Lessons Learned from
Past Fundraising Mistakes:
A Look at the Cases
Canadian Council of Christian Charities
Annual Conference, September 2012,
Vancouver, BC
Charles De Jager & Luke Johnson
De Jager Volkenant & Company
Barristers & Solicitors, Surrey, BC
OUTLINE
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Brief overview of new CRA Fundraising Policy
Are fundraising activities charitable?: Vancouver Society
Refunding a gift, split-receipting requirements: Richert
Risk of revocation for involvement in tax shelters: Millennium
Unscrupulous fundraisers: Innovative Gifting
Director obligations for fundraising: AIDS Society
Court's limited power to re-direct specified gifts: YWCA
Board permits fraud, complicit donors penalized: Coombs
Risk of gift being disallowed in tax shelter: Norton
Effect of private benefit on donations: Ballard
Requirement to control and document fundraising: ICAN
Access by CRA to charity’s records of donors: Redeemer
Class action remedies: Cannon
Common Errors
NEW CRA FUNDRAISING
POLICY
• New CRA Policy Fundraising by
Registered Charities CG-013 issued April
20, 2012 interprets cases, the Income Tax
Act and policy to provide charities with a
comprehensive guide for fundraising
activities
• CRA policy is that fundraising is not a
charitable purpose in itself or a charitable
activity that directly furthers a charitable
purpose
FUNDRAISING
• Fundraising is “any activity that includes a
solicitation of present or future donations
of cash or gifts in kind, whether the
solicitation is explicit or implied”
SCOPE
Fundraising can be carried out by the charity or by anyone acting on its behalf
and includes:
• face to face canvassing, telemarketing, major gift work with individuals,
direct mail
• internet or media campaigns (for example, electronic mail, online
publications, Web sites, television or radio)
• printed information, advertisements or publications (for example,
newspapers, flyers, brochures, and magazines)
• events (sports tournaments, runs, walks, auctions, dinners, galas, concerts,
and travel or trekking adventures)
• sales of goods or services
• donor stewardship, and membership or corporate sponsorship programs
• researching and developing fundraising strategies and plans or prospective
donors
• recruiting development officers, hiring fundraisers
• operating donor recognition programs
EXCLUDED
Fundraising does not include:
• seeking grants, gifts, contributions, or
other funding from other charities or
governments
• recruiting volunteers to carry out general
operations of the charity
• related business activities
PROHIBITIONS
Fundraising must not:
• Become a purpose of the charity (a collateral
non-charitable purpose)
• Deliver more than incidental private benefit (a
benefit that is not necessary, reasonable, or
proportionate in relation to the resulting public
benefit)
• Be illegal or contrary to public policy
• Be deceptive
• Be an unrelated business
CRA ASSESSMENT
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Disallow fundraising where the resources devoted to fundraising
exceed the resources devoted to charitable activities
Discourage fundraising without an identifiable use or need for the
proceeds
Disallow inappropriate purchasing or staffing practices:
– purchases of fundraising merchandise or services for unnecessary
fundraising or that do not increase fundraising revenue
– paying more than fair market value for fundraising merchandise or
services
– sole source or not-at-arm's length contracts for fundraising merchandise
or services without justification or independent verification that contract
is for fair market value
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Discourage activities where most of the gross revenues go to
contracted non-charitable parties
CRA ASSESSMENT, cont.
• Discourage commission-based fundraiser remuneration
or payment of fundraisers based on the amount or
number of donations
• Disallow misrepresentations in fundraising solicitations
or in disclosure about fundraising costs, revenues or
practices
• Discourage fundraising initiatives or arrangements that
are not well documented
• Discourage high fundraising expense ratio
• Consider the size of the charity
• Consider causes with limited appeal
• Accept donor development programs
• Consider involvement in gaming activities
FUNDRAISING RATIO
• Costs / revenue under 35%: unlikely to generate
concerns by the CRA
• Costs / revenue of 35% to 70%: CRA will examine the
average ratio over recent years to determine if there is a
trend of high fundraising costs. The higher the ratio, the
more likely CRA will be concerned the charity is engaged
in fundraising that is not acceptable, requiring a more
detailed assessment of expenditures
• Costs / revenue above 70%: raises concerns with the
CRA. The charity must be able to provide an explanation
and rationale for this level of expenditure to show that it
is not engaged in unacceptable fundraising
FUNDRAISING COSTS
ALL0CATION
Fundraising ratio is derived from allocation on
T3010
• 100% -- activities that are exclusively, or almost
exclusively (90% or more of the activity is
devoted to fundraising), undertaken to fundraise
• 0% -- activity would have been undertaken
without the fundraising component
• Pro-rated -- less than 90% of the total content of
the activity advances fundraising
CRA RECOMMENDATIONS
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Use a prudent planning process
Evaluate fundraising performance in the context of CRA guidance,
before and after
Adopt appropriate procurement and staffing processes, scaled to the
amount raised
Be aware of risks associated with hiring third-party fundraisers
Provide ongoing management and supervision of fundraising
Keep complete and detailed records relating to fundraising activities
Provide disclosure about fundraising costs, revenues, practices, and
arrangements
FUNDRAISING CASES
• The following selected legal cases
demonstrate what can happen when
charities fail to comply with the law,
Income Tax Act, and CRA policy in
regards to fundraising activities
• The emphasis is on the mistakes made,
and lessons to be learned from these
cases
Vancouver Society of Immigrant and Visible
Minority Women (SCC 1999)
• Organization applied to register as a charity, and
CRA refused. The organization appealed up to
the Supreme Court of Canada
• Result: Establishes a framework for analysis of
what activities are charitable. The organization's
proposed purposes and activities did not qualify
• The Court confirmed the general principle that a
charity’s purposes must be exclusively charitable
and that all of its resources must be devoted to
these purposes unless exempted under law and
the Income Tax Act
Result
• CRA cites this case in support of its policy that
fundraising is not a charitable purpose in itself or a
charitable activity that directly furthers a charitable
purpose
• “…the character of an activity is at best ambiguous; for
example writing a letter to solicit donations for a dance
school might well be considered charitable, but the very
same activity might lose its charitable character if the
donations were to go to a group disseminating hate
literature. In other words, it is really the purpose in
furtherance of which an activity is carried out, and not
the character of the activity itself, that determines
whether or not it is of a charitable nature....”
Result, cont.
• The Court held that pursuing a purpose
which is not itself charitable may not
disqualify an organization from being
considered charitable if the purpose is
pursued only as a means to fulfill another,
charitable purpose and not as an end in
itself
• CRA fits fundraising into this exemption
Lessons Learned
• CRA accepts fundraising within limits set
by law and the Income Tax Act, but it is
not in itself a true charitable purpose or
activity
• Fundraising is an exception to the general
rule and is therefore likely to be enforced
strictly
Richert v. Stewards' Charitable
Foundation (2005 BCSC)
• A donor attended a luncheon event and
made a donation of $1,000. The host
charity deducted a portion of his donation
to cover his meal and a complimentary
book (following CRA’s split receipting
rules). The offended donor demanded a
refund (alleged a resulting trust)
• Donor's claim dismissed and Appeal
dismissed
Lessons Learned
• All advantages derived from attending an event,
including complimentary items, must be
deducted from the purchase price of the ticket to
arrive at the eligible amount of the gift
• Follow CRA split receipting rules
• Clearly communicate policies in advance: gift
acceptance policies, refunds, etc.
• Be aware of donor expectations or risk “trivial
misunderstandings” developing into court cases
• A completed gift cannot be undone
Millennium Charitable Foundation
v. Canada (2008 FCA)
• Charity being revoked for participation in
tax shelters attempts to maintain its
charitable status
• Appeal denied and charity revoked
Mistakes Made, Lessons
Learned
• The charity was purely a tax shelter
vehicle: it had no proper charitable
donations or activities to point to in
attempting to maintain its status
• Revocation is CRA's ultimate punishment
for inappropriate fundraising
• CRA holds all the cards
Innovative Gifting Inc. v. House of the Good
Shepherd (2010 OSCJ)
• A promoter and team of financial advisors recruited
charities into receiving cash donations from local donors.
The cash donations were to be matched by an
anonymous philanthropist by way of share donations.
Promoter's fees were calculated on full value of cash
and shares (which were actually worthless). The
philanthropist did not in fact exist
• Two charities refused to pay the promoter, and he sued
to enforce a fundraising agreement
Result
• Court found in favour of the charities, and
refused to uphold the promoter's fundraising
agreement, for several reasons:
– The fee portions of the agreements were nonsensical,
and so unenforceable
– The promoter gave the charities false information
– The promoter failed to provide the donated shares
– The agreements were void as contrary to public policy
as the fees were not reasonable, justified or
proportionate to the amount of money raised for
charitable purposes (the promoter received 90% or
more of the funds raised)
Mistakes Made, Lessons
Learned
• Even sophisticated charities can be drawn into tax
schemes
• Promoters prefer using established, legitimate charities
• Disentangling from a tax scheme is difficult and
expensive, and puts the charity's registration at risk
• Some opportunities are too good to be true
• Be skeptical of professional fundraisers, and scrutinize
their promises carefully
• Courts are willing to get involved to assist charities
Ontario v. AIDS Society for
Children (2001 OSCJ)
• A charity retained third party fundraisers.
Donor complaints led to a provincial
investigation, which revealed that all of the
funds had been applied to the fundraising
expenses, and the Society was in debt
• The CRA revoked the charity’s registration
and the Ontario Public Guardian applied to
court to order an accounting of how funds
were spent.
Mistakes Made, Lessons
Learned
• Directors gave up too much control to the
fundraisers, and failed to terminate the contracts
when it became clear that 100% of the funds
raised were going to expenses
• Court found that the charity and the directors
were responsible as fiduciaries to the public for
all of the funds raised
• Fundraisers are agents for a charity, and must
account to the charity for every dollar raised
Mistakes Made, Lessons Learned,
cont.
• The fundraising contracts were voidable
as contrary to public policy, and because
they misrepresented to donors how the
funds would be used
Re:YWCA Extension Campaign Fund (1934
SASK.K.B.)
• In 1929, the Regina YWCA raised $17,000
to be used to build accommodations for
young women. The amount was not
enough to complete the project, and also
attendance dropped and so the expanded
accommodations were unnecessary
• YWCA applied to court for consent to use
the money for its operating deficit instead,
under the cy-pres doctrine
Result
• The court refused the application
Lessons Learned
• A court has a general power to divert
charity funds when a particular project
proves impossible, but not when a charity
simply decides not to proceed
• A charity has a responsibility to notify
donors in advance of how their donation
may be used
Coombs v. R (2008 TCC)
• A charity’s accountant used his access to
receipts to issue false donations receipts
to his friends and family for several years,
for well over $500,000. CRA investigated
when the new accountant discovered the
scheme, disallowed the donation claims
and assessed penalties against the
“donors”. The “donors” appealed to the
Court
Result
• The appeals were denied and the
penalties upheld. The Court found that the
“donors” made no real gifts to the charity
Mistakes Made, Lessons
Learned
• The charity’s executive director and board
were far too trusting of the accountant,
and allowed the scheme to proceed for
years
• Donors risk harsh penalties for false
donations
• The board and their new accountant
managed to avoid revocation of their
charity status, despite the scheme
Norton v. the Queen (2008
TCC)
• Donor gave $20,000 to her husband’s
charity, received $15,000 back, claimed
receipt for $20,000
Result
• Court found the scheme was typical of the aggressive
tax shelters that attempt to leverage tax deductions or
credits. Court listed examples: gifting of art to charities,
buying of false charitable tax receipts, tax shelters for
research and development in Quebec, seismic data,
marketing software
• The technique is the same: donors write off more than
the amount they have paid or are liable to pay
• Donation receipt disallowed
Mistakes Made, Lessons Learned
• Donor relied on her husband
• CRA challenges all aggressive tax
schemes, and donors will be reassessed
Ballard v. Canada (2011 FCA)
• CRA challenged a donor scheme at Foundation
that partnered with Trinity Western University
• Students solicited donations from friends and
family, then received bursaries for education
expenses, equal to approximately 80% to 100%
of the lesser of students’ eligible expenses and
the funds that they had solicited. Donors
appealed to have their donations recognized
Result
• Donations disallowed
• Donors motivated to make gifts by knowledge that their
relatives would receive scholarships. A gift is a
gratuitous transfer of property owned by the donor in
return for which no benefit flows to the donor. When a
private benefit arises from a gift, a court will determine
whether the strength of the link between any benefit to
the donor and his or her “donation” is sufficiently strong
to disqualify the “donation” from being a “gift” under the
Income Tax Act
• Appeal dismissed
Mistakes Made, Lessons
Learned
• Private benefit taints fundraising programs
• A true gift has minimal private benefit to
the donor
• Charities risk their reputation when they
participate or endorse tax schemes
International Charity Association
Network v. Canada (2008 TCC)
• Charity failed to provide CRA with
documentation to explain, support or
justify payments and expenditures of
$26M in fundraising payments and $244M
in charitable program expenditures (gifts in
kind of medication)
• Charity applied to postpone the CRA
penalty (suspension of their receipting
rights)
Result
• The Court denied ICAN’s application to
postpone the suspension of receipting
privileges
• ICAN’s charity status revoked in 2008
Mistakes Made, Lessons
Learned
• Charities risk dissolution or having
receipting privileges suspended for
inappropriate fundraising arrangements
• Charities must be able to prove direction
and control of their own fundraising: this
should be evident from documents, board,
minutes, policies, etc.
Redeemer Foundation (2006 FCA)
• CRA challenged Redeemer Foundation
scholarship program. This court decision
did not assess the program, but dealt with
a preliminary issue of the CRA’s right to
access the donation records, and what
procedures CRA needs to follow
• Redeemer challenged CRA’s ability to
access donor records
Result
• Redeemer Foundation lost: the SCC found
that CRA was entitled to the donor
information that Redeemer was obligated
to collect.
Result
• A charity is required to maintain records to
enable CRA to ascertain if there are grounds to
revoke its registration as a charity, and to verify
that the donations were eligible for deductions
• CRA can access this information pursuant under
its audit power in the Income Tax Act, which
entitles CRA to examine all the books and
records of a charity. CRA is not required to
obtain a court order before obtaining this
information
Mistakes Made, Lessons
Learned
• CRA has broad power to access records
• Onus is on charity to justify its fundraising
schemes
Cannon v. Funds for Canada
Foundation (2012 ONSC)
• Almost 10,000 donors gave millions to a tax scheme,
which saw money flow through a complex structure to
the promoters, and back to the donors
• This decision was a certification motion for a class action
by donors against a charity, its related trusts and entities,
and their lawyers regarding a disallowed charity
fundraising tax scheme
• Result: the class action was certified and sent on to trial.
Case is still in progress
Mistakes Made, Lessons
Learned
• Class actions represent a new form of remedy for
aggrieved donors against charities and tax scheme
promoters, because they can now more easily band
together to bring claims related to fundraising schemes
• Court notes that the scheme required “legitimate
charities ... that were in need of cash and were prepared
to give back 99% of the money donated to them ...in
return for the promise of a future income stream from the
use of the Software Program...”
COMMON FUNDRAISING
ERRORS
1. Downplaying private benefits to donors
2. Issuing receipts improperly: receipting for
services, not obtaining independent
valuations for non-cash gifts
3. Allowing excessive or disproportionate
fundraising costs, especially with thirdparty fundraisers
4. Being tempted into participating in
suspicious tax schemes
COMMON FUNDRAISING
ERRORS
5. Assessing and reporting allocations incorrectly
on the T3010 Annual Report. This leads
charities to unnecessarily attract CRA attention
by exaggerating fundraising costs, or risk
censure for understating fundraising costs
– Not following CRA requirements on what is
considered fundraising
– Incorrectly categorizing fundraising costs in line
5000 and following
– Making errors in transferring amounts from the
financial statements (addition errors, using the
wrong line, using net amounts instead of gross, etc.)
– Omitting fundraising costs altogether
COMMON FUNDRAISING
ERRORS
6. Improperly “lending” receipting status to
a worthy individual or new organization
7. Not adequately overseeing or
documenting fundraising practices
DISCUSSION AND
QUESTIONS
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