May a Canadian Charity Operate Outside Canada?

BILL C-19: EASING CHARITY ACTIVITIES OUTSIDE CANADA

The new Bill C-19 (Budget Implementation Act, 2002 No. 1, aka BIA) will no doubt cause a seismic shift in how Canadian charities implement their international activities.

Until the BIA was passed, the Income Tax Act mandated that a Canadian charity could only implement it’s “own activities.”

This meant that a Canadian charity could not transfer assets or funds to a non-charity (in legal parlance “non-qualified donee), unless it (the charity) had complete “direction and control”.

With the passing of the BIA, the Income Tax Act is now amended to allow charities to transfer assets to non-charities, even without having“direction and control.” This adds a another possibility for a Canadian charity to operate outside Canada, under less onerous terms.

However, this doesn’t mean that it’s a free-for-all, andthat charities could randomly distribute funds to whomever they want. Instead,the BIA broadens the scope of how charities may operate outside of Canada by allowing certain charitable distributions it calls “qualifying disbursements”.

In short, to meet the criteria of a “qualifying Disbursement”, a Canadian charity must document the following:

a.      The purpose of the Disbursement; and

b.      That the disbursement was applied exclusively to charitable activities that further its charitable purposes.

The CRA is framing this Income Tax Act amendment as moving the focus from “direction and control” to ensuring that the activities are deemed “charitable.”

BILL C-19 SPECIFICS

Specifically, the BIA requires a Canadian charity taking advantage of this new category (“qualifying disbursements”) to report every qualifying disbursements in an amount greater than $5,000.000. Said report must include the following:

a.      The name of the recipient (“grantee”)organization;

b.      The total amount received by the recipient; and

c.      The purpose of the disbursement.

BILL C-19 GUIDANCE

The BIA is vague on what it deems “sufficient documentation”which will evidence that the disbursement was applied exclusively to charitable purposes. The CRA has advised us that it is preparing guidance on this critical legislation, and that it hopes to publish it by mid December.

In the interim, until the CRA comes out with a list of requirements to meet the regulation, it is recommended that charities continue their international activities under the “direction and control” regime, so as not to run afoul of CRA policy. Only once the government has clarified requirements under the BIA should Canadian charities consider moving to the more lenient BIA regime.

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