Charity and foundation sector associations are split over whether long-awaited guidance from the CRA makes it easier for non-profits and other non-qualified donees to be granted money. 

The federal charity regulator’s guidance, published on Dec. 19, recommends interpreting changes made to the Income Tax Act in 2022, which newly allowed charities to grant to non-qualified donees, such as non-profits, grassroots groups or individuals (NQDs). 

“No guidance was ever going to be perfect…but this is very much a win for the sector,” said Benjamin Miller, a staff lawyer for the Ontario Nonprofit Network. 

Miller said the policy will likely spur additional granting to grassroots groups.

“It shouldn’t be understated how many decades of work it took to get here,” he said.  

The guidance and legislation constitute a “major victory” for the charitable sector because they legitimize granting to NQDs and provide clarity for how it can be done, said Sara Krynitzki, director of public affairs for Philanthropic Foundations Canada, the national association of private foundations. 

While some foundations began granting to NQDs soon after the law was changed in 2022, this will provide confidence to a more tentative group of foundations awaiting CRA’s guidance before proceeding, she said.

But not all shared their optimism. 

Andrew Chunilall, CEO of Community Foundations of Canada, said the federal legislation and guidance have failed to address the “heart of the concern” raised by charity sector advocates who pushed for the policy change because the new granting approach maintains some of the “feeling” and “infrastructure” of the so-called direction and control regime. 

Direction and control is the method charities could use to flow money to NQDs before the 2022 legal change (and can still be used now as an alternative to granting.)  

Critics pushed for the new granting approach, arguing direction and control is patronizing and paternalistic. 

Under that regime, a funder must detail when the NQD’s work will begin, how it should take place, and what can be bought using the funder’s money. Funders also own any subsequent intellectual property of the work produced.

But despite the sector’s urging, the new granting guidance retains some of this “punitive” spirit, Chunilall said. 

For example, he cited the risk assessment tool in the CRA’s guidance, which recommends considering any grant of more than $5,000 to an NQD as medium or high-risk.

Most foundation grants are larger than $5,000, “so right out of the gate, the vast majority of grants are going to be at least medium-risk,” he said.  

Chunilall also pointed to the recommended risk assessment for grant duration. 

Grants under two years are deemed low risk, two to five years are medium risk, and grants more than five years are high risk.  

This approach is antithetical to the spirit of trust-based philanthropy, which encourages foundations to give long-term grants to support grantee sustainability, he said. 

More importantly, these recommended risk assessment factors will impact how foundations approach NQD granting because funders are required to use more thorough accountability tools when the risk level is higher, he added. 

For instance, for a high-risk grant, CRA suggests a grantor should engage in an “extensive review” of the NQD before granting (such as through requesting information from the organization or an on-site visit). In contrast, a “limited review” is considered appropriate for a low-risk grant. 

Another barrier to granting to NQDs?

In addition to the risk assessment framework, Chunilall said the guidance may reduce the likelihood of foundations awarding new grants to NQDs because it indicates that many will need to update their governing documents to issue such gifts.  

In the guidance, CRA said that any grant to an NQD must further a charity’s charitable purposes — its key objectives as described in its governing documents. 

However, because most foundations were created before the 2022 Income Tax Act amendment, many foundations’ purposes are to make grants to qualified donees, rendering grants to NQDs out of scope. 

A motivated foundation will change its governing documents to make NQD grants, but those on the fence might not, said Chunilall.

Making this sort of change involves a charity’s board and lawyers and can be time and resource-intensive; most foundations don’t do it more than once every 10 years, he said. 

“When you can just cut a cheque to a qualified donee — and you don’t have to change your governing documents, and you don’t have to have all of these CRA-mandated accountability tools and risk assessment frameworks — sometimes you just pick the path of least resistance.”  

CRA guidance: Recommendations, not rules

Krynitzki and Miller agree that a $5,500 grant shouldn’t be considered medium risk but stress that the CRA guidance is flexible and provides recommendations, not rules. 

The guidance states that the document is not law but, instead, a set of approaches a charity can use to meet their Income Tax Act requirements while taking “reasonable, flexible, and proportionate measures based on the nature of each grant.” 

The guidance says that the risk assessment chart is meant to provide a roadmap which charities can use to consider a grant’s overall risk level. 

Compared to guidance documents of decades past, this one is encouraging, Miller added.  

“I think the tone of the document signals a shift in the tone of guidances away from strictly regulatory documents — to a CRA that really understands that they play an important role in enabling the sector in doing its work,” he said. 

Changes made to a prior draft also show the CRA listened to feedback provided by many charities, including PFC, Krynitzki added. 

For instance, the draft version mentioned the word “risk” 62 times. In the final guidance document, that figure is cut in half. 

The previous version was also very long, drawing criticism. The final version, though modestly longer than the draft, includes a variety of tables, charts and collapsable sections. 

The CRA also adjusted the risk assessment somewhat. 

The previous version of the document recommended a grant of more than $25,000 be considered high-risk. The final version suggests that treatment for any grant greater than $50,000. 

“This is going to be a really important tool to support the sector,” said Krynitzki. “I’m really hopeful.” 

Miller agreed. 

“The CRA is careful to say their risk framework is meant to be contextual,” he said. “I would…caution against putting too much of a wet blanket over the guidance too soon.

“In an ideal world, all of this would be more streamlined and easier. But that should not stop us from being bold now and taking full advantage of this new window and opportunity that this policy provides us to flow more resources to the frontlines.”

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