Axing the anti-directed giving rule

In a nutshell

The Canadian Bar Association’s Charities and Not-for-Profit Law Section is recommending that the government delete or amend the anti-directed giving rule of the Income Tax Act. Paragraph 168 (1)(f) of the Act prevents a registered charity from accepting donations that, in substance, are passed through to a specific non-qualified donee at the donor’s direction, such as a foreign NGO or a non-charity in Canada.

The rule risks revoking charity registrations for accepting donor-specified gifts or grants intended for non-qualified donees, even when properly structured as qualifying disbursements for legitimate charitable programs, such as grassroots or Indigenous initiatives.

Key reasons

There is sufficient guidance from the Canada Revenue Agency that states a registered charity acting as a conduit contravenes the Act. The CBA believes that deleting the references that extend the application of paragraph 168(1)(f) to registered charities is the best way to address the issues and problems created by the anti-directed giving rule for the following reasons:

1. Unnecessary challenges: Registered charities historically collaborate on projects and funding for smaller grassroots organizations and groups that provide public benefit but may not be qualified donees under the Act. The anti-directed giving rule makes it challenging for registered charities to accept gifts or grants intended to support specific projects or programs when it is publicly known that the charity works with non-qualified donees to carry them out.
2. Original intention of paragraph 168(1)(f): It was originally introduced into the Act to prohibit registered Canadian Amateur Athletic Associations (RCAAA) from engaging in activities that could be seen as abusive. Unlike RCAAAs, registered charities are subject to significant restrictions on how to use their resources under the common law and the Act. Extending the paragraph to registered charities has unintentionally restricted legitimate and longstanding methods of structuring charitable programs within the sector.
3. Provision is unworkable: The CRA has acknowledged that, as worded, the anti-directed giving rule would prevent many funders from participating in the type of granting that the qualifying disbursements are intended to promote and has included suggestions for workarounds for charities in certain situations. These workarounds come close to crossing a line into suggesting the rule would not be enforced. This creates an unacceptable level of uncertainty for registered charities trying to further their missions in the most efficient, impactful and cost-effective manner possible. 

Why this matters

The anti-directed giving rule creates unnecessary confusion and uncertainty and, in some instances, prevents charities from distributing resources to support legitimately charitable activities. The recommendations in this CBA submission protect charities’ ability to use the new qualifying disbursement rules to fund legitimate, community-based work without facing an automatic threat of revocation simply because a donor has expressed a preference that funds ultimately support a non-qualified donee.

Read the full submission.