The 'no gifts to non-qualified donees' rule.

• Author: Broder, Peter

The registered charities provisions of the Income Tax Act (ITA) feature a number of obscure terms. That makes registered charities vulnerable to inadvertent non-compliance. It means prudent organizations need to keep a keen eye on regulatory trends and emerging issues. Looming regulatory concerns with making gifts to groups that are not qualified donees are a case in point.

Eligibility for charitable status under the ITA is based on the common law, which uses the Preamble of the Statute of Elizabeth (1601) and the famous classification from Income Tax Commissioners v. Pemsel as its touchstones. In addition, tax authorities have modified--some might argue clarified--what is permissible for Canadian registered charities by introducing certain concepts and language not found in the common law.

Thus, in Section 149.1(6.4) of the ITA we have National Arts Service Organizations, which create a special category of charity with objects and activities supportive of the arts and with certain other characteristics. More broadly, in addition to registered charities, it designates a number of kinds of bodies as "qualified donees" for donation purposes and as a mechanism through which charitable and certain other public benefit work can be carried out.

Specifically, qualified donees include:

* registered charities and Canadian amateur athletic associations;

* federal and provincial governments;

* the United Nations and its agencies;

and, where registered with the Canada Revenue Agency:

* certain housing corporations;

* municipalities;

* bodies performing functions of government (such as aboriginal bands);

* foreign organizations; and

* prescribed foreign universities.

The regulatory regime varies according to what kind of organization or body they are. For donation purposes, however, they are all treated the same. As well, a specific provision of the ITA defines charitable purposes as including "disbursement of funds to a qualified donee". So gifting funds to such a group (so long as it is within the objects of the registered charity giving the funds) is permissible under the ITA. Similarly, disbursements made by a charitable organizations to qualified donees as a means of devoting their resources to charitable activities are provided for in the legislation.

All this is important because, a few years back--in conjunction with modification of disbursement quota rules--provisions were added to the registered charity revocation sections of the ITA . These...