Articles & Cases
Canadian Charities Operating Outside Canada and Agency Agreements
November 07, 2006
[PLEASE NOTE: There is an updated and expanded version of this article at Canadian Charities and Foreign Activities or www.globalphilanthropy.ca.]
A large number of Canadian charities operate to some degree outside of Canada. These charities help to deal with many of the most difficult global problems.
As more Canadian charities operate outside of Canada, it is important for Canadian charities to realize that there are restrictions with respect to charities operating abroad and the transfer of funds to foreign NGOs and charities.
The Canada Revenue Agency (CRA) has prepared two useful publications on Canadian charities operating abroad, namely "Registered Charities: Operating Outside Canada (RC4106)" and "Registered Charities Newsletter No. 20".
In addition the CRA has developed Policy Statements, Consultations on Proposed Policy and Information Letters that provide additional information on CRA views relating to charities operating abroad all of which are available on the CRA website. I have compiled some of the Information Letters which deal with Canadian charities operating abroad and have placed them in one PDF file for convenience. It is located at www.blumbergs.ca - Information Letters.
Some of the restrictions on Canadian charities operating abroad are similar to restrictions imposed on Canadian charities operating in Canada such as a prohibition on partisan political activities, limited non-partisan political activities, needing to operate within the objects of the charity and only undertaking charitable activities.
Before a charity embarks on activities outside of Canada if it is a corporation it should ensure that its objects allow for the operations outside of Canada. The Letters Patent/Articles of Incorporation contain the objects and restrictions. A charity wants to avoid operating outside of its legal authority (ultra vires). If the charity is set up as a trust then the charity should ensure that the Trust Agreement does not preclude operations outside of Canada.
Examples of appropriate object clauses can be found in the Ontario Not-For Profit Incorporator’s Handbook at the Ontario Public Guardian and Trustee Website.
For example "To relieve poverty in developing nations by providing food and other basic supplies to persons in need", "To improve the quality of drinking water in developing nations by constructing wells and water treatment, irrigation and sewage treatment systems", or "To advance and teach the religious tenets, doctrines, observances and culture associated with the (specify faith or religion) faith."
An example of an object clause which would need to be modified in order to allow foreign operations is "To establish and maintain a religious day school in Mississauga, Ontario."
The type of objects that are defined as charitable fall into one of 4 categories accepted by CRA and the courts namely to relieve poverty, advance education, advance religion, or benefit the community as a whole. In addition to fitting under the four categories, the charity must also be established for the benefit of the public or a sufficient segment of the public. CRA will examine issues such as whether the benefit is tangible, whether the beneficiaries are either the public-at-large or a sufficiently large segment of the public, and whether there are benefits to private individuals except under certain limited conditions.
Canadian charities operating in Canada are allowed to undertake certain activities that Canadian charities operating abroad may not be allowed to do. The example given in RC4106 is that while it may be charitable for a Canadian charity in Canada to help the Canadian government reduce its debt, however, for a Canadian charity to reduce a foreign countries debt is not charitable nor permissable under Canadian law. As well, a Canadian charity offering technical assistance to registered Canadian charities in certain circumstances is considered charitable whereas a Canadian charity offering technical assistance to foreign charities may not be considered charitable.
The Canadian Income Tax Act allows charities to conduct their charitable purposes by 1) their own activities (at home or abroad) or 2) to give monies to another "qualified donee" (usually a Canadian charity but also includes the United Nations and a small number of foreign entities). A Canadian charity cannot just transfer money over to a foreign NGO or charity.
There are a number of different ways in which a Canadian charity could operate abroad including 1) Canadian Employees of the Canadian charity directly work abroad 2) by Agency Agreement with an Agent, 3) a Contractor, 4) Joint Venture Agreement/Joint Ministry Agreement and 5) Cooperative Partnership Agreement.
CANADIAN EMPLOYEES
Some Canadian charities send their own employees or volunteers abroad in order to conduct the Canadian charity's activities. For example, a medical relief organization in Canada may send a Canadian doctor to a developing country to provide medical help to those who cannot afford it or to assist in a disaster situation. A Canadian church may send a missionary abroad to conduct religious activities. There are many advantages of sending your own employees over including using the skill and knowledge of Canadians, using your employees understanding of your organization and its belief/philosphy, control over the employee, and the ability to harness the experience of the employee on his or her return to Canada.
However, many Canadian charities operating abroad find that it is not always possible to send Canadian employees abroad. Sometimes because of logistical reasons, costs, language, culture, security or other reason Canadian charities often prefer to contract with local organizations to conduct the activities.
There are various models employed to conduct activities abroad.
AGENCY AGREEMENT
The most commonly used way of operating abroad is through an agency agreement. The Canadian charity appoints an agent to conduct the Canadian charity's activities, on behalf of the Canadian charity. The Canadian charity provides all of the funding and is in control of the relationship pursuant to a written agency agreement. This is one of the most popular methods of Canadian charities operating abroad. The concern is that the Canadian charity as principal is liable for the actions of the agent.
CONTRACTOR AGREEMENT
A Canadian charity can also retain a foreign contractor to conduct certain work. For example, a Canadian charity that is interested in providing clean drinking water could by written agreement employ a contractor in a developing country to dig the well. The contractor could be either a for-profit entity or a non-profit. The advantage of this type of independent contractor relationship is that of limited liability.
JOINT VENTURE/JOINT MINISTRY AGREEMENT
A Canadian charity can work with a foreign entity jointly pursuant to a joint venture agreement and pool their resources to carry out certain charitable work. The Canadian charity would need to have control of the charitable work at least in proportion to the funds that the Canadian charity is contributing.
COOPERATIVE PARTNERSHIP AGREEMENT
In the cooperative partnership model a -
Canadian charity works with the foreign entity and each contributes different resources and undertakes a different part of the project.
The Canada Revenue Agency has identified in RC4106 certain elements that are required in order for the foreign activities of a Canadian charity to be considered the "own activities" of the Canadian charity:
1) the charity has obtained reasonable assurance before entering into agreements with individuals or other organizations that they are able to deliver the services required by the charity (by virtue of their reputation, expertise, years of experience, etc.)[I would compare this to due diligence in the purchase of a business - if you are going to transfer large amounts of money to an agent to undertake your charity's work you need to satisfy yourself that they have the capacity, skills, interest, honesty etc. to carry out the work. This step is particularly important if you have not had previous dealings with the organization];
2) all expenditures will further the Canadian charity's objects and constitute charitable activities that the Canadian charity carries on itself [the objects or formal purposes of the charity are found in the Letters Patent of the charity. What is 'charitable' under Canadian law is an evolving area];
3) an adequate agreement is in place (a written agreement containing the minimum elements outlined below is required);
4) the charity provides periodic, specific instructions to individuals or organizations when appropriate;
5) the charity regularly monitors the progress of the project or program and can provide satisfactory evidence of this to the Canada Revenue Agency; and
6) where appropriate, the charity makes periodic payments on the basis of this monitoring (as opposed to a single lump sum payment) and maintains the right to discontinue payments at any time if it is not satisfied.
The CRA has identified certain minimum requirements with respect to the written agreements between the Canadian charity and the foreign entity in RC4106 which provides:
"Written agreements should typically include at least the following information:
1) names and addresses of all parties;
2) the duration of the agreement or the deadline by which the project must be completed;
3) a description of the specific activities for which funds or other resources have been transferred, in sufficient detail to outline clearly the limits of the authority given to the recipient to act for the Canadian charity or on its behalf;
4) provision for written progress reports from the recipient of the Canadian charity's funds or other resources, or provision for the charity's right to inspect the project on reasonably short notice, or both;
5) provision that the Canadian charity will make payments by instalments based on confirmation of reasonable progress and that the resources provided to date have been applied to the specific activities outlined in the agreement;
6) provision for withdrawing or withholding funds or other resources at the Canadian charity's discretion;
7) provision for maintaining adequate records at the charity's address in Canada;
8) in the case of agency agreements, provision for the Canadian charity's funds and property to be segregated from those of the agent and for the agent to keep separate books and records; and
9) the signature of all parties, along with the date."
The CRA also has identified in RC4106 additional guidelines relevant to joint ventures to ensure proportionate ongoing control.
-presence of members of the Canadian charity on the governing body of the joint venture;
-presence in the field of members of the Canadian charity;
-joint control by the Canadian charity over the hiring and firing of personnel involved in the venture;
-joint ownership by the Canadian charity of foreign assets and property;
-input by the Canadian charity into the venture's initiation and follow-through, including the charity's ability to direct or modify the venture and to establish deadlines or other performance benchmarks;
-signature of the Canadian charity on loans, contracts, and other agreements arising from the venture;
-review and approval of the venture's budget by the Canadian charity, availability of an independent audit of the venture and the option to discontinue funding;
-authorship of procedures manuals, training guides, standards of conduct, etc., by the Canadian charity; and
-on-site identification of the venture as being the work, at least in part, of the Canadian charity.
Transfer of Assets
Canadian charities operating abroad should maintain ownership and control over all of their assets. In general the Canadian charity can only sell these assets at fair market value or transfer them to a qualified donee. Except as provided below, a Canadian charity cannot just transfer money or assets to a foreign charity or NGO. The first exception is a policy of the CRA called the "Charitable Goods Policy" in which a charity can give away or transfer assets if the goods or assets can only be used for charitable purposes - such as food, medical supplies, or prayer books. Secondly, CRA has accepted that in certain countries there are prohibitions on a Canadian/outside charity owning real estate and it may be necessary for a local charity or government institution (which would not be a qualified donee) to hold the real estate. The local charity or government institution would have to give written assurances to the Canadian charity that the building or land will be used for charitable purposes. The third exception deals with the transfer of assets as part of development work. A Canadian charity can turn over to local control bridges, roads, wells etc that are part of a development initiative as long as the charity receives assurances that the structures or equipment will continue to benefit the community.
The CRA tries to assist charities with their compliance requirements for operating abroad by publishing material and answering calls. A charity can always provide their agency agreement to the CRA and request their approval of the agency agreement. However, my experience is that many charities are reluctant to interact with CRA in such a fashion unless required, for example as part of an audit. Many charities operating abroad are concerned about dealing with the CRA because of its oversight responsibility. Furthermore, some charities from certain groups within society have the erroneous view that CRA will not 'support' their organization, activity, or ethnic group and they are afraid to deal with CRA. The length of time that it takes CRA to respond to written questions - sometimes 4-6 months, undercuts the interest of Canadian charities in asking CRA for advice and consequently in compliance with Canadian laws and rules relating to operations abroad.
CASES
Recent Canadian cases such the Tel-Aviv Foundation case, The Magen David Adom case and the Bayit Leplitot case, all decided in the last few years should be of particular interest to Canadian charities that operate outside of Canada. I deal with the three cases below.
The Canadian Committee for the Tel Aviv Foundation v. Canada (2002 FCA 72)
The Tel Aviv Foundation Case deals with a Canadian charity set up to promote education and the relief of poverty in Tel-Aviv, Israel. The Canadian charity had an agency agreement with the Tel Aviv Foundation. In 1990 the Canada Revenue Agency conducted an audit which in which CRA noted its concern that there overseas expenditures were not being properly documented. In 1993 there was another audit where apparently the new Israeli management of the Tel Aviv Foundation was not aware of Agency Agreement. In 1996 the Tel-Aviv Foundation made undertakings to CRA to “conform strictly to the requirements of Revenue Canada, including the specific provisions of the Agency Agreement”.
In 1997 there was a further CRA audit – CRA was concerned with the following:
*violation of the agency agreement - there was little control over funds disbursed to agent(the Canadian charity is just a 'conduit' and not controlling the funds and activities),
*Canadian Charity could not show reporting of transactions,
*the funds of the Foundation were not kept separate from agent,
*receipting and T3010 and T4 irregularities,
*concerns that the Canadian Charity did not authorize projects,
*no evidence of alleged oral arrangements that superceded the agency agreement,
*a grant to an Air Force Museum in Beersheva which another city in Israel (ultra vires)
In 2002 the Canadian Federal Court of Appeal found against the Tel-Aviv Foundation and their charitable registration was revoked.
This case illustrates the importance of not only having the correct agreement with a foreign non-profit or charity but also in the importance of following the agreement. In order to follow the agreement, both the Canadian charity and the foreign agent must be aware of the agreement and understand it and be committed to implementing the agreement.
Furthermore, if there are going to be changes in the manner of how an operation or relationship is going to be carried out then the changes to the agreement must be documented in writing. One of the greatest challenges that charities face in operating abroad is in direction, control and supervision of agents abroad. Blumberg Segal LLP assists charities with these issues including sometimes meeting with representatives of the foreign agent to emphasize the importance of these requirements.
The case also reminds Canadian registered charities of the importance of operating within the Charity’s objects.
A final point, as illustrated in the Tel-Aviv Foundation case and the Magen David Adom case, discussed below, the CRA provides warnings about concerns with operations abroad and it is only after those warnings are not heeded over a protracted period of time do they typically go to the extraordinary step of deregistering a charity. As well, when a charity gives a written undertaking to 'clean up its act', presumably to avoid deregistration, then that charity will be held by the Courts to a higher standard, than another charity who has not been warned and provided such undertaking.
Canadian Magen David Adom for Israel and MNR (2002 FCA 323)
The Canadian Magen David Adom (hereafter “CMDA” or “Canadian Charity”) was set up to donate emergency medical supplies and ambulances directly to the people of Israel. CMDA appointed a Canadian representative in Israel to implement the program. In 1986 there was a CRA audit. In that audit the CRA raised two concerns, first that the funds were being given by CMDA to the US MDA for purchasing ambulances and were not being used directly by CMDA to purchase from General Motors the ambulances. Secondly, CRA was concerned that there was no written agency agreement between the Canadian Charity and a similarly named Israeli organization (Magen David Adom) and no control over how the ambulances are used once they are sent to Israel.
The CRA has a charitable goods policy, in which it allows certain limited types of good to be transferred to a foreign organization or given away without the need, in some cases, for a written agreement. Frequently cited examples include food in a famine situation, or prayer books. However, there are limits to the CRA's charitable goods policy to the extent that the charitable goods may be used for non-charitable or private purposes. In those cases it is important that the charity impose controls on the use of the goods. CMDA was arguing that the transfer of the ambulances and equipment to Israel fell within the charitable goods policy. CRA was concerned that some of the expenditures, such as purchasing bullet proof vests, were more remote and therefore subject to being used for non-charitable purposes.
CRA was also concerned about expenditures funded by the Canadian charity including setting up a new magnetic punch card system for employees of the Israeli charity which ostensibly improved the operation of the Israeli charity. CRA was of the view that the punch card system was an administrative expense in terms of the T3010 Registered Charity Information Return and not a charitable program. Depending on whether an expense is part of a charitable program or an administrative expense affects the disbursement quota requirements of the Canadian Charity and in this case would result in a shortfall in the disbursement quota.
The CMDA acknowledged at one point that there is probably a need for an agency agreement, but does not enter into one with their agent, as the agent in Israel was not interested.
The CRA undertook further audits for the 1993, 1995, and 1996 years. The CRA again raised concerns about the lack of any agency agreement, persistent disbursement quota problems, and potentially non-charitable expenditures like bullet proof vests and telecom equipment. In fact, in one instance a CMDA purchased ambulance was transferred over to the Israel Defence Forces for their use.
The CRA also raised a public policy concern. As the ambulances were being used in Israel and the West Bank, the CRA was of the view that to some extent they were being used to support the permanence of Israeli settlements in West Bank. The CRA argued that such actions were contrary to Canadian foreign policy which opposed settlement activity as an impediment to creating peace in the region.
In 2001 the CRA issued a notice of revocation to CMDA. The Federal Court of Appeal ultimately dismissed the CMDA appeal and CMDA lost its status as a registered charity in Canada.
The Federal Court of Appeal agreed with the charity with respect to the public policy argument. The FCA found that there is no “definite and somehow officially declared and implemented policy” with respect to Israeli organizations operating in the West Bank and Gaza strip.
However, the Federal Court of Appeal found that:
1) The agent in Israel was “not effectively authorized, controlled and monitored by the charity”
2) equipment was not only used for charitable purposes and the court was concerned about the involvement by the agent with Israeli military operations.
A few weeks after the FCA decision CMDA and CRA worked out an agreement whereby CMDA would not lose their charitable status! What can be drawn from this case which reads more like a saga from 1986 to 2002? What was the financial and emotional cost and distraction caused by the decision by CMDA to operate as it did? Could the CMDA not have just agreed in 1986 to buy the ambulances from GM directly, as it subsequently did, and to have a proper written agreement and follow through with the agreement, as it subsequently must have agreed to do. It is important that those involved and who care about Canadian charities realize that there are rules for Canadian registered charities operating outside of Canada. Those rules are not too onerous and it is easier, less expensive, and less stressful to follow the rules than to argue, even eloquently, that those rules should not apply to your charity.
Bayit Lepletot, 2006 FCA 128 (March 28, 2006)
This case dealt with a Canadian Charity that had an agency relationship with a Rabbi in Israel who “presumably” exercised some control over an Israeli charity with a similar name to the Canadian Charity. The Israeli charity ran 3 orphanages. But, according to the Federal Court of Appeal, there is no evidence of the Rabbis’ control over the charitable works of the Israeli charity and the status of the Canadian Charity was revoked.
This case demonstrates the importance of having a written agreement with the correct party. An agent can carry on charitable work but it must be shown that the agent is actually carrying out the work. It is not sufficient for an agent to be part of another organization that does the actual charitable work. Although it is possible for an agent in certain circumstances to sub-delegate their authority in this case the Court found that there was also no factual basis for arguing that the Rabbi had delegated his authority.
Concerns and Traps
Some areas of particular concern to charities operating abroad are:
1) terrorism and money laundering
2) bribery and corruption
3) fraud
4) private benefits
5) Intellectual Property (IP) issues (trademark, copyright, trade secrets, licences)
6) Legal constraints of foreign country (eg. Russia, foreign
currency restrictions, land)
7) donor and Canadian International Development Agency (CIDA) constraints
8) books and records (in Canada, official language, frequency, types)
9) specific restrictions on a charity or
undertakings
10) ethical issues
I will deal with some of the issues below:
1) Terrorism and Money Laundering
It goes without saying that Canadian charities cannot support terrorism at home or abroad. In 2001 the Canadian government passed the Charities Registration (Security Information) Act (Canada) which disqualifies organizations that are involved with terrorism from having registered charity status in Canada. Charities should establish mechanism and controls to ensure they are not duped or their funds used to support terrorism. Charities should beware of schemes by foreign entities to deceive them. An example is when a foreign "donor" provides to a Canadian charity a loan in foreign funds that is without interest for a period of say 6 months or a year. The monies are converted into Canadian dollars and ostensibly the waiver of interest is a donation. However the foreign "donor" is actually interested in using the good offices of the charities to launder the money and to evade attempts by certain governments to freeze assets. When the loan is paid back by the charity to the foreign donor the money is "clean". Canadian charities should be careful to conduct their due diligence to ensure that the supposed "legitimate entity" is not involved with terrorism and maintain adequate internal controls over the charity's operations. Although it is possible for a Canadian charity to be wholly controlled by a group of individuals who are intent on supporting terrorism, it is far more likely that a legitimate charity will be duped by a foreign agent or contractor or will have an individual employee abuse their position in the Canadian charity.
The CRA has suggested in its publication 'Charities in the International Context' that Canadian charities review the U.S. Department of the Treasury Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities and the UK –Operational Guidance – Charities and Terrorism (OG96) to review ideas to avoid the charity's funds falling into the hands of terrorists. U.S. Treasury Best Practices covers issues such as Governance, Disclosure, Accountability and Financing Procedures. The UK –Operational Guidance suggest reporting any concerns to the proper authorities, being aware of large donations from unknown individuals or donations conditional on certain organizations in the field being used as an agent or contractor.
2) Bribery and Corruption
It is important for Canadian charities to maintain a high standard of ethical and legal conduct abroad including avoiding bribery and corruption. Canada has recently passed the Corruption of Foreign Public Officials Act (Canada) which has a broad definition of 'official' and 'bribe'. As well CIDA also has the “Protocol for Dealing with Allegations of Corruption” which requires disclosure of previous offences and can lead to CIDA refusing to fund particular organizations.
3) Fraud
Whether it is fraudulent solicitations (advance fee fraud), more sophisticated internal fraud or fraud by an agent, it is important to have internal controls to prevent and detect fraud. The farther the foreign operations of the charity are from the charity in Canada the more difficult it is to adequately monitor the operations.
4) Private benefits
For a Canadian charity to qualify for registration as a registered charity, it must meet a public benefit test. The charity must demonstrate that its objects and activities provide a tangible benefit to the public as a whole, or a significant section of it. When charities enter into a contractual relationship, whether it be an agency agreement or contractor or otherwise, CRA is concerned that the relationship provide the maximum charitable benefit and is done is such a way as to minimize any private benefit. If the agent or contractor is a private person or corporation the concern is greater than if the agent or contractor is a foreign charity. The greatest concern is with capital assets such as land or buildings where the CRA requires assurance that ownership and improvements either vest in the Canadian charity or, if prohibited by foreign laws, the ownership may be turned over to a government body or another public authority (for example, a local town) or to a charity officially recognized in the host country. CRA does not want large amounts of money to be spent on land and/or buildings, subsidized by Canadian taxpayers, only to have it handed over to private interests that use it for their own personal benefit.
5) Intellectual Property (IP) issues (trademark, copyright, trade secrets, licences)
Canadian charities have in many cases spent years developing programs, materials and goodwill. They carefully manage their corporate identity and are concerned about reputational issues. When operating abroad and working with an agent, joint venturer, partner or contractor it is important to give some consideration to protecting the reputation, resources and goodwill of the Canadian charity. Protecting intellectual property can be easy and cost effective. Often IP issues are only dealt with after problem develops.
6) Legal constraints of a foreign country
Many countries place constraints on foreign charities operating in their country. For example Russia has recently passed an NGO law which will effect many Canadian charities wishing to operate in Russia. Some countries restrict whether a foreign charity can own land. Other countries impose foreign currency restrictions and controls. It is important that charities understand the legal limitations they may face in operating in a particular country.
7) Donor and CIDA constraints
If donors provide restrictions on the use of their funds those restrictions need to be observed. CIDA allocated in 2004/2005 3.7 billion dollars for various programs. CIDA often provides matching funds to organizations and CIDA requires that recipients of their aid sign written agreements and keep to them. Also because CIDA is prepared to provide funds to a charity it does not necessarily mean the activity in question is charitable under Canadian law.
8) Books and Records
Books and Records for Canadian charities operating abroad need to be kept in either English or French and kept in Canada. The books and records need to be able to substantiate the qualification of the Canadian charity to registration, to permit verification of donations, and must also include source documents. The CRA's publication IC78-10R4 has further details.
9) Specific Restrictions on a charity or Undertakings
When some charities are granted charitable status they have restrictions imposed on their activities in the Notification of Registration received from CRA. Other charities after registration may have provided to CRA an undertaking to do certain things. These restrictions or undertakings can affect what operations are carried on by the charity and how they are carried on.
10) Ethical issues
There are many ethical issues affecting Canadian charities operating abroad including but not limited to:
-concerns about cooperation versus control by Canadian charities;
-carry out long term comitments in foreign countries versus in some situations withdrawing over concern for the security of a charity's employees;
-operating in countries that do not treat women and minorities fairly;
-sexual coercion by aid workers or recipients of aid;
-the proliferation of development projects by military forces that, in some circumstances create confusion about the role and impartiality of a charitable organization;
-the truthfullness of fundraising solicitations and advertising in Canada.
Canadian charities need to carefully consider these and other issues before operating abroad in order to minimize problems and avoid subsequent legal liabilities. An interesting resource is the Canadian Council for International Cooperation (CCIC) Code of Ethics.
It is not easy running a charity with international operations. However, I think one needs to keep a certain perspective. There is an interesting background paper called “Frequency of Various Type of Non-Compliance by Registered Charities”. The paper was prepared by Diana Laing, John Skelton and Judy Torrance, for the Voluntary Sector Initiative and it reviewed the 58 revocations of Canadian charities from 1995-2001 (the report excludes those charities deregistered for non-filing of the T3010 form). First they found then that about 10 charities were being deregistered per year - that is out of 82,000 thousand registered charities. Secondly, when revocation took place there were usually numerous problems, not just insufficient supervision of a foreign agent. In the case of lack of control over foreign activities they found that about 6 charities over the six year period lost their registration. In fact of the 37 instances were lack of control over foreign activities was an audit issue the results were as follows: CRA issued educational letters in about 16% of the cases, undertaking letters in 62% of cases and revocation was the result in 21% of the audits. We can see from the Magen David Adom Case and the Tel Aviv Foundation case that numerous warnings are typically given and only after many years of non-compliance will CRA typically move to deregister a charity.
As discussed above, there are CRA policies with respect to how a Canadian charity can conduct foreign operations. These policies must be adhered to in order to avoid penalties or revocation of charitable status. Although some commentators have criticized the CRA’s requirements for charities operating abroad as silly or artificial, it appears that the totality of what the CRA requires is not unreasonable in light of the benefits that registered charities receive, the importance of the funds transferred abroad being used for appropriate charitable activities and the substantial contribution of the Canadian government by way of tax credits. When monies are transferred abroad, about 46 cents of every dollar is actually coming from the Canadian taxpayers. Many "major donors" who put in only a small percentage of a project would require far greater controls than those required by the Canada Revenue Agency.
As well, from a corporate governance perspective, many of the Canada Revenue Agency requirements are simply good corporate governance. Charities should always receive reports on activities they are undertaking whether in Canada or abroad. When an organization is conducting a large or ongoing project it makes sense to have progress payments. Keeping Canadian charities funds separate simplifies the accounting and auditing process. Canadian charities who receive donations from the public or other sources need to ensure that their funds are being spent wisely or the consequence to the Charities reputation could be far greater than any legal consequence.
One of the biggest stumbling blocks to effective implementation of the CRA requirements is often resistance from the foreign entity to control or reluctance to commit to any 'onerous' reporting obligations. It is important that the foreign entity understand the rationale for the requirements and often it is helpful to have a Canadian legal representative explain the requirements. The alternative to complying with the CRA requirements for charities is for the supporters of the cause to directly donate to the foreign entity and receive no tax receipt for their donation. In some cases this will mean that the entity will receive substantially less funds and in other cases it will mean that the foreign entity will receive no funds.
The Canada Revenue Agency does not provide Canadian charities with sample agency/joint venture/cooperative partnership agreements. The CRA may be concerned that charities will cut and paste the agreement and not give it sufficient thought to the relationship. I am not sure that this is the right approach. It would seem to me that for many Canadian charities operating abroad they are constantly grappling with issues relating to the relationship and it would be helpful for the Canada Revenue Agency to provide samples of what could be acceptable agreements for certain circumstances and charities could modify them accordingly.
The rules governing Canadian charities operating abroad, while somewhat complicated, are not too onerous, and it is important that Canadian charities understand the rules and comply with them.
You can read the Canada Revenue Agency publication Registered Charities: Operating Outside Canada (RC4106) at http://www.cra-arc.gc.ca/E/pub/tg/rc4106/rc4106-e.html
If you wish to read the full text of the above 3 Federal Court of Appeal cases dealing with Canadian charities conducting foreign activities then you can access them at Federal Court of Appeal Cases on Canadian Registered Charities Operating Abroad
As well you may want to review
CRA Information Letters On Canadian Charities Operating Abroad or Conducting Foreign Activities.
If you have any questions with respect to Canadian charities operating abroad or require assistance in preparing an appropriate agreement please contact Mark Blumberg at mark@blumbergs.ca or at 416-361-1982 x. 237. To find out more about legal services that Blumbergs provides to Canadian charities and non-profits please visit our Non-Profit and Charities page. To subscribe to Blumbergs’ non-profit and charities law e-mail newsletter please go to http://www.blumbergs.ca/newsletter.php