Bill S-216, (the “Bill”), the Effective and Accountable Charities Act, a private member bill introduced by Senator Ratna Omidvar, passed its third and final reading on December 9, 2021, and passed its first reading in the House of Commons on February 3, 2022. The Bill eliminates the “own activities” requirement for charities and changes the rules for Canadian charities working with non-charities, both in Canada and abroad. Specifically, it amends the Income Tax Act to permit charities to provide their resources to a person who is not a qualified donee, provided that they take reasonable steps to ensure those resources are used exclusively for a charitable purpose.
According to Senator Omidvar, the Bill enables Canadian charities to “establish equal partnerships with non-charities, especially empowering the voices of BIPOC organizations, while still ensuring accountability and transparency.”
Removing the “Own Activities” Test
Prior to the introduction of the Bill, the Income Tax Act included a requirement for a charity to devote all of its resources to charitable activities carried on by the organization itself.
Referred to as the “own activities” requirement, charities were required to show “direction and control” over the use of their resources by third parties who are not qualified donees. This has been stipulated by the Canada Revenue Agency when issuing guidelines based on the Income Tax Act.
To meet the own activities test, a charity has to either directly carry out its own activities or exercise sufficient direction and control when working with an intermediary (non-qualified donee).
The “own activities” test has been criticized by many in the charity and not-for-profit sector as being “expensive,” “complex,” and “colonial,” among other things. There are times when the best way for a charity to pursue its charitable purpose is to partner with non-charities, such as not-for-profits, social enterprises, co-ops, or civil society groups. In June 2019 the Special Senate Committee on the Charitable Sector released a report stating that the “own activities” approach is “costly and inconsistent with contemporary values of equal partnership and recommended a shift from “direction and control” to an “expenditure responsibility test.”
In modernizing the Income Tax Senator Omidvar seeks to move away from “direction and control” to “resource accountability” so that charities and non-charities in Canada and overseas can be empowered in their operations but also ensure accountability and transparency.
The Bill replaces the “own activities” requirement with a “reasonable steps” requirement such that a Canadian registered charity will be permitted to make resources available to third parties if the charity takes reasonable steps to ensure the resources are and will be used exclusively for a charitable purpose.
The Bill seeks to remove the own activities test by deleting all references to charitable activities being “carried on by the organization itself,” and similar phrasing, in the Income Tax Act.
The New “Reasonable Steps” Test
Under the Bill charities will be permitted to provide their resources to a person who is not a qualified donee, provided that they take reasonable steps to ensure those resources are used exclusively for a charitable purpose.
The Bill provides that a charity is considered to have taken reasonable steps to ensure its resources are used exclusively for a charitable purpose if,
(a) before providing resources to a person who is not a qualified donee, it collects the information necessary to satisfy a reasonable person that the resources will be used for a charitable purpose by the person who is not a qualified donee, including information on the identity, experience and activities of the person who is not a qualified donee; and
(b) when providing resources to a person who is not a qualified donee, it establishes measures, imposes restrictions or conditions or otherwise takes actions necessary to satisfy a reasonable person that the resources are being used exclusively for a charitable purpose by the person who is not a qualified donee.
Both categories of information must be sufficient to satisfy a reasonable person that the resources will be used for a charitable purpose.
Definition of “Charitable Activities”
The Bill also replaces the definition of “charitable activities” in the Income Tax Act as follows:
“Charitable activities” means:
- public policy dialogue and development activities carried on in furtherance of a
(a.1) all the resources of which are devoted to charitable activities
- making resources — including grants, gifts or transfers — available through transactions, arrangements or collaborations of any kind whatsoever in furtherance of a charitable purpose to a person that is not a qualified donee if those resources are made available by a charity that takes reasonable steps to ensure that those resources are used exclusively for a charitable purpose in accordance with subsection (27).
“Charitable purpose” under the Income Tax Act includes the disbursement of funds to a qualified done.
Deemed Charitable Activity
The Bill further replaces the provision with respect to deemed charitable activity with the following:
An amount paid by a charitable organization to a qualified donee that is not paid out of the income of the charitable organization is deemed to be a devotion of a resource of the charitable organization to a charitable activity.
Coming Into Force
If accepted into law these changes to the Income Tax Act would come into effect two years after the Bill receives royal assent.
Contact the Business Lawyers at Baker & Company in Toronto for Assistance with Not-for-Profits and Charities
The knowledgeable lawyers at Baker & Company will continue to monitor the Bill as it proceeds through the House. We will update if and when it receives Royal Assent and advise as to how the Bill may impact a charity’s operations. Our team has extensive experience advising and representing many clients in this highly specialized area of the law, providing advice on a wide range of matters including applications for charitable status, corporate governance and contracts as well as the day-to-day issues that arise in running a charity or a not-for-profit. To speak with a lawyer, contact us online or by phone at 416-777-0100.