Foreign Membership Fees and Similar Payments
Arthur Drache, December 17, 2009
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| The new proposed guidelines on foreign activities of Canadian charities has received generally positive reviews though the final reaction will have to await the final version of the document. It is worth noting that the new document explicitly states that it updates and replaces Guide RC4106, Registered Charities: Operating Outside Canada, and any previous policies regarding transfers to non-qualified donees. |
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| This means that organizations will have to be aware of what may have changed or of situations which may not be referenced in the new document. |
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| We recently had occasion to deal with the question of the extent to which a Canadian charity which is part of an international group can remit funds as membership dues. The issue arises quite often in a host of situations including religious organizations which have an international governing body or non-religious groups which are part of an international network. |
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| The rules are quite unclear but one key point is that in almost every case the foreign recipient of the funds will not be a qualified donee. |
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| In the aforementioned RC 4106 we have a fairly lengthy (if unsatisfying) discussion of the subject. |
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| "Some registered charities are offshoots of organizations with headquarters outside the country or are closely associated with a foreign organization. These related organizations may provide the Canadian charity with various goods and services, such as professional training, accounting services, and literature for distribution, for a fee or as a benefit of membership. The related organization can also allow the Canadian charity to use a name, trademark, or copyright material. |
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| Payments to related organizations are only acceptable where the amount paid by the charity can reasonably be regarded as proportional to the benefit it receives. |
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| Example |
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| A head organization outside the country (that is not a qualified donee) offers a training course to improve the skills of a Canadian charity's staff. The fees charged by the head organization must correspond to the actual value of the course. If the fees are excessive, we may regard the payment as a gift by the Canadian charity to a non-qualified donee. |
| We are generally willing to accept that a Canadian charity is receiving value for its payments when only a small amount is involved. For these purposes, we will probably consider a small amount to be the lesser of 5% of the charity's total expenditures in the year and $5000. |
| Payments made to related organizations outside the country should be clearly identified as such in the charity's books. Where the payments exceed a small amount, as described above, the charity should be able to document the actual goods and services it is receiving in exchange for the payments, or demonstrate that they were made under a properly structured arrangement." |
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| Note that the "$5,000 rule" is a simple internal guideline and not a hard and fast rule. But the key point for the CRA is that the Canadian charity is supposed to get some benefit. Presumably the benefit could enure to members of the Canadian organization such as the right of the individuals to vote in elections for the international body or to get material from the international group. |
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| We have seen situations where the payments were far in excess of $5,000, particularly where the international organization charges on the basis of the number of domestic member. |
| The benefit often relates to copyrights and other intellectual property owned by the foreign organization. |
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| In registered charity newsletter # 20 which discussed many international issues we find the following: |
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| "Q. Under what circumstances can a Canadian registered charity pay tithes, memberships, or similar fees to an organization that is not a Canadian registered charity? |
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| A. Payments to related organizations are only acceptable where the amount paid by charity is proportional to the benefit it receives. For small amounts-that is, the lesser of 5% of total expenditures or $5,000-we are generally willing to accept that the Canadian charity is receiving value for its payments. For more information, see RC4106 Registered Charities: Operating Outside Canada. |
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| Q. Can trademark and/or copyright licence agreements involve payments to a head organization outside of Canada that exceed the above-mentioned limits where the charity receives something of equal or greater value in return? |
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| A. In all cases, the charity must be able to establish that the Canadian charity is receiving a benefit that is proportional to the amount it pays. The limit of the lesser of 5% of total expenditures or $5,000 refers to the point at which we are generally willing to accept that a charity is receiving value for its payments without receiving further proof." |
| What become obvious (and is borne out by our own experience) is that the acceptability of payment to foreign "parent" organizations is very much a question of fact and that the charity has the usual onus to defend the reasonableness of such payments. In every case there should be something in writing which sets out the basis of the payments (per capital, based on capital assets or what have you) and the services or other benefits which flow back to Canada.." |
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