The Senate passed Bill S-2161 - the Effective and Accountable Charities Act - on December 9, 2021, potentially ushering in a highly-anticipated new era for Canadian registered charities who partner with organizations that are not registered charities or other types of qualified donees,2 both within Canada and abroad.
Background: The "Own Activities" Requirement
Since the 1950s, the Income Tax Act has included a requirement for a charity to devote all of its resources to charitable activities carried on by the organization itself. This is often referred to as the "own activities" requirement and has been interpreted to require a charity to show "direction and control" over the use of its resources by third parties who are not qualified donees.
The "own activities" requirement has been criticized as being overly restrictive, costly, inefficient, and unrealistic. Participants in the charity sector have described this requirement as creating a legal fiction wherein Canadian charities must expend significant time and money to prove their direction and control (often through complex contracts and onerous reporting requirements) when they are partnered with non-qualified donee organizations who carry out charitable activities the Canadian charities are truthfully not carrying on themselves.
Additionally, many critics have called the "own activities" requirement paternalistic, outdated, and out of step with contemporary values. Requiring Canadian charities to have control over third party non-qualified donee organizations, which can include foreign development partners and Canadian Indigenous groups, contradicts both Canadian international development policy encouraging self-reliance as well as Canadian policies encouraging shifts away from colonial practices and towards Indigenous self-governance.
Bill S-216: The "Reasonable Steps" Requirement
In June 2019 the Special Senate Committee on the Charitable Sector released a report3 which considered the above concerns and recommended a shift from "direction and control" to monitoring through an "expenditure responsibility test". The CRA Advisory Committee on the Charitable Sector considered this recommendation4 and concluded changes to administrative requirements alone would be insufficient to address the concerns and it would be necessary to amend the Income Tax Act itself to replace the "own activities" requirement with a different monitoring method.
Senator Ratna Omidvar subsequently introduced Bill S-216 (first introduced as Bill S-222 prior to the 2021 general election) to make these recommended changes. Bill S-216 replaces the "own activities" requirement with a "reasonable steps" requirement such that a Canadian registered charity will be permitted to make resources available to third parties if the charity takes reasonable steps to ensure the resources are and will be used exclusively for a charitable purpose. Bill S-216 also requires a charity to collect information on the identity, experience, and activities of the intended third-party recipient prior to providing resources.
Senator Omidvar touts Bill S-216 as enabling Canadian charities to "establish equal partnerships with non-charities, especially empowering the voices of BIPOC organizations, while still ensuring accountability and transparency."5 Bill S-216 received the Senate's unanimous support on third reading.
So, when can Canadian charities expect these changes to be effective? Unfortunately, they will have to wait a little while longer. Since Bill S-216 began in the Senate, the House has yet to consider it. Additionally, even if Bill S-216 passes in both Chambers, in its current form it will not come into force until two years after receiving royal assent. Canadian charities will have to keep up the legal fiction for now, but the end of an outdated era is finally in sight.
Footnootes
2 Definition of "qualified donees"
3 Catalyst for Change: A Roadmap to a Stronger Charitable Sector
5 Effective and Accountable Charities Act – Ratna Omidvar
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