Are Your Fundraising Activities in Compliance with CRA Guidelines?
Fundraising Activities
The necessity of fundraising for many charities is recognized by the Canada Revenue Agency (CRA), but it also expects that charities will not allocate an unreasonable amount of resources to fundraising activities. The CRA offers guidance on determining what it deems excessive, what activities it classifies as fundraising, and how charities should calculate their fundraising expenses.
Which activities are classified as fundraising?
Per the guidelines set by the Canada Revenue Agency (CRA), any action that involves soliciting assistance qualifies as fundraising, unless a charity meets one of the following criteria:
- the "substantially all" test, or the
- four-part test.
Activities such as planning, researching, or readying to request support, in addition to associated actions like profile enhancement, donor management, and donor acknowledgment, are deemed fundraising activities. Fundraising also encompasses the sale of products or services, barring those conducted as part of a related business endeavor. Both the charity's own fundraising efforts and those performed on its behalf by employees, vendors, and volunteers are included.
"Support" covers cash and in-kind donations alike. However, the recruitment, solicitation, administration, and appreciation of volunteer assistance are not regarded as fundraising activities.
Soliciting funds from governments, foundations, or other registered charities, and running a related business, are activities that are not considered as fundraising.
“Substantially all” test
The term "substantially all" generally refers to "90% or more." This test is typically based on the amount of content in an activity that is related to soliciting support, as well as the resources allocated to the activity. Additionally, the Canada Revenue Agency (CRA) assesses the fundraising portion's relative prominence within the activity.
Four-part test
The CRA deems an activity to have taken place without solicitation of support if all of the following four questions are answered in the negative:
1. Was the main aim of the activity to raise funds?
In general, the objective that receives the greatest allocation of resources is deemed to be the primary goal of an activity. It can be challenging to differentiate between content that is charitable in nature versus content that is aimed at fundraising. For instance, a story about a child living on the streets could be shared with the intent of either raising funds or raising awareness about the social issue that the charity is addressing. To help determine this, the CRA looks for a clear objective for the activity that goes beyond fundraising.
2. Did the activity involve repeated or ongoing appeals, emotionally charged requests, gift incentives, donor rewards, or other fundraising merchandise?
If an activity included repetitive or emotionally charged requests for support, or if it featured incentives or merchandise designed to raise funds, it is likely that the primary focus of the activity was fundraising.
3. Was the target audience chosen for the activity based on their potential to contribute?
An activity's audience will often reflect its purpose. For instance, a brochure sent to affluent neighborhoods while the charity's programs are accessible to all (especially poorer) neighborhoods indicates that the main goal is fundraising.
4. Was commission-based pay determined by the number or amount of donations?
When an activity involves paying commissions or other types of performance-based compensation that are tied to the amount of funds raised, the entire activity is regarded as fundraising.
Prohibited activities
The CRA prohibits certain forms of fundraising, irrespective of other criteria.
Additional considerations that impact CRA's evaluation of fundraising.
In addition to the fundraising ratio, the CRA considers various factors when evaluating a charity's fundraising effectiveness. In determining whether an issue exists, the CRA evaluates each charity on a case-by-case basis, assigning different weights to these factors:
- "Best practices" that the CRA believes can minimize the risk of unsatisfactory fundraising;
- How the charity's size impacts fundraising efficiency;
- Causes that have limited appeal, which may pose unique fundraising obstacles.
a. Cost-to-Revenue Ratio during Fiscal Period - Below 35%
This ratio is less likely to raise any questions or concerns from the CRA.
b. Cost-to-Revenue Ratio during Fiscal Period - 35% and Above
The CRA will scrutinize the average ratio across recent years to identify if there's a pattern of high fundraising expenses. The higher this ratio, the greater the likelihood that the CRA will express concerns regarding the charity's involvement in unacceptable fundraising practices, necessitating a more thorough examination of the expenditures.
c. Cost-to-Revenue Ratio during Fiscal Period - Exceeding 70%
At this level, the CRA will have increased concerns. To demonstrate that it's not participating in unacceptable fundraising activities, the charity must present a valid explanation and reasoning for such a high level of expenditure.
Accounting for fundraising expenses
Except for one specific scenario, all expenses associated with fundraising activities must be meticulously documented as fundraising costs. Any activity involving the solicitation of support is deemed fundraising, except if the charity fulfills one of the two tests specified by the Canada Revenue Agency (CRA) to determine whether the activity would have occurred without the act of soliciting support.
The expenses associated with the following activities must be recorded partially as fundraising costs:
1. Activities that encompass asking for support, which would have taken place regardless of soliciting support, and satisfy the "four-part" test determined by the CRA.
2. Activities that necessitate the solicitation of support and would not have transpired otherwise are regarded as fundraising activities. However, there are certain exceptions to this rule, such as charitable activities specifically designed to inspire action or encourage positive behavioral change in their target audience.
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