Echoes of the UK in Canada’s new granting regime

The new regime that allows Canadian charities to make grants to non-charities may be new in Canada, but the UK has used a similar system for some time. The UK experience can help provide practical direction to Canadian charities seeking to understand the Canadian Revenue Agency's (CRA) guidance.

To understand the connection between the UK approach and the Canadian rules one must first realize that the Canadian system of charity law was inherited from the UK and Canada has imposed its own rules mostly through the Income Tax Act. In both countries directors of charity have legal duties to (amongst others):

1. Ensure that charitable property is used to pursue the objectives of the charity
2. To act in the best interests of the charity

The UK guidance is directed at compliance with these general responsibilities of directors, while the Canadian version focuses on the Income Tax Act obligations.

To ensure that charity property is properly used, the Charities Commission suggests that trustees analyze the risk that a particular grant will not be used as intended. Then, depending on the level of risk that the directors take reasonable steps to ‘reasonably ensure’ the risk is reduced as far as possible. Further, from the perspective of acting in the best interests of the charity, the guidance suggests that directors consider all the potential problems for a charity – such as reputational risk, or legal risks funding in a foreign country.

On the other hand, the Canadian Income Tax Act requires that a charity ‘ensure’ - note, that it is not ‘reasonably ensure’ - that the funds sent by way of qualifying disbursement (i.e., grant) will be used to further the charity’s objectives. The extremely high bar of ‘ensure’ requires – at least in theory - that there be no deviation from the absolute fulfilment of the law with no allowance for unseen circumstances. Given the impossibility of controlling for all factors in the development of a project, one would hope that the courts and the CRA will read the word ‘reasonable’ into the legal provision.

Until then, the CRA’s solution to the conundrum of unforeseen circumstances is to require that the charity undertake due diligence steps in applying the grant money. The ‘level’ of diligence being commensurate with the level of risk identified in the analysis. Theoretically, one would assume that areas in which the charity identifies greater risk it must engage in stronger protocols to ‘ensure’ the funds are properly spent. While the guidance is silent on the point, it would seem to be overkill to be ‘unduly’ diligent in an area where the risk is deemed to be zero - but see our comments on putting this into practice below.

Once the charity decides on the due diligence measures these mechanisms must be enshrined in the grant document. Besides the requirements necessary to comply with the granting rules, charities will want to include any other provisions necessary for the protection of the charity’s property and reputation. It should be noted that the UK Charities Commission uses the term due diligence as a synonym for the word ‘assurance’. Fundamentally, the charity must be assured that the grant recipient is using the funds properly and that there are no other risks to the charity’s property or reputation.

The British emphasis on the director’s responsibilities is important to keep in mind because it applies equally to directors of Canadian charities. The question that needs to be answered is whether the statutory regime in Canada imposes greater obligations on the directors with respect to protecting charitable property than that required by the common law and as discussed in the UK guidance. Fundamentally, this duty of directors is near sacrosanct and, although the British document uses the word ‘reasonable’, directors in both countries must do all they can to protect charitable property whether or not it is described in the guidance.

What then of the steps described in the CRA guidance? Given that the CRA has wide discretion when conducting an audit, the guidance can be taken as an outline of when that discretion might be used. To avoid negative consequences on audit, this means that charities should be extremely careful in conducting the analysis and papering the file in the way expected by the CRA. Moreover, because of the general responsibilities of trustees, directors may want to consider the CRA guidance the minimum that should be done to protect charitable property and give each grant its own specific analysis to best protect charitable resources.