Granting to Grantees: An Opportunity for More Collaborative Partnerships?

By Diana Apostolides, VP of Strategy and Operations at JN Clarke Consulting

In June 2022, the Government of Canada enacted Bill C-19, which amended the Income Tax Act to include a new way for registered charities to work with non-qualified donees (Organizations without registered charity status with the Canada Revenue Agency). Grant making to grantees (formerly non-qualified donees) is now another way organizations in Canada can operate, and is being positioned as an opportunity for the charitable sector to build more collaborative and equitable partnerships. 

What’s different about this new way of operating? How will this impact your organization, and how can organizations start taking advantage of this new legislation? In this article, we will provide some initial thinking on these questions, and discuss how one charitable organization, the Equality Fund, is planning to leverage this new way of collaborating with other organizations.

The Equality Fund is a global feminist fund and model for sustainably resourcing women’s rights organizations and feminist movements through global grantmaking, gender-lens investing, policy advocacy, and feminist philanthropy. Through an initial contribution of $300 million CAD provided by the Canadian government in 2019, and through investments from institutional funders like the Ford Foundation and others, the Equality Fund provides grants to WROs through different grant making portfolios. Since its launch, the Equality Fund has committed $85 million to date which flows to more than 800 organizations working across 90 countries. Equality Fund’s charitable purpose, according to common law, is ‘other purposes beneficial to the community.

What’s different about this new legislation?

To answer this question, it’s important to revisit the Income Tax Act, and its rules related to how a registered charity can operate in Canada. Based on the Act, a registered charity [This includes all types of registered charities, including charitable organizations, public foundations, and private foundations, that are registered with the CRA (https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/charities-giving-glossary.html)] can operate in two ways: 1) carry on its own charitable activities through its own staff or through an intermediary (An individual or organization that is a non-qualified donee and is separate from the charity.), over which the charity must direct and control the activities conducted on its behalf and the use of its resources; and 2) gifting money or other resources to a qualified donee [An organization that can issue official donation receipts for gifts it receives from individuals and corporations (https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/charities-giving-glossary.html)].

These two ways of operating are still in effect under the recent Income Tax Act amendment; however what’s different is in addition to being able to provide a gift to a qualified donee (the second way of operating), charitable organizations can now also choose to provide a gift to a non-qualified donee (a grantee) in the form of a grant. There are certain ‘accountability requirements’ that charitable organizations need to be mindful of if they choose to pursue this approach. However the way in which a charity chooses to meet these requirements is not prescriptive.

It is important to note that exercising ‘direction and control’ over an intermediary- in the case where a charity is carrying on its own charitable activities (the first way of operating)- is still a requirement for charities who continue to operate in this way even under the new legislation.

How will this new legislation impact your organization? 

As an organization interested in pursuing grant-making, it is important to understand how to remain compliant with the Income Tax Act and ensure adherence to  its ‘accountability requirements.’ A charity can only provide grants that further its stated purpose(s), as articulated in its governing documents5. Something for organizations to consider if they’re interested in pursuing this new way of operating:  if the grant activity isn’t relevant to the granter’s charitable purpose(s), then the organization would have to consider amending its governing documents. Activities undertaken beyond the scope of an organization’s stated charitable purposes can have significant negative consequences, including the revocation of a charity’s status.

A charity must also ensure that its grant resources are used only for charitable activities that further its own charitable purposes. The extent to which a charity can be assured that its resources will be used exactly as stipulated in the grant agreement, depends on the level of risk associated with each grant and grantee. The CRA recommends that when it comes to both the act of granting and the approach to grant documentation (the requirement of doing adequate bookkeeping and keeping sufficient records), organizations should adopt a reasonable, flexible, and proportionate approach, informed by the assessed risk level of the grant.  

What sort of criteria does the CRA recommend organizations consider when it comes to assessing the risk of a grant, and ultimately the extent of administrative burden placed on the granter and grantee?

The criteria can be grouped into a few categories including: 

-considerations related to the granter and the grantee; 

-whether the grant activity will take place in or outside of Canada; 

-the value of the grant; 

-the duration of the grant. 

A granter with no experience working with grants or working with non-qualified donees, including intermediaries, would be classified as high risk, whereas an organization with significant experience either in grants or working with intermediaries and other non-qualified donees, would be considered low risk. Many charitable organizations in Canada working in the international development sector would likely be classified as low risk in carrying out granting to grantees, considering how prevalent it is for these types of organizations to operate through intermediaries.

5  There are four broad categories of charitable purposes, as outlined by the CRA: relief of poverty, advancement of education, advancement of religion, and other purposes beneficial to the community. https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/registering-charitable-qualified-donee-status/applying-charitable-registration/charitable-purposes.html

The Equality Fund engages in grantmaking through four distinct granting streams. The first is the ‘Catalyze’ stream, where grants are provided directly to individual WROs. The second is the ‘Activate’ stream, where funding is provided to other feminist funds, who then engage in their own grantmaking, channeling funds to smaller, grassroots organizations. The ‘Prepare, Respond and Care’ stream provides  grants for partners responding to crises. And finally, the ‘Connect’ stream, which is a new granting stream to support networks and consortia to do the sustained work it takes to connect activists and build coalitions and movements for feminist organizing globally. 

A grantee’s experience is also considered, with younger or newly established organizations classified as high risk compared to an organization with a longer operating track record. Relatedly, the level of sophistication of an organization’s structure is also taken into consideration, with organizations lacking a robust organizational structure considered high risk. This could have implications on the types of organizations that would be supported through grants, such as newer, less sophisticated organizations potentially being overlooked.

Grant activity that takes place in Canada as opposed to outside the country would be considered low risk. Grants outside of Canada would be considered medium to high risk, especially in contexts that are considered unstable, such as humanitarian/emergency situations. Grants that are valued at $5,000 or below and are less than two years in duration would be considered low risk, while grants valued at above $50,000 and between two to five years in duration would be considered medium to high risk.

Therefore, for charitable organizations working in the international development sector, where programming is implemented in the Global South, sometimes in unstable contexts, and which are often multi-year and with larger budgets, their grants would ultimately always be considered medium to high risk. In comparison, organizations working in Canada, with short time frames and smaller budgets could face less administrative burden given their granting activity would likely be assessed as low risk.

How can organizations start taking advantage of this new way of operating?

Following the enactment of Bill C-19, the CRA published draft guidance on how registered charities could engage in grantmaking to grantees, to ensure they meet Income Tax Requirements. This guidance was reviewed by the public, feedback was shared, and towards the end of last year, the final guidance was published. An important caveat to note: the guidance clearly states that charities don’t have to follow the CRA’s granting recommendations, and can show in their books and records the means in which they chose to meet the ‘accountability requirements.’ That being said, there are a number of steps suggested that organizations can follow in pursuing granting to grantees, that are laid out in the guidance.

Firstly, when a charitable organization decides it wants to collaborate with another organization, it is helpful to consider at the outset what approach will be taken, and to clearly document this in its bookkeeping and records. The options could be a grant to a grantee, a gift to a qualified donee, or to carry on its own activities through an intermediary. 

Assuming the organization decides to move forward with granting to a grantee, the organization would next need to engage in a due diligence process. This includes first establishing how the grant activity furthers the charity’s charitable purpose(s); assess the grant’s risk level using the categories mentioned above; determine and apply accountability tools (reporting schedule, contracts, transfer schedule, etc.) in proportion to the assigned risk level of the grant. 

Finally, the organization would be required to document this due diligence in their records, including the initial due diligence process, as well as the ongoing reporting that is conducted throughout the lifecycle of the grant. Organizations making grants should keep in mind that the accountability requirements have some flexibility, and the type of reporting during the life of the grant can vary based on the grant’s assessed risk level and length. For example, reports could be written or verbal, a check-in call or a site visit, depending on the accountability measures deemed necessary.

As a registered charity in Canada, and since its founding, the Equality Fund has operated under the model of carrying out its own activities through intermediaries, which includes a large global network of over 100 organizations across 90 countries. When it was founded, the organization’s original charitable purpose, as articulated in its governing documents, was to promote the economic empowerment of women globally. In practice, empowerment is complex, and through the numerous WROs and feminist funds supported, the Equality Fund’s support has contributed to women’s economic empowerment, and connected purposes that girls, women, and gender expansive people are also working on in their communities. This includes environmental sustainability and sexual reproductive health and rights, to name a few. 

As a feminist fund whose mandate is to shift power to WROs and feminist activists and work against the traditional, top-down dynamics present in the international development sector, grantmaking to grantees is much more in-line with the organization’s purpose and programming approach. Additionally, the flexibility in applying ‘accountability requirements’, as opposed to imposing direction and control on partners, is more in line with the Equality Fund’s partnership model and feminist operational principles. Acknowledging this, the organization has plans to review how it works within each of its grantmaking streams and assess the possibilities to change the ways that it engages with partners, taking into consideration the opportunities presented by the new Income Tax Act legislation. This includes ensuring that the grants to grantees are for activities that align with the organization’s charitable purposes, as emphasized in the legislation and CRA guidance, and finding ways to meet the CRA’s accountability requirements, while respecting the time, expertise, and agency of grantee partners. 

Concluding thoughts:

Within the confines of the Income Tax Act, granting to grantees presents an opportunity for organizations to expand and support a wider network of partner organizations, including those that are not legally registered in Canada, and/or organizations operating outside of the country. This way of operating could also change the ways in which organizations work with their partners, from the shift in direction and control to accountability requirements, the adherence to which are up to the discretion of the granter and its grantee. 

Relatedly, the activities that are supported in this sort of operating arrangement can be more in line with the grantee’s own organizational objectives and priorities, so long as those objectives support in some way the charitable purpose(s) of the granter. 

However, under this new operating approach the issue of administrative burden  still exists, especially for grantees that are newly established or lacking robust organizational structures (deemed medium to high risk). These organizations also typically struggle to meet accountability or compliance requirements due to limited staff and resources. 

Despite the challenges that come with working with medium to high risk grantees or pursuing grants classified as medium to high risk, the more flexible approach to ensuring compliance with grants and the opportunity to engage with more diverse partners is important and worth considering as a charitable organization operating in Canada.

The information presented in this article is not legal advice, but rather the opinion and thoughts of the author, who is not a legal professional. If you would like to seek legal advice on behalf of your charitable organization, including advice on how to engage in granting to grantees that is in compliance with the Income Tax Act, please contact a charity law firm, such as Blumbergs or Carters. 

A special thank you to the Equality Fund, specifically Ashley Rerrie (Senior Grant Operations Officer), for taking the time to share her invaluable thoughts and perspectives on this subject matter. To learn more about the Equality Fund, visit their website at: https://equalityfund.ca/