If it is passed in its current form by the Canadian House of Commons and becomes law, Bill S-216 would amend stringent provisions of the Income Tax Act that deal with the permitted use of resources of a registered charity.
Currently these provisions require that a charity only permit its resources (funds, personnel, and property) to be used by persons under the charity's immediate control (for example - members, employees, or volunteers) or it can “direct and control “others as intermediaries or agents to use its resources and carry out the charitable activities on its behalf. A charity that fails to do this risks sanctions under the Income Tax Act, including the revocation of registered status.
If Bill S-216 passes, it will mean that registered charities will be able to stop using elaborate structures to prove they pass their own activities test by having complicated intermediary or agency agreements in place every single time a charitable activity is done by an organization or individual who is not under the immediate direction and control of the charity.
Why a change?
The member of parliament who introduced this private members bill to the House of Commons said...“it would help charities do their great work around the world. Currently, charities are unfortunately encumbered by significant red tape and bureaucracy. This legislation would go from a granular control, where charitable organizations in Canada have to okay nearly every decision of the partners they work with around the world or in Canada, to a system of accountability and transparency that will increase accountability for charities while giving them the autonomy to do their great work.”
How would S-216 amend the Income Tax Act?
The definition of charitable activities in subsection 149.1(1) of the Income Tax Act would be replaced to not only include “public policy dialogue and development activities carried on in furtherance of a charitable purpose” but more importantly would include “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”. For greater certainty, charitable foundations would also be given the same definition of charitable activities as charitable organizations .
This would mean that a Canadian charitable organization or foundation would more easily be able to engage with a larger variety of individuals and organizations and not just qualified donees (such as other registered Canadian charities) to carry on its charitable work as long as it took certain steps to protect its charitable resources.
What will be considered reasonable steps that a charity must take?
Bill S-216 proposes that a charity will be considered to have taken reasonable steps to ensure its resources are used exclusively for a charitable purpose if these two conditions are met:
(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.
Note that providing resources to a person also covers providing resources to an organization if it is incorporated because in the Income Tax Act the word “person” includes any corporation.
What does this mean for charities registered under the Income Tax Act?
Until the Income Tax Act is amended it is business as usual and all registered charities must ensure that either they continue to carry out their own charitable activities or direct and control agents or intermediaries (through agreement) that use resources of their charity for the purposes of carrying out charitable activities on behalf of the charity.
If Bill S-216 passes in its current form, then charities will still be able to have their members employees and volunteers use the resources of their charity to carry out their charitable purposes. But more importantly, it will mean that registered charities will be able to stop using elaborate structures to prove they pass their own activities test by having complicated intermediary or agency agreements in place when charitable activity is done by an organization or individual who is not under the immediate direction and control of the charity but who must, nevertheless, be directed and controlled by the charity through an agreement.
Will this become law and if so, when?
First reading of Bill S-216 was completed in the House of Commons on February 3, 2022. The bill was introduced by a private member, in which case it is called a “private Member’s bill”. There are two main categories of bills: public bills and private bills. Public bills deal with matters of national interest while the purpose of private bills is to grant special powers, benefits or exemptions to a person or persons, including corporations. Most bills considered by the House of Commons are public bills. The next steps for Bill S-216 are second reading and referral to a committee for consideration before third reading, potential adoption and finally consideration and passage by the Senate. Note that this bill originally came from a unanimous vote in the senate in December 2021.
However, it should be noted that if passed, this Act will not come into force until two years after the day on which it receives royal assent. There will be lots of time for registered charitable organizations and charitable foundations alike to digest this and take any steps they deem appropriate to operate under a new scenario.
Yvonne Chenier, QC, is a lawyer and philanthropy consultant –Yvonne brings more than 35 years of experience helping those in the philanthropic, nonprofit, and social enterprise sectors as general legal counsel and as an advisor on planning, organizational, regulatory and governance matters.