all costs related to any activity that includes a solicitation of support, or that is undertaken as part of the planning and preparation for future solicitations of support. This applies unless it can be demonstrated that the activity would have been undertaken whether or not it included a solicitation of support.

For purposes of reporting on fundraising expenditures, solicitations of support do not include asking for government funding. A solicitation of support includes requests by the registered charity, or someone acting on its behalf, for financial or in-kind donations. It also includes the marketing and sale of goods or services not within the charity’s own charitable programs, but sold specifically to fundraise. This applies even where no donation receipt is issued for the transaction.

To show that an activity would have been undertaken without the solicitation of support, charities must satisfy test A or B below:

A. Substantially All Test

An activity would have been undertaken without a solicitation of support if substantially all of the activity advances an objective other than fundraising. For the purposes of this test, substantially all is considered to be 90% or more.

Generally, this determination will be based on the proportion of the fundraising content to the rest of an activity, as well as the resources devoted to it. However, the prominence of the fundraising content in the activity must also be considered.

If this test is satisfied, the charity may report all the expenditures of the activity on its Form T3010 under charitable expenditures, management and administration, political activity, or other expenditures as applicable.

B. Four Part Test

If the substantially all test is not met, a charity can still show that the activity would have been undertaken without the solicitation of support if the answer to all of the following questions is "no":

1. Was the main objective of the activity fundraising?
2. Did the activity include ongoing or repeated requests, emotive requests, gift incentives, donor premiums, or other fundraising merchandise?
3. Was the audience for the activity selected because of their ability to give?
4. Was commission-based remuneration or compensation derived from the number or amount of donations?

When the answer to all four questions above is "no", the charity may allocate a portion of the costs as non-fundraising expenditures and a portion as fundraising expenditures on its annual Form T3010.

If any of the answers to the four questions above is "yes", all costs must be reported as fundraising expenditures, unless the exception below applies.

Exception

Even if an activity would not have been undertaken without the solicitation of support, charities may still be allowed to allocate a portion of the costs other than to fundraising, if the activity furthers one of the charity's purposes. The CRA recognizes that, in certain circumstances, an event or activity may serve multiple purposes—for example, as a way to advance its charitable programs and to raise funds for the charity. Examples.

The CRA only considers that an event or activity could advance an organization’s charitable programming when it is designed to prompt an action (other than the giving of a donation or other financial support) or a change in behaviour. The event or activity should also reach a significant portion of the charity's stakeholders other than its current or prospective donors, or clearly exhibit greater emphasis on helping beneficiaries than on obtaining financial support.

Note: The CRA generally does not consider raising awareness of a charity's mandate or work, when it is carried on in conjunction with fundraising through non-charitable third parties (such as for-profit telemarketing, direct mail or canvassing companies), to qualify for the exception. So, charities must allocate costs for such activities to fundraising expenditures.

9. Evaluation of fundraising activities

For the purposes of this assessment fundraising revenues and expenditures are:

• Fundraising revenues include amounts reported on Lines 4500 and 4630 of the charity's annual Form T3010. All amounts for which a charitable tax receipt is issued must be reported on line 4500. All other revenue generated as a direct result of fundraising expenses must be reported on line 4630.
• Fundraising expenditures include amounts reported on Line 5020 of the charity's annual Form T3010. All expenses determined to be fundraising expenses in accordance with this guidance should be reported on line 5020.

Fundraising Ratios and the CRA’s Approach

The CRA recognizes that the charitable sector is very diverse and that fundraising effectiveness will vary between organizations. There can be good reasons for a charity to incur higher fundraising costs for a particular event or in a particular year. As a result, a range of factors will be considered in the course of a CRA review. One of the factors that the CRA will consider is the ratio of fundraising costs to fundraising revenue. The following table provides some general guidance in terms of where the CRA may seek additional information or justification for fundraising costs.

Fundraising ratios alone are not determinative in assessing whether a charity’s fundraising complies with the requirements of the guidelines in this guidance. However, these ratio ranges give charities a way to generally gauge their performance and understand the circumstances where the CRA is likely to raise questions or concerns.

Ratio of costs to revenue over fiscal period	CRA Approach
Under 35%	Unlikely to generate questions or concerns.
35% and above	The CRA will examine the average ratio over recent years to determine if there is a trend of high fundraising costs. The higher the ratio, the more likely it is that there will be concerns and a need for a more detailed assessment of expenditures.
Above 70%	This level will raise concerns with the CRA. The charity must be able to provide an explanation and rationale for this level of expenditure to show that it is in compliance; otherwise, it will not be acceptable.

In addition to considering where a charity falls within the ratio ranges, the CRA will look to the factors described in paragraphs 10 and 11 below, when it considers a charity’s fundraising activities. In addition, the CRA’s assessment of a charity’s fundraising will take into consideration the following factors:

1. The size of the charity (which might have an impact on fundraising efficiency).
2. Causes with limited appeal (which could create particular fundraising challenges).
3. Donor acquisition and planned giving campaigns (which could result in situations where the financial returns are only realized in later years).

 10. Best practices

The following is a list of best practices considered to decrease the risk of unacceptable fundraising.

Note: These are indicators only.  Their applicability and utility will depend on a number of factors, including the size of the particular fundraising event.

1. Prudent planning processes.
2. Appropriate procurement processes.
3. Good staffing processes.
4. Ongoing management and supervision of fundraising practice.
5. Adequate evaluation processes.
6. Use made of volunteer time and volunteered services or resources.
7. Disclosure of fundraising costs, revenues, and practice (including cause-related or social marketing arrangements).

11. Areas of concern that could lead to further review

The following is a list of indicators that could cause the CRA to further review a registered charity’s fundraising activities.

1. Sole-source fundraising contracts without proof of fair market value.
2. Non-arm's length fundraising contracts without proof of fair market value.
3. Fundraising initiatives or arrangements that are not well-documented.
4. Fundraising merchandise purchases that are not at arm's length, not at fair market value, or not purchased to increase fundraising revenue.
5. Activities where most of the gross revenues go to contracted non-charitable parties.
6. Commission-based fundraiser remuneration or payment of fundraisers based on amount or number of donations.
7. Total resources devoted to fundraising exceeding total resources devoted to program activities.
8. Misrepresentations in fundraising solicitations or in disclosures about fundraising or financial performance.

12. Questions and answers

1. Has the Canada Revenue Agency (CRA) changed its position on fundraising by charities?

No. The CRA has not changed its position on fundraising by charities.

This guidance updates and replaces Policy Statement CPS-001, Applicants that are Established to Hold Periodic Fundraisers, and provides more detailed information on the current treatment of fundraising under the Income Tax Act and under common law. The guidelines ensure that registered charities are aware of the CRA’s perspective on fundraising in general, and the appropriate reporting of fundraising expenditures.

2. What steps can the CRA take if an audit raises concerns about a charity’s fundraising?

Generally, the CRA uses a series of progressive compliance measures. In some cases of non-compliance, the CRA uses education letters or compliance agreements. The CRA can also impose a monetary penalty, suspend a charity's tax-receipting privileges, or revoke a charity's registered status. Although revocation is generally the last resort, the Income Tax Act allows revocation at any time—when it is appropriate to the circumstances.

3. What is the relationship between the disbursement quota requirements and the fundraising guidance grid?

Meeting the disbursement quota is a mandatory obligation. The grid is an indicator for charities and CRA auditors that there may be concerns about a charity’s fundraising activities.

4. 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 our charitable purposes. Can we report a portion of the costs of the telemarketing initiative as a charitable expenditure?

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 are to be reported as fundraising expenditures. Generally, the CRA requires that all telemarketing costs to raise funds be reported as fundraising expenditures.

5. Are costs and revenues associated with the carrying on of a related business considered fundraising?

No, these costs and revenues are not considered fundraising. However, you should be familiar with the definition of a related business and the restrictions on operating businesses that apply to registered charities. For more information, please consult Policy Statement CPS-019, What is a related business?.

6. How does the CRA regulate fundraising activities such as lotteries or charitable gaming?

Most aspects of lotteries and gaming are regulated by the provinces and territories rather than the CRA. Therefore, if a charity is in compliance with provincial or territorial regulations regarding costs, revenues, and returns for lotteries and charitable gaming, the CRA will generally not examine these aspects of a charity’s fundraising activities.

7. Our fundraising staff spends part of their time fundraising and part of their time seeking grants from governments and foundations. How should we report their salary expenditures?

The salary costs related to the portion of time spent on fundraising should be reported as a fundraising expenditure. The portion spent applying for grants is to be reported as an administrative expenditure. The CRA will accept reasonable estimates of time spent on these distinct activities.

8. Our small charity only has one employee who handles all aspects of our administration and operations. Are we supposed to keep timesheets to satisfy the CRA’s new guidelines?

There are no new reporting requirements associated with this guidance. As before, the CRA expects the charity to provide reasonable estimates of the portion of a salary that should be reported as a fundraising expenditure.

9. Our charity only has one fundraising event each year. We sell tickets to the event. It is a well-supported event that is an established tradition in the community. Our costs for the event are generally around 50% of revenues generated from ticket sales each year. Will we have to change our fundraising activities?

Not necessarily. The CRA will expect your charity to be able to demonstrate that it has taken reasonable steps to ensure that the costs spent on the event are no more than necessary.

For example, this could include pricing of goods and services from several suppliers to ensure the charity is paying a fair price and that there is no undue benefit to the individuals and organizations involved in the event. If the charity takes these steps and is able to continue to meet its annual disbursement quota, it could continue with the annual event notwithstanding that costs are around 50% of revenues.

10. My charity is involved in a cause-related marketing campaign, where the non-charitable business is bearing 95% of the cost of the campaign. Are the proceeds that my charity receives from the campaign considered fundraising revenue?

Yes. Revenues from cause-related marketing should be reported on line 4630 of the T3010.

11. What if my charity has high costs because it is involved in a donor development drive in a particular fiscal period?

The CRA recognizes that revenues from a donor development drive may not be realized in the same fiscal period as expenditures related to that drive and will take this into consideration when examining a charity’s activities. However, the CRA would expect donor development costs to generally decline over time as the charity and its fundraising activities become more established. 

12. Our charity has the purpose of promoting health, and publishes a four-page leaflet with the following goals:

• to provide information about specific health risk factors;
• to urge readers to take specific steps to reduce their risk; and
• to show readers where to find additional resources our charity provides to help them implement these steps. 

The last page of the leaflet briefly explains our charity's programs and invites readers to make a donation to support those programs.

The leaflet is mailed to the general public as part of a direct mail campaign, without targeting a particular segment of the population. We pay no commission based remuneration or compensation for donations collected. Can we report a portion of the costs as charitable expenses?

As described, the activity appears to meet the four-part test:  

• the main objective is to prompt readers to take actions that can directly further the charitable purpose of promoting health; 
• the leaflet does not include repeated requests or emotive requests for donations;
• the audience was not selected based on their ability to give; and
• there is no commission-based remuneration or compensation.

The charity can therefore show that the activity would have been undertaken without the solicitation of support, and can report a portion of the costs as charitable expenses.

In the above situation, an allocation of 25% of the cost of the production of the leaflet and its distribution as a fundraising expense, and 75% as a charitable expense would be reasonable.

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Footnotes

[Footnote 1]

See Oxford Group v. IRC [1949] 2 All ER 537 (fundraising purpose not charitable) and Vancouver Society of Immigrant and Visible Minority Women v. Minister of National Revenue, [1999] 1 S.C.R. 10 at para. 152 (fundraising activity not necessarily charitable).