Mills & Mills LLP has recently been informed about new banking requirements for international transfers of funds by Canadian charities to foreign charities and other intermediary NGO's.
Registered charities that wish to make international transfers to an intermediary that is a "non-qualified donee" (an organization that does not have registered charity status with the Canada Revenue Agency (CRA)) are subject to regulatory and institutional requirements. Additional banking requirements are triggered when a registered charity indirectly supports another beneficiary through the intermediary's activities.
CRA Guidance for Grants to Non-Qualified Donees
On December 19, 2023, the CRA updated Guidance CG-032, Registered charities making grants to non-qualified donees. This new guidance is believed to have triggered new banking due diligence requirements for international transfers to an intermediary on behalf of another beneficiary.
Working Through an Intermediary
It is not uncommon for charities to partner with intermediaries to effectively carry out their missions. When a charity cannot carry on its activities through its own staff, an intermediary can step in to provide the necessary skills, regional knowledge, or specialized equipment. Sometimes an intermediary will use independent contractors to perform services – the identity of those third parties must be revealed to the bank and the Canadian charity and additional due diligence must be performed. When working through an intermediary, a charity must direct and control the use of its resources. Failing to meet the proper legal requirements can lead to serious repercussions under the Income Tax Act, including financial penalties or even the revocation of the charity's registration.
Regulatory and Institutional Requirements
The level of due diligence required by a charity when making a grant depends on the risk level. The CRA recommends following a due diligence model that a charity can use to meet the Income Tax Act requirements while taking reasonable, flexible, and proportionate measures based on the nature of each grant:
- Establish how the grant activity furthers the charity's charitable purpose;
- Assess the grant's risk level – low, medium, or high – based on factors that may affect the charity's ability to meet the Income Tax Act requirements;
- Determine how much due diligence the charity needs to apply through accountability tools based on the risk level;
- Apply the accountability tools in collaboration with the grantee; and
- Document the charity's due diligence over the grant's duration in its books and records.
The New Banking Requirements
In response to the CRA's updates, banks in Canada have introduced new institutional requirements for international transfers to beneficiaries through an intermediary, such as a requirement for more thorough information to complete a wire transfer.
When preparing to support a beneficiary indirectly through an intermediary, a registered charity must obtain detailed entity and identity information on both the ultimate beneficiary and the intermediary receiving the funds.
Such information includes:
- details about the relationship between the entities,
- their contact information,
- their registration numbers, and
- their identification numbers.
While intermediaries and beneficiaries might balk at the level of information and documentation required by the Canadian charity, the bottom line is that banks will not process transfers of funds until and unless they are satisfied with all the required information.
Concrete Actions Required
Whereas the CRA's Guidance CG-032 might have appeared theoretical and nebulous, the new banking requirements are quite concrete and will force intermediaries and foreign beneficiaries to comply with these new requests for information. Best practice is to perform appropriate due diligence and have written agreements in place between the Canadian charity and the foreign intermediary and beneficiary – a tri-party agreement can be very useful and will help a Canadian charity withstand a CRA audit.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.