What do I need to know about Canada Revenue Agency (CRA)’s new Guidance on Fundraising?

That’s an excellent question for all of us to ask…even with 20+ years in the profession! Go to the CRA website to find the new Guidance – Fundraising by Registered Charities. Its purpose is “to support registered charities to comply with reporting requirements related to fundraising, and encourage them to self-assess their fundraising activities.”

I would highly recommend that the ED/CEO, board chair, treasurer, and chief development officer (any or all of the above, regardless of the size of your charity) review the document thoroughly to identify what changes might need to be considered regarding your fundraising activities and subsequent expenses. I found the Additional information on Guidance CPS-028, Fundraising by Registered Charities particularly helpful with all their examples.

This “live document” is the result of CRA’s Charities Directorate having an extensive consultation with Imagine Canada, the Association of Fundraising Professionals, and the Health Charities Coalition of Canada and is subject to an ongoing process of review. Their goal is to develop a policy that is equitable for nonprofit fundraising while protecting the public and allowing the government to address fraud and other issues.

Last month I mentioned the Charity Law Information Program (CLIP) and through work with them I’ve met Mark Blumberg who is their lead trainer; he is a lawyer who is committed to strengthening charities by sharing his legal expertise in a very down-to-earth way. CLIP is going to launch officially in September and Mark will be travelling extensively providing workshops and webinars on various topics including the CRA Guidance on Fundraising. Stay tuned on their website for announcements of upcoming training opportunities.

I have invited charity lawyer Mark Blumberg to contribute to today’s article. Here are his comments…

Fundraising is important for many charities and it is great that the CRA is providing guidance and ground rules. Inappropriate or poorly handled fundraising can devastate a charity – whether it results in lack of needed revenue or negative publicity. Donors and the media have been particularly interested in abuse of charities by fundraising businesses over the last few years. The egregious conduct of a small number of charities has reduced public trust in the sector.

The CRA recognizes that charities need to fundraise but they want it to reflect well on the charity and the sector, involve appropriate amounts of resources, and be transparent. In other words, the CRA does not like when charities either spend an excessive amount of their resources (time and money) on fundraising or are deceptive about it.

If a charity is acting contrary to the Guidance on Fundraising it is ultimately the board of directors who is responsible. 2009 is the year for boards of Canadian charities to really focus on the following areas surrounding fundraising:

  • The cost;
  • The appropriateness of certain types;
  • The disclosure made to the public.

 

CRA auditors are already using this guidance so an increase in the number of audits specifically relating to fundraising is conceivable in 2010. It is important that charities work hard to comply with the fundraising guidance, although many charities will find that the guidance have little impact on what they are already doing.

Mark’s top seven points

1. Definition of Fundraising and Other Terms. 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. The CRA also defines terms that may be relevant to understanding certain elements of the guidelines such as:

  • ancillary and incidental purpose;
  • arm’s length/non-arm’s length;
  • cause-related marketing/social marketing;
  • disclosure;
  • fundraising activity;
  • resource(s).

2. Fundraising, while important, is not charitable. The CRA quite legitimately takes the common sense view that fundraising (whether undertaken as a purpose or activity) is not in-and-of-itself charitable. Direct costs of fundraising cannot usually be reported as charitable expenditures on a charity’s annual Form T3010. Fundraising activities which are done in conjunction with activities primarily directed at achieving a charitable purpose can be allocated between charitable and fundraising for purposes of the reporting. Funds spent on fundraising will not satisfy the disbursement quota obligation of a charity.

3. Prohibited Fundraising Conduct. Canadian charities are prohibited from conducting a fundraising activity (or activities) that:

  • is illegal or contrary to public policy;
  • is a main or independent purpose of the charity;
  • results in more than an incidental or proportionate private benefit to individuals or corporations;
  • is misleading or deceptive.

4. Allocation of Fundraising Expenditures. For many charities this is not an issue. One activity is fundraising and another not and they are viewed as different. However, for most charities there is, in some cases, crossover between charitable activities and fundraising.

A solicitation of support, according to the CRA, includes both requests by the registered charity (or someone acting on its behalf), for financial or in-kind donations and the marketing and sale of goods or services not within the entity’s charitable programs but sold specifically to fundraise. This applies even where no donation receipt is issued for the transaction.

As a general rule, fundraising expenditures include all costs related to any activity that includes a solicitation of support or is undertaken as part of the planning and preparation for future solicitations of support, unless it can be demonstrated that the activity would have been undertaken whether or not it included a solicitation of support.

Asking the government for money is not considered a “solicitation of support.”

Registered charities must report fundraising expenditures on their T3010 Registered Charity Information Return. There is a lot written on allocation of fundraising expenditures in the guidance. Bookkeepers, treasurers, accountants and fundraisers who will be allocating some of the expenses of an event that is more than 10% fundraising should be aware of the “substantially all test” and the four part test for allocation of fundraising expenditures if they wish to allocate any part of an activity or event in which there is a solicitation of support.

5. Evaluation of Fundraising Activities. The CRA is making it clear that the onus is on charities to justify the appropriateness of fundraising activities and the ratio of fundraising revenue to expenses. The CRA will review all fundraising revenue and expenses (except government revenue) together and will not focus on a particular event or activity in isolation.

The CRA recognizes that the charitable sector is 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 given year. As a result, a range of factors will be considered in the course of a CRA review. Fundraising ratios of costs and revenue alone are not determinative in assessing whether a charity’s fundraising complies with the requirements 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 about the ratio. The following CRA table provides some general guidance in terms of where the CRA may seek additional information or justification for fundraising costs.

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.

 

In addition to considering where a charity falls within the ratio ranges, the CRA will take into consideration the following factors:

The CRA will also look at at the best practices and indicators of concern described below.

6. Best Practices. CRA sets out some best practices with respect to fundraising that charities should consider implementing if not they are not doing it already. When the CRA audits they will look to see whether these practices are implemented and if so it will reduce the likelihood that an auditor finds “unacceptable fundraising”. The following is a list of best practices considered to decrease the risk of unacceptable fundraising.

7. Indicators of Concern. The CRA has identified the following indicators that could raise concerns and questions that may cause them to further review a registered charity’s fundraising activities. This is a polite way of saying that you should try to avoid these behaviours:

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

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

c. Fundraising initiatives or arrangements that are not well-documented.

The CRA wants charities to properly document their activities. Types of documentation include:

  • Minutes of 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);
  • 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.

e. Activities where most of the gross revenues go to contracted non-charitable parties. 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;
  • Disclosing costs so that the public or attendees are not misled about the use of their donations, entrance fees, or other contributions.

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

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

h. Misrepresentations in fundraising solicitations or in disclosures about fundraising or financial performance. Misrepresentations may:

  • Result from the intentional conduct of a charity;
  • Arise through failure to exercise adequate care in producing or delivering information to the public or stakeholders;
  • Occur prior to or during fundraising;
  • Occur in a charity’s reporting on its fundraising or financial performance after solicitation;
  • Result from a statement by the charity, or someone on its behalf, which is inaccurate or deceptive;
  • Result from an omission of information that creates a false impression.

Mark has provided us with an introduction to this important document. Please make the CRA’s new guidance for charities on fundraising one of your top reading priorities this summer! Okay it’s not a best seller but a very prudent approach to strengthening your fundraising and financial accountability.

Mark Blumberg is a lawyer at Blumberg Segal LLP in Toronto, Ontario. He can be contacted at mark@blumbergs.ca or at 416-361-1982 x. 237. You can visit his website at www.canadiancharitylaw.ca.

Cynthia Armour is a freelance specialist in fundraising and governance. A Certified FundRaising Executive (CFRE) since 1995, she volunteers as a subject matter expert with CFRE International. She works with boards and senior staff to ensure that strong leadership will enhance organizational capacity to govern and fundraise effectively. Contact Cynthia directly at 705-799-0636, e-mail answers@elderstone.ca, or visit www.elderstone.ca for more information about her services.

To submit a question for a future column, or to comment on a previous one, please contact editor@charityvillage.com. No identifying information will appear in this column.

Disclaimer: Advice and recommendations are based on limited information provided and should be used as a guideline only. Neither the author nor CharityVillage.com make any warranty, express or implied, or assume any legal liability for accuracy, completeness, or usefulness of any information provided in whole or in part within this article.

Please note: While we ensure that all links and e-mail addresses are accurate at their publishing date, the quick-changing nature of the web means that some links to other web sites and e-mail addresses may no longer be accurate.

The CRA recognizes that the charitable sector is 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 given year. As a result, a range of factors will be considered in the course of a CRA review. Fundraising ratios of costs and revenue alone are not determinative in assessing whether a charity’s fundraising complies with the requirements 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 about the ratio. The following CRA table provides some general guidance in terms of where the CRA may seek additional information or justification for fundraising costs.