We’re a newly organized registered charity. We heard that under the Income Tax Act there are certain requirements that apply to our fundraising. What do we need to know about fundraising?
Short answer
Two things must be remembered to keep your registered charity’s status:
- fundraising must not be your primary activity
and
- you must devote certain portions of your resources to charitable programs or services (including gifts to qualified donees) rather than fundraising expenditures.
While the Canada Revenue Agency accepts that you will encounter costs in your efforts to raise funds for your charitable purpose, it expects that these expenses will be reasonable.
Long answer
When you registered your charity, you declared your charitable purpose. That purpose must always be the focus of your time and resources.
The CRA does not view fundraising as a charitable expenditure. Spending excessive amounts on fundraising could also result in the charity not meeting its disbursement quota (DQ), that is, its spending requirement. View more information on disbursement quotas here.
For further discussion on fundraising, see CRA’s checklist of allowable activities at www.canada.ca/en/revenue-agency/services/charities-giving/charities/checklists-charities/engaging-allowable-activities.html
See CRA’s guidelines for fundraising events and charitable activities at www.canada.ca/en/revenue-agency/services/charities-giving/charities/operating-a-registered-charity/issuing-receipts/fundraising-events-issuing-receipts.html
Can our charity hire someone to manage a fundraising drive and pay them a percentage of the donations they raise?
Short answer
Maybe. A registered charity may, provided it is carrying on its own charitable activities, enter into fundraising contracts. The charitable activities carried out by such fundraisers must be conducted under the registered charity’s direction and control and the fundraisers must not be paid more than fair market value.
On the other hand, you may want to consider paying a fundraiser based on effort (for example, devotion of time and resources) rather than fundraising success. Payment based on effort is less likely to result in disproportionate or excessive “private benefit,” which is benefit to individuals or corporations, rather than to the public.
Long answer
If a charity provides a commission or a percentage for fundraising on the basis of results rather than effort, a disproportionate or excessive remuneration may result in an unacceptable contractual arrangement. Charities are not to enter into fundraising agreements that result in unduly rich remuneration for the fundraiser.
Excessive “private benefit” to fundraisers (as well as to members and directors of the registered charity) must always be avoided. Private benefit is seen in contrast to public benefit. Your registered charity’s purpose indicates the public benefit you intend as a charity. When funds are spent to further your objectives, then the merit of the expense is self evident. If funds are spent on something not directly furthering your objectives, then you need to carefully consider the expense.
Any private benefit associated with a charity’s operations is only acceptable as a minor and incidental by-product of its work. Any private benefit must not be excessive or disproportionate to the public benefit of the charitable purpose it exists to pursue.
When the fundraising arrangement includes commission-based payment or other compensation based on the number or amount of donations raised, the charity will want to ensure that such provisions would not result in lopsided or excessive private benefit. Groups such as Imagine Canada and the Association of Fundraising Professionals discourage use of commission-based fundraising because of the conflict it may create between a fundraiser’s personal interests and those of the charity. Since you can’t measure the link between performance-based fees and the effort required to secure donations, contracts providing for such fees could possibly result in a windfall profit for the fundraiser. This is particularly true when the compensation is set at a high percentage and limited or no additional provisions govern how the work is done.
Example
This year, XXX Charity paid a fundraiser at a modest rate based on calls completed, regardless of whether a donation was received. YYY Charity paid on an hourly basis at a reasonable market value for the work entailed. Neither of these arrangements usually results in disproportionate or excessive private benefit.
For the same event the year before, however, XXX had paid a different fundraiser on a percentage basis an amount that was later seen as an amount exceeding reasonable market value for the work he did. Within a few calls, the fundraiser had been able to land some very large contributions and was eligible for a significant payment. In this circumstance the private benefit to the fundraiser, therefore, was not minor (or “incidental”) to the broader public benefit associated with the charities work.
More…
If you have any concerns about certain expenses or budget items, consult a professional who is familiar with charities.
Our registered charity sends mailing labels to members of the public in our direct mail campaign. Is this an acceptable expense?
Short answer
Yes. This minor solicitation of support is treated as an acceptable fundraising expense. Similar promotions for donations must be incidental and are considered minor if:
- the promotional items were supplied at arm’s-length,
- the promotional items were purchased at a value no more than the retail value, or
- any associated private benefit was necessary.
Long answer
Any personal or corporate benefit associated with a charity’s operations is only acceptable as a minor and incidental by-product of its work. No private benefit should be disproportionate to the public benefit that the charity exists to pursue.
Before purchasing gift incentives or donor premiums, make sure that any private benefit associated with such purchases is minor or incidental.
To qualify as incidental, any personal or corporate benefit would have to be necessary. Consider whether:
- a supplier is dealing at arm’s-length from the charity
- it can be shown that the gift incentive increases the net amount or number of donations.
More…
Review the general fundraising guidelines here.
Why isn’t a fundraising activity a charitable expenditure? I don’t understand the difference.
A charitable expenditure is spending that directly furthers your charitable purpose. If your charitable purpose is to fight childhood diseases, then distributing mosquito nets and immunization campaigns might be among your charitable programs. In order to finance these programs, you need to raise funds. You might hold an auction, a dinner, or a golf tournament. Those are your fundraising activities.
The distinction between charitable expenditures and fundraising expenditures is not always clear. One activity can have both charitable and fundraising components. While a fundraising banquet isn’t a charitable program or service, a guest speaker’s presentation at the banquet may educate a new audience about a topic included in the charity’s purpose.
In this combined activity, the charity needs to decide how to allocate the elements of the event and their costs for reporting purposes and needs to maintain separate records of those costs. A registered charity is allowed to spend up to 20 per cent of its total receipted income on non-charitable expenditures of which fundraising is only a part. This limitation is explained in the disbursement quota FAQs.
Example
123Go, a children’s health charity, has a month-long awareness campaign in which most of a printed flyer provides information about childhood diseases and a paragraph on the back page appeals for funds so 123Go can continue its work. Note: 123Go, in this example, does not use a professional fundraiser to create or distribute the flyer.
For its record keeping, the charity separates the portion that furthers its charitable object and the portion that raises funds. On the two-page flyer, the closing paragraph represents 15 per cent of the content. Therefore 15 per cent of the writing, printing, and distribution costs is considered fundraising costs, while the other 85 per cent is seen as 123Go’s charitable costs.
More…
See the disbursement quota FAQs.
Is there a limit on how much our registered charity can spend on fundraising?
Short answer
Yes, there certainly is. Your charity’s stated purpose when you registered must always be your main focus of time and resources. To ensure that this emphasis is maintained, you must calculate your “disbursement quota” each year.
Fundraising expenditures are ineligible for use toward meeting disbursement quota obligations. Spending excessive amounts on fundraising could result in your charity not meeting its disbursement quota. For more on disbursement quota, see below.
Long answer
A registered charity cannot engage in fundraising as a primary activity. Devoting a substantial portion of your revenue to fundraising activities also puts your registered status in jeopardy. Making fundraising a primary activity and/or spending most of your revenue on fundraising could potentially lose you your ability to function as a registered charity.
Registered charities that have major shortfalls in their charitable spending over a number of years risk losing their charitable status. They also risk losing their status if fundraising costs are excessive, particularly if the charity is not able to show that such costs would decline in future years.
More…
Information on the Disbursement Quota is found here.
Our registered charity just held a major fundraiser. Are there guidelines about issuing receipts?
Yes, there are guidelines.
The FAQs about receipting found at Receipting FAQs
I have heard the term “arm’s-length” applied to registered charities. What does it mean?
Short answer
“At arm’s-length” describes a relationship in which the parties act independently of each other.
The opposite —“not at arm’s-length”— includes individuals who are related to each other by blood, marriage, adoption, and common law relationships. Not at arm’s-length also covers people acting together without separate interests, such as those with close business ties.
Long answer
The concept of arm’s-length is used, amongst other things, in registered charities to clarify private benefit. For example, promotional items must be supplied at arm’s-length at a reasonable market value and without any excessive private benefit to the supplier, the charity’s board, or any individual members of the board.
I heard about a very successful fundraising campaign run by a charity in another country. My registered charity would like to duplicate that campaign in Canada. Can we do that without any problems?
Short answer
Not necessarily. Problems can occur when you simply copy the fundraising program of another charity without considering your charity’s purpose as well as federal and provincial laws, among other issues.
Long answer
Registered charities should conduct an appropriate “due diligence” review of the legal liability or the suitability of a program prior to adopting another charity’s fundraising program (whether the other charity is within or outside of Canada).
A due diligence review may include some, if not all, of the following:
- The fundraising program may have originated in the other country and been adopted without taking into account the differences in the regulatory bodies between Canada, the other country and that particular province.
- The corporate objects and powers of the registered charity may be very different from the charity in the other country.
- Even if a legal opinion has been obtained by another charity concerning the legality of a fundraising program, the legal opinion will not have application to your charity.
- Even if a fundraising program is determined to comply with all applicable laws, it may not be practical for your registered charity to undertake the same program due to the inexperience or size of your charity.
If you are still not sure, check with the Fundraising Guidance and the appropriate provincial regulatory authorities.
I’ve heard that the Canadian Radio-television and Telecommunications Commission has introduced a new rule that impacts telemarketing solicitation. Do these changes impact how registered charities can fundraise?
Short answer
Perhaps. Registered charities that use telemarketing are impacted. Registered charities that make fundraising solicitations that do not comply with Canadian Radio-television and Telecommunications Commission directives, the CRTC’s telemarketing rules, or other established government policy may be subject to review.
This is particularly important since 30 September 2008 when a do-not-call list (DNCL) was implemented. Although charities are exempt from the do-not-call list, individuals can specifically request that a charity remove them from their list. The charity should maintain its own DNCL and comply with that request.
More…
If the CRTC can be of any assistance, you can contact them here.
Visit the CRTC’s National Do Not Call List website at https://crtc.gc.ca/eng/phone/telemarketing/
Who is ultimately responsible for registered charity fundraising.
Short answer
The legal responsibility for fundraising lies with the charity and its board of directors. The charity and its board of directors have to provide direction and exercise control over all fundraising activities.
Long answer
Directors have a responsibility to exercise prudence in overseeing the operations of a charity and protecting its charitable property, which includes protecting the charity’s property from undue risk of loss and ensuring against excessive administrative expenses.
Example
The duty placed on directors of charities from fundraising programs was underscored in a 2001 Ontario case in which the court found the AIDS Society for Children and its three directors liable for unreasonable fundraising costs of almost $740,000 and imposed a further $50,000 penalty on the directors of the charity. It had been discovered that despite raising over $920,000 through public donations, no funds had been spent on charitable programs. More than 76 per cent of the money raised went to fundraising companies for fees.
The court held that directors of a charity:
- have an obligation to the charity and the property held by the charity
- are accountable to the public for all funds publicly raised
- are accountable to use such funds to further the objects of the charitable institution
For more details, see Ontario (Public Guardian and Trustee) v. The AIDS Society for Children (Ontario), [2001] at www.carters.ca/pub/bulletin/charity/2002/chylb17.htm.
As a director of a registered charity, can I be held personally liable for not protecting a donor’s rights in a fundraising operation?
Short answer
Yes, you can. The Courts have placed a fiduciary duty on boards of directors to oversee charitable fundraising and ensure that the rights of a donor have been adequately protected, as seen in the AIDS Society case (see example above).
Long answer
Directors of a charity should actively review, approve, and oversee all fundraising activities of a charity, including the terms of contractual relationships with professional fundraisers. A risk management approach to fundraising is essential in order for board members to avoid personal liability.
Example
The duty placed on directors of charities from fundraising programs was underscored in a 2001 Ontario case in which the court found the AIDS Society for Children and its three directors liable for the unreasonable fundraising costs of almost $740,000 and imposed a further $50,000 penalty on the directors of the charity. It had been discovered that despite raising over $920,000 through public donations, no funds had been spent on charitable programs. More than 76 per cent of the money raised went to fundraising companies for fees.
The court held that directors of a charity:
- have an obligation to the charity and the property held by the charity
- are accountable to the public for all funds publicly raised
- are accountable to utilize such funds to further the objects of the charitable institution
More…
See Checklists for Charities at https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/checklists-charities.html