On July 25, 2013, the Charities Directorate of the Canada Revenue Agency (CRA) issued policy guidance on how to draft purposes clauses for charitable registration. At the same time, CRA also issued revised Model Purposes clauses.
The Guidance will apply to new applicants for charitable registration, existing registered charities that are seeking to change their charitable purposes and, undoubtedly, will be used by CRA in auditing registered charities and assessing their eligibility for ongoing registration.
Questions that the Guidance Addresses
The Guidance addresses three broad questions:
- What are the general requirements for purposes clauses in order for an organization to obtain charitable registration?
- What are the requirements for purposes clauses under each of the recognized general categories of charity (that is, the categories of relieving poverty, advancing education, advancing religion and advancing other purposes beneficial to the community that the law recognizes as charitable)?
- How will CRA deal with organizations that have unstated purposes and/or include in their governing document “power clauses”?
What are the general requirements for purposes clauses in order for an organization to obtain charitable registration?
A preliminary comment by way of background: with some slight variations that are irrelevant for our purpose here, a registered charity can be set up either as a trust, a corporation or an unincorporated association. Whatever the organizational structure chosen, it will include a statement of “purposes” (some corporations, depending on the legislation under which they are incorporated, will refer to the “purposes” as “objects) and may include a set of “powers” (for example, a fundraising power or an investment power).
The statement of purposes is key for obtaining charitable registration. It is necessary that the organization’s governing document (that is, the document that created the organization – for example, for a corporation, its letters patent or articles of incorporation) establish the organization for charitable purposes only. For an organization to be established for “charitable purposes only” it must be restricted by its governing document to using its resources for its stated charitable purposes.
The Guidance states that an organization’s stated purposes “should” include three elements, namely, identify: (i) the category of charitable purpose the organization intends to advance; (ii) the means by which the organization proposes to provide a charitable benefit; and (iii) the group intended to benefit from the organization’s charitable programs.
CRA allows that if an organization’s purposes do not include all three elements, the organization’s purposes may still be considered charitable by inferring the missing elements. An example cited is a purpose “to operate a soup kitchen for the poor” – the element of the charitable purpose category (to relieve poverty) is not expressly stated in this formulation, but would be implied.
Identify the Category of Charitable Purpose
This requirement will force an organization to identify, in their statement of charitable purposes, which of the four categories of charity (also known as “heads” of charity) the organization is set up to advance: relieve poverty, advance education, advance religion or another purpose beneficial to the community that the law recognizes as charitable.
This should be easily achieved in the case of the first three categories (poverty, education and religion) – a simple reference to “relieving poverty,” “advancing education” and/or “advancing religion” will satisfy this requirement.
In the case of the fourth category, it will be necessary to describe the purpose more specifically – for example, promote health, protect the environment or advance the public’s appreciation of the arts.
Identify the Means for Advancing the Charitable Purpose
This element involves identifying, in an organization’s statement of purposes, the specific means by which the organization intends to advance the charitable category it is set up to achieve. In the example purpose statement, mentioned above, the second element is “operat[ing] a soup kitchen” as the means for relieving poverty. Other examples of this second element, mentioned in the Guidance, include “operating a hospital” as the means for promoting health, “providing scholarships” as the means for advancing education.
This will be the most controversial requirement. Buried in the Guidance is the following statement, signalling CRA’s attitude and approach to reviewing applications for charitable registration: “… when drafting charitable purposes, the recommended approach is to err on the side of precision” (para. 25, emphasis added). Those with more than a fleeting knowledge of operating a charity understand that the means for achieving a charitable purpose evolve with time. If the means that an organization is allowed to employ are spelled out in its governing document, then the organization will be limited to only those means and not others. If the organization desires to employ other means, it will have to amend its governing document to be able to do so, resulting in additional expense for the organization, not to mention having to return to CRA for approval.
One can divine in this second element CRA the regulator setting up more hurdles that organizations seeking charitable registration will have to jump over to get charitable registration, as well as to maintain charitable registration.
Identify the Beneficiary Group
With the introduction of this element, charitable purposes will now have to include a reference describing the group intended to benefit from the charitable programs of an organization. Examples provided in the Guidance include “providing scholarships … to university students”; “operating a food bank for the poor”; “operating social businesses for people with disabilities.”
Again, this seems like an effort by CRA to introduce greater regulation. Traditionally, in the law of charity, an organization set up to achieve one of the first three categories of charity – relief of poverty, advancement of education and advancement of religion – was presumed to be established for the benefit of the public. So, it’s unclear – and the Guidance does not make the policy argument ‑‑ why it is necessary to include an express reference to the beneficiary group in the statement of purpose of an organization established to relieve poverty, advance education and / or advance religion.
The same concerns arise here as were identified, above, in the discussion of the second element. If an organization decides to shift the focus of the populations that it seeks to serve and its governing document specifies a particular segment of the population, then it will have to amend its governing document to make the shift.
What are the requirements for purposes clauses under each of the recognized general categories of charity?
In addition to the general requirements, described above, purposes clauses under each of the recognized general categories of charity have specific requirements, which the Guidance illustrates by examples (and readers interested in more examples can review the Model Purposes that is on CRA’s website).
For purposes that relieve poverty, CRA states in the Guidance that they should be formulated in a way that ensures benefits are provided only to eligible beneficiaries.
When it comes to education, the Guidance reflects CRA’s long‑standing view that education in the charitable sense means “… formally training the mind, advancing the knowledge or abilities of the recipient, or improving a useful branch of human knowledge” (para. 32 of the Guidance).
As for advancing religion, CRA’s view, expressed in the Guidance, is that it means “… manifesting, promoting, sustaining, or increasing belief in a religion’s three key attributes, which are: faith in a higher unseen power such as a God, Supreme Being, or Entity; worship or reverence; and a particular and comprehensive system of doctrines and observances” (para. 34 of the Guidance).
Finally, as mentioned, above, for purposes that fall under the fourth category of charity it will be necessary to describe the purpose more specifically and, in particular, be clear about the beneficiary group eligible for the organization’s charitable programs.
How will CRA deal with organizations that have unstated purposes and/or include in their governing document “power clauses”?
A couple of points are worth noting here. First, CRA examines the activities and operations of applicants for charitable registration, as well as those of existing registered charities. The examination may reveal, because of the weight of time, attention and resources devoted by an organization on particular activities, that the organization is, in fact, operating to achieve other purposes that are not expressly stated in its governing document. If the unstated purpose or purposes are charitable, then CRA will allow the organization to amend its governing document to bring it in line with its operations. In that case, once the governing document is amended, an applicant for charitable registration may obtain registration (assuming the other requirements are satisfied) and an existing registered charity can retain its charitable registration. On the other hand, if the unstated purpose or purposes are not charitable, then the organization does not qualify for charitable registration. For an applicant, that means that its application will be refused, and for a registered charity, there is the risk of deregistration.
Second, the Guidance states that, as a general rule, CRA will not be concerned about “power” clauses contained in an organization’s governing document, unless the power clause allows the organization to further non‑charitable purposes or requires the organization to do things that the law does not permit charities to do.
The Guidance is less “guidance” (in the sense of being a document aimed at facilitating charitable registration) and more “regulation.” Admittedly, it only states that an organization’s purposes “should” include the three elements. But, in all likelihood, it will be applied in a “regulatory” fashion, another tool to restrict the kinds of organizations that are granted charitable registration.
As the Guidance states, “[W]hen drafting charitable purposes, the recommended approach is to err on the side of precision. Including all three elements in a stated purpose will help to avoid potential problems associated with uncertainty” (para. 25). The “potential problems,” of course, will be with CRA’s examinations of applications for charitable registration.