New CRA Policy on Fundraising

 

The Canada Revenue Agency (CRA) has published new rules for fundraising by registered charities.  The information below is excerpted from the policy document.  The full document runs over 50 pages, so I have only included the parts that most organizations ask me about.

 

As a general rule, fundraising is any activity that:

• includes a solicitation of support for cash or in-kind donations (solicitations of support include sales of goods or services to raise funds);
• is part of the research and planning for future solicitations of support; or
• is related to a solicitation of support (efforts to raise the profile of a charity, donor stewardship, donor recognition, etc.).

 

Fundraising includes activities carried out by the registered charity, or someone acting on its behalf.

 

Fundraising activity

 

For the purposes of this guidance, a fundraising activity may be a single action, such as an advertisement published in a newspaper, or a series of related actions, such as a capital campaign to fund a new building. The charity may decide what it considers a separate activity so long as it can reasonably be treated as discrete from other activities.

 

Fundraising activities may be external activities, such as soliciting donations through telemarketing, direct mail, or door-to-door canvassing, putting on events, or distributing information through the media or a charity’s own publications.

Fundraising activities may also be internal, such as researching prospective donors or hiring fundraisers, and includes activities carried out by contract, staff, or volunteers.

 

Resource(s)

 

The term resources is not defined in the Income Tax Act, but the CRA considers it to include the total of a charity’s financial assets, as well as everything the charity can use to further its purposes, such as its staff, volunteers, directors, premises, and equipment.

 

Prohibited Fundraising Conduct

 

Conduct that results in more than an incidental or proportionate private benefit to individuals or corporations.

 

Fundraising activities that result in more than an incidental or proportionate private benefit are prohibited and may result in revocation of registered charity status.

Although charities cannot be established to confer private benefits, some private benefit may arise in the course of pursuing charitable purposes. Any private benefit to individuals or corporations is only acceptable as an incidental and proportionate by-product of the activity undertaken to fulfill a charitable purpose.

 

Private benefit is generally incidental and proportionate where the amount or percentage of gain to individuals or corporations is not excessive relative to the benefit to the public. As well, private benefit must be necessary to be considered incidental.

Example 1

 

Registered charities sometimes enter into fundraising contracts that provide commissions or a percentage of the proceeds from solicitations. Where these arrangements result in a third party enjoying a benefit exceeding fair market value for the work it does, the private benefit will not be incidental.

 

Example 2

 

Registered charities sometimes purchase merchandise to offer as gift incentives or donor premiums during fundraising activities. Charities should satisfy themselves that any private benefit associated with such purchases is incidental. To qualify as incidental, private benefit must be necessary. In determining if a private benefit is necessary, the CRA may consider whether the charity is dealing at arm’s length with the supplier and whether it can be shown that distributing the item increases the net amount or number of donations.

 

Evaluation of Fundraising Activities

 

Fundraising Ratios and the CRA’s Approach

 

The CRA recognizes that the charitable sector is very diverse and that fundraising effectiveness will vary between organizations. There can be good reasons for a charity to incur higher fundraising costs for a particular event or in a particular year. As a result, a range of factors will be considered in the course of a CRA review. One of the factors that the CRA will consider is the ratio of fundraising costs to fundraising revenue. The following table provides some general guidance in terms of where the CRA may seek additional information or justification for fundraising costs.

Fundraising ratios alone are not determinative in assessing whether a charity’s fundraising complies with the requirements of the guidelines in this guidance. However, these ratio ranges give charities a way to generally gauge their performance and understand the circumstances where the CRA is likely to raise questions or concerns.

 

Ratio of costs to revenue over fiscal period	CRA Approach
Under 35%	Unlikely to generate questions or concerns.
35% and above	The CRA will examine the average ratio over recent years to determine if there is a trend of high fundraising costs. The higher the ratio, the more likely it is that there will be concerns and a need for a more detailed assessment of expenditures.
Above 70%	This level will raise concerns with the CRA. The charity must be able to provide an explanation and rationale for this level of expenditure to show that it is in compliance; otherwise, it will not be acceptable.

 

Additional factors the CRA may consider in assessing fundraising.

 

a) The size of the charity (which might have an impact on fundraising efficiency)

The size of a charity might have an impact on fundraising efficiency. The CRA generally considers that registered charities with revenues under $100,000 have a small constituency. In these cases the CRA will consider whether the fundraising costs are reasonable given the profile of the community the charity serves or with which it works, and whether the charity can demonstrate that costs are being adequately controlled.

 

b) Causes with limited appeal (which could create particular fundraising challenges)

 

The CRA recognizes that charities that advance causes with limited appeal may encounter particular fundraising challenges. These charities could include those conducting research into the prevention and cure of an emerging disease, that is relatively unknown, and charities with causes that are less popular with the general public, such as those supporting the rehabilitation of violent offenders. The CRA may be prepared to accept some higher costs for these charities, provided these can be shown to be reasonable given the nature of the cause that the charity advances and that it can demonstrate costs are being adequately controlled.

 

c) Donor acquisition and planned giving campaigns (which could result in situations where the financial returns are only realized in later years)

 

Donor acquisition and planned giving campaigns could result in situations where financial returns are only realized in later years. The CRA recognizes that the cost of donor development represents a long-term investment on the part of a charity. Provided a charity can demonstrate that it has adopted recommended best practices (see below) for fundraising to control and reduce costs, the CRA may be prepared to accept the higher costs associated with donor development solicitations.

 

Donor development includes, but is not limited to, direct mail campaigns, telemarketing, and face-to-face solicitations by paid canvassers. Special events may also be a way of identifying potential donors. Returns from donor development are often not realized within the fiscal period in which the spending on development occurs. However, donor development costs should, generally, decline over time as the charity and its fundraising activities become more established.

 

CRA rules do not permit the attribution of fundraising expenditures to future years, or the issuance of receipts for contributions pledged for future years. Because of this, the CRA recognizes that revenue-to-cost ratios calculated within a calendar or fiscal year may not fully reflect a charity’s operations.

 

 The following is a list of indicators that could cause the CRA to further review a registered charity’s fundraising activities.

a) Sole-source fundraising contracts without proof of fair market value.

 

A sole-source contract is a contract entered into where only one party was given an opportunity to make a proposal to the charity. Sole-source contracts for fundraising may lead to an excessive or disproportionate private benefit, which would make the fundraising unacceptable. Any private benefit associated with a charity’s operations must be a minor and incidental by-product of its work.

If a charity enters into a sole-source contract for fundraising services, it should be able to demonstrate that it paid no more than fair market value. Generally, this will show that the charity is acting reasonably in entering into the contract, and will address any concerns that the private benefit arising from the arrangement is excessive or disproportionate. However, other considerations related to the amount or percentage of public benefit may also apply.

 

b) Non-arm’s length fundraising contracts without proof of fair market value.

 

If a charity enters into a non-arm’s length contract for fundraising services or supplies without determining the fair market value of the work to be undertaken, there may be an undue benefit associated with the contract that makes the fundraising unacceptable.

The sanction provisions of the Income Tax Act with respect to registered charities include a penalty related to a charity conferring an undue benefit on any person. If the charity enters into a non-arm’s length contract for fundraising services or supplies, it should be able to demonstrate the amounts paid either reflect or are less than the fair market value. Generally, this will show the charity is acting reasonably in entering into the contract, and will address any concerns that there is an undue benefit arising from the arrangement. However, other considerations, such as whether the arrangement is necessary to fulfill the charity’s purposes, may also apply.

 

c) Fundraising initiatives or arrangements that are not well documented

 

A charity must properly document its fundraising activities to ensure all its resources are being used for charitable purposes and that other regulatory obligations are being met.
To show that it is retaining control of its fundraising, the charity should have:

• minutes of board meetings or other meetings where decisions on a fundraising contract were made;
• records of research to determine appropriate costs;
• documentation on any procurement processes, appropriate for the size of the fundraising services being sought, undertaken before entering into the contract(s); and
• written copies of any fundraising contract(s) entered into.

 

d) Fundraising merchandise purchases that are not at arm’s length, not at fair market value, or not purchased to increase fundraising revenue.

 

Where the charity purchases gift incentives, donor premiums, or other fundraising merchandise, it must be able to demonstrate that increased revenue will result directly from the distribution of such gifts or premiums. Otherwise, the purchase of such gifts or premiums may be unnecessary and may raise concerns of a private benefit accruing to the supplier of these items.

 

The private benefit associated with producing fundraising merchandise is inevitably quite remote from the public benefit the charity exists to pursue. It is therefore difficult to characterize any private benefit associated with producing these items as truly necessary to fulfilling the charity’s purpose(s).

 

If a charity enters into a non-arm’s length contract for fundraising merchandise without determining the fair market value of the work to be undertaken, there may be an undue benefit associated with the contract that makes the fundraising unacceptable.

The charity must be able to demonstrate that it paid no more than fair market value for such services. However, even where a charity can show that costs reflect fair market value, it may not satisfy the requirement that the arrangement not give rise to a disproportionate or excessive private benefit. As well as not exceeding fair market value, transactions that have private benefit associated with them are only acceptable as a minor and incidental by-product of a charity’s work.

 

e) Activities where most of the gross revenues go to contracted non-charitable parties

 

If most of the gross revenues of a charity’s fundraising activities go to contracted non-charitable parties, there may be an excessive or disproportionate private benefit that makes the fundraising unacceptable.

 

Where a high percentage of fundraising proceeds go to a non-charitable party or parties, the charity must show that it has taken steps to determine the fair market value for the good or service supplied, and that it has taken adequate measures to control costs. Generally, the larger the cost, either in absolute terms or as a proportion of the charity’s resources, the more attention the charity should pay to the issue.

 

Charities can manage this risk in various ways, such as:

• showing that expenditures on the activity or activities represent an investment and will result in lower costs for subsequent activities;
• using volunteers or obtaining non-receipted contributions of services, facilities, or equipment that enhance the activity and are not reflected in the financial reporting of the initiative; and
• disclosing costs so that the public or attendees are not misled about the use of their donations, entrance fees, or other contributions.

 

In such cases, the charity should be able to demonstrate that it is taking steps to lower its fundraising costs over time. It should also be able to document how and when it intends to achieve a more reasonable return.

 

f) Commission-based fundraiser remuneration or payment of fundraisers based on amount or number of donations.

If a charity provides remuneration for fundraising on the basis of results rather than effort, then there may be a disproportionate or excessive private benefit included in the remuneration that makes it unacceptable.

 

Where the fundraising arrangement includes commission-based remuneration or other compensation based on the number or amount of donations raised, the charity should satisfy itself that such provisions would not result in disproportionate or excessive private benefit. It is possible that contracts providing for such fees can result in a windfall profit for the fundraiser, particularly when the compensation is set at a high percentage and there are limited or no additional provisions governing how the work is undertaken.

 

Profits related to effort (for example, devotion of time and resources) rather than fundraising success are less likely to give rise to disproportionate or excessive private benefit. For example, payments which compensate fundraisers based on calls completed or contacts made—regardless of whether a donation is received—or on a periodic (for example, hourly or weekly) basis, at a fair market value for the work entailed, are not generally considered to result in disproportionate or excessive private benefit.

 

g) Total resources devoted to fundraising exceeding total resources devoted to program activities.

 

If the total amount of resources devoted to fundraising exceeds the total amount of resources devoted to program activities, fundraising may have become a collateral purpose of a charity. This issue may arise regardless of whether fundraising is done through staff or a contractual arrangement.

 

A charity may make substantial use of non-financial resources, such as volunteers, in fulfilling its charitable purposes. If the charity documents the use of such resources, it can show that a purely financial analysis of its operations does not accurately represent a fair picture of the resources devoted to charitable and fundraising activities.

 

However, a charity should also be able to demonstrate that its use of non-financial resources is a reasonable and effective way to advance its mandate. Fundraising revenues should primarily be used to support the charity’s operations, not fundraising itself. Where use of financial resources is heavily skewed to fundraising functions, and other operations are carried on primarily with non-financial resources, the fundraising may be an end-in-itself, not a means-to-an-end.

 

Market conditions may sometimes account for discrepancies in costs of different functions. Where this is the case, charities should be able to provide evidence to demonstrate that the costs of particular functions are reasonable. Merely showing that costs of fundraising are at market rates is not sufficient.