23 October 2006 External T.I. 2006-0168601E5 - Charitable activities

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Meaning of the term "charitable activities" as it applies to charitable organizations.

Position: Provided general comments.

Reasons: This issue is currently under review. While a charitable organization is required to expend an amount equal to its disbursement quota on charitable activities and to devote all its resources to charitable activities carried on by it, the Income Tax Act does not specifically define what constitutes a charitable activity. The CRA publications contain general commentary but additional guidance is required.

XXXXXXXXXX 							2006-016860

October 23, 2006

Dear XXXXXXXXXX:

Re: Expenditures of a Charitable Organization

This is in reply to your letter dated January 18, 2006 concerning the expenditures of a charitable organization. In particular, you are seeking guidance on how to determine whether expenditures of a charitable organization are expenditures on charitable activities or on management and administration and how to allocate expenditures that are partly attributable to charitable programs and partly to management and administration.

You have noted that lines 5000 and 5010 of form T3010A, Registered Charity Information Return, require a registered charity to divide expenditures between those that on charitable programs and those that are on management and administration. This allocation is necessary as a charity may have its registration revoked if it fails to expend in any taxation year an amount equal to its disbursement quota on charitable activities carried on by it or by way of gifts made by it to qualified donees. Also, a charitable organization is required by definition to devote all its resources to charitable activities carried on by the organization itself.

Our Comments

You have questioned whether the position in the T4033A guide and form T3010A that expenditures on management and administration are not expenditures on charitable activities is inconsistent with the requirement that a charitable organization devote all its resources to charitable activities. The distinction that we have consistently maintained in this regard is that the definition of "charitable organization" in subsection 149.1(1) of the Act uses the words "devotion of resources" while the revocation provision in subsection 149.1(2) of the Act does not. Our position is that a charitable organization can still be considered to be devoting resources to charitable activities even when it is incurring expenditures that are not themselves expenditures on charitable activities. In our view, management and administrative expenses support the charitable activities and as such constitute a devotion of resources to charitable activities even though they are not, in and of themselves, expenditures on charitable activities. This position is conceptually consistent with the disbursement quota requirement that only 80% of receipted amounts be expended on charitable activities or on gifts made to qualified donees.

Regarding the issue of allocation, in cases where costs are partly attributable to charitable programs and partly to management and administration, the T4033A guide states that it will be necessary to allocate the expenditures between these two categories and the allocation should be made on a consistent and reasonable basis. In your letter, you described a situation where a charity has leased a building from an arm's length landlord and the building has an office for a person that devotes 20% of his/her time to administration and 80% of his/her time to charitable activities. The office occupies 10% of the square footage of the building and the remaining 90% is used exclusively for charitable purposes. If we assume that the annual rent is $10,000, the portion of the rent allocated to administration would be $200 (20% of 10% of $10,000). Heat and utilities would be allocated using the same basis. We recognize that in practice it is not always easy to draw the line between these two categories. As a result, the CRA has undertaken to review this issue. In the meantime, if a charity is unsure how to categorize a particular expenditure, we suggest that it contact the CRA Charities Directorate for assistance (1-800-267-2384).

We hope these comments are of some assistance.

Yours truly,

F. Lee Workman
Section Manager
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch