CRA Grant Regime: Replacing Direction and Control in Canada

Canadian registered charities now have a new way to work with non-qualified donees that does not require the strict direction and control framework.

In December 2023, the Canada Revenue Agency released finalized guidance on how charities can make grants to organizations that are not registered charities or qualified donees.

This marks a significant shift in how the Income Tax Act regulates charitable partnerships.

It expands the options available to charities working with community organizations both in Canada and internationally.

The new grant regime allows charities to support a non-qualified donee's own activities, provided the charity meets specific accountability requirements set out in the Income Tax Act.

This differs from the previous system where charities had to maintain ongoing direction and control over activities to ensure they remained the charity's own work.

The change recognizes the value that non-qualified donees bring to charitable work.

It aims to create more collaborative and equitable partnerships.

While the granting option provides more flexibility, charities still need to understand how to meet the accountability requirements outlined in CRA Guidance CG-032.

The new regime introduces concepts like due diligence, qualifying disbursements, and documentation standards that charities must follow.

Both the grant regime and the direction and control framework remain available options.

This gives charities the ability to choose the approach that best fits their partnerships and circumstances.

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Overview of the Previous Direction and Control Framework

Before December 2023, Canadian registered charities operated under strict direction and control requirements when working with non-qualified donees.

This framework created significant barriers for partnerships and imposed unequal power dynamics between funders and grassroots organizations.

Purpose and Rationale of Direction and Control Rules

The direction and control rules existed to ensure registered charities devoted all their resources to charitable activities.

Under the Income Tax Act, charities could only operate in two ways: carrying on their own charitable activities or making gifts to qualified donees.

When charities wanted to work with non-qualified donees, they had to maintain complete oversight.

The own activities test required charities to direct and control how intermediaries used their resources.

This meant charities needed to make all major decisions about where, when, and how activities were carried on.

The Canada Revenue Agency developed these requirements to prevent charities from acting as conduits.

A conduit was a charity that simply funneled resources to non-qualified donees without proper oversight, which could jeopardize a charity's registration status.

The rules applied to transfers of money, which always required ongoing direction and control.

Non-monetary resources like medical supplies or books had limited exceptions if they could only be used for charitable purposes.

Impact on Charities Partnering With Non-Qualified Donees

Direction and control requirements created substantial administrative burdens for registered charities.

Charities needed detailed written agreements with intermediaries that specified their respective roles and responsibilities.

They had to review the intermediary's status, activities, history, and reputation before starting any partnership.

Ongoing monitoring was mandatory.

Charities required regular detailed reports on resource use and had to provide continuous instructions to intermediaries.

Site visits, reference checks, and consultations with project stakeholders became necessary.

These requirements meant charities maintained decision-making authority rather than sharing it with local partners.

Many charities found the framework time-consuming and resource-intensive, especially for smaller organizations with limited administrative capacity.

Challenges for Grassroots Organizations and Funders

The direction and control framework created unequal power dynamics in charitable partnerships.

Grassroots organizations and local community groups often had better knowledge of their communities and needs.

However, the rules required funders to withhold decision-making power from these local actors.

This prevented partnerships based on mutual respect and shared expertise.

Local organizations became subordinate implementers rather than true partners.

They had to follow directions from funders who might be less familiar with local conditions.

Grassroots organizations faced barriers to accessing charitable funding.

Many could not meet the strict oversight requirements or lacked the capacity to provide extensive reporting.

This limited their ability to carry out charitable work in their communities.

The framework also restricted how Canadian registered charities could support international development work and domestic community initiatives.

Critics argued these rules prevented more effective and equitable charitable work.

Introduction to the CRA Grant Regime

The Canada Revenue Agency introduced a new framework in 2022 that allows registered charities to provide resources to non-qualified donees through qualifying disbursements.

This regime offers an alternative to the previous direction and control requirements and changes how charities can work with organizations that lack registered charity status.

Key Changes in the Income Tax Act

The Income Tax Act was amended in 2022 to create a new way for registered charities to support non-qualified donees.

Before these changes, charities could only provide resources to non-qualified donees by maintaining ongoing direction and control over activities.

The activity had to remain the charity's own work.

The new legislation recognizes that charities can now support a grantee's own activities.

This marks a significant shift in how Canadian charities operate.

The change acknowledges the value that non-qualified donees bring to charitable work both in Canada and internationally.

The amendments aim to help charities build more collaborative and equitable partnerships.

Charities now have two distinct options when working with non-qualified donees: the traditional direction and control approach or the new grant-making framework.

Who Qualifies as Non-Qualified Donees

A non-qualified donee includes any person, club, society, association, organization, or prescribed entity that does not have qualified donee status with the Canada Revenue Agency.

These organizations contribute to charitable activities but lack registered charity status in Canada.

Non-qualified donees operate both within Canada and internationally.

They may be community groups, grassroots organizations, or international partners working on charitable projects.

The key distinction is that they cannot issue official donation receipts for income tax purposes.

Qualified donees are specifically excluded from the non-qualified donee definition.

This means registered charities, registered Canadian amateur athletic associations, and other organizations with qualified donee status fall under different rules.

Concept of Qualifying Disbursements

A qualifying disbursement refers to a specific type of transfer defined in the Income Tax Act.

It occurs when a charity provides resources to a grantee organization by way of gift or by otherwise making resources available.

These resources can include both cash and non-cash items.

Three requirements must be met for a disbursement to qualify.

The disbursement must further a charitable purpose of the charity making the grant.

The charity must ensure that resources are exclusively applied to charitable activities that further its charitable purposes.

The charity must also maintain documentation sufficient to demonstrate the purpose of the disbursement and that the grantee applied it exclusively to charitable activities.

The charity needs to show these requirements through adequate books and records.

The Canada Revenue Agency expects charities to apply due diligence measures based on the nature and risk level of each grant.

Understanding CRA Guidance CG-032

The Canada Revenue Agency released CG-032 on December 19, 2023, to provide charities with practical direction on making grants to non-qualified donees under the new qualifying disbursement rules.

This guidance establishes a flexible framework based on due diligence and proportionate accountability measures.

Background of CG-032

The Income Tax Act was amended in 2022 to create a new way for registered charities to work with non-qualified donees.

Non-qualified donees are organizations that contribute to charitable work but do not have registered charity status with the Canada Revenue Agency.

The new legislation allows charities to make grants to support the grantee's own activities, rather than maintaining direction and control.

This change recognizes the value that non-qualified donees bring to charitable work in Canada and internationally.

The amendments were introduced to help charities build more collaborative and equitable partnerships.

CG-032 is not law.

It recommends ways a charity can meet the Income Tax Act requirements through reasonable and flexible measures.

Charities can use other methods to meet the accountability requirements as long as they can show compliance in their books and records.

Recommended Grantmaking Process

The Canada Revenue Agency recommends five due diligence steps for making grants.

First, charities must establish how the grant activity furthers their charitable purposes as stated in their governing documents.

The grant must support one of the four categories of charity, not just any charitable purpose.

Second, charities should assess the grant's risk level as low, medium, or high.

Third, they need to determine how much due diligence to apply through accountability tools based on that risk level.

Fourth, they must apply these accountability tools while working with the grantee.

Fifth, charities must document their due diligence over the grant's duration.

The grant must meet the public benefit test and comply with Canadian law and public policy.

Charities should also ensure they do not confer an unacceptable private benefit when making grants.

All grant activities must be reported using two separate filings. The main return is Form T3010, the Registered Charity Information Return. However, specific details about each qualifying disbursement to a non-qualified donee must also be disclosed on Form T1441, Qualifying Disbursements: Grants to Non-Qualified Donees. Filing only the T3010 without the supplemental T1441 is a filing error under CRA Guidance CG-032, Section 8. 

Risk Assessment and Accountability Tools

Risk refers to conditions that could compromise a charity's registration and public trust in the charitable sector.

The Canada Revenue Agency recommends charities apply due diligence to reduce the risk of grant resources being misused.

The level of due diligence required depends on factors that may affect the charity's ability to meet Income Tax Act requirements.

Accountability tools are due diligence measures that help charities meet the accountability requirements.

The extent of these tools varies based on whether the grant requires limited, moderate, or extensive due diligence.

Charities must maintain documentation sufficient to demonstrate the grant's purpose and that resources were exclusively applied to charitable activities.

The charity must ensure that grant resources are used only for charitable activities that further its charitable purposes.

The Canada Revenue Agency aims to adopt a reasonable, flexible, and proportionate approach to grant documentation.

Charities should apply a consistent approach to similar grants while keeping appropriate records in case the grantee cannot follow through on the grant agreement.

Granting to Non-Qualified Donees: Requirements and Limitations

Registered charities must meet specific accountability requirements when making grants to non-qualified donees.

This includes ensuring the grant furthers the charity's own charitable purposes and maintaining sufficient documentation to demonstrate proper use of resources.

Alignment With Charitable Purposes

The grant must further a charitable purpose stated in the charity's own governing document.

This means registered charities cannot make grants for any charitable purpose.

They must ensure the disbursement supports one of their specific purposes that falls within the four categories of charity under common law.

Many charities can use their existing purposes to make grants to non-qualified donees.

However, a charity must amend its purposes if it wants to make a grant outside what is stated in its governing document.

A foundation that only has a purpose to make gifts to qualified donees would need to amend before granting to non-qualified donees.

A "grant-making" purpose alone does not qualify as charitable.

The purpose must specify what the charity aims to achieve, such as "to advance education by providing books and equipment to students" or "to relieve poverty by providing necessities to disaster victims."

Documentation and Reporting Obligations

Charities must maintain documentation sufficient to demonstrate three key elements:

• The purpose for which the grant was made
• That the non-qualified donee applied the resources exclusively to charitable activities
• That the charity applied appropriate due diligence throughout the grant process

The Canada Revenue Agency recommends a risk-based approach to documentation.

The level of detail required depends on whether the grant poses low, medium, or high risk.

Higher-risk grants require more extensive accountability tools and records.

Registered charities must report their grants using two filings. The T3010, Registered Charity Information Return, is the main annual return. Form T1441, Qualifying Disbursements: Grants to Non-Qualified Donees, is the required supplemental form that captures specific details about each grant to a non-qualified donee. Both filings are required. Relying on the T3010 alone without the T1441 constitutes a filing error.

For most grants, a written agreement is not merely recommended—it is a practical necessity. Under Section 230(1) of the Income Tax Act, charities bear the onus of proof when demonstrating compliance. Without a written agreement, a charity will have difficulty establishing that a disbursement qualifies, particularly for grants that are not one-time gifts of $5,000 or less. Charities that rely on informal arrangements risk having the CRA deem the disbursement non-qualifying.

The documentation must show how the charity ensured resources were used only for charitable activities that further its purposes.

Books and records must be clear about whether the charity used the granting approach or the direction and control model when working with non-qualified donees.

Impact on Funders and Capacity Building

Funders can now support non-qualified donees in more collaborative and equitable ways.

The granting regime allows charities making grants to non-qualified donees to support the grantee's own activities, rather than requiring the charity to maintain direction and control.

This change recognizes that non-qualified donees bring significant value to charitable work.

However, their capacities, resources, and administrative expertise vary.

Some non-qualified donees may need support to meet accountability requirements.

Charities can devote reasonable expenses to administer and manage grants.

The Canada Revenue Agency considers capacity building costs necessary and important.

This includes expenses related to helping grantees develop systems for tracking and reporting on grant use, though charities must ensure these costs remain reasonable and proportionate to the grant's purpose.

Anti-Avoidance Provisions and the Ban on Directed Giving

The new grant regime includes strict anti-avoidance measures that prevent registered charities from acting as mere conduits for donor-directed gifts.

These rules particularly affect charities that operate shared platforms or provide fiscal sponsorship arrangements with non-qualified donees.

Rule on Conduit Arrangements

The Income Tax Act prohibits registered charities from accepting a gift that is expressly or implicitly conditional on the charity making a grant to a specific non-qualified donee. This is known as a directed gift. The key legal concern is that the charity must maintain absolute legal discretion over its granting decisions. A charity that accepts a donation on the condition that it flows to a particular organization is acting as a conduit, which can result in revocation of registration.

A donor may identify a preferred project or organization without creating a directed gift, provided the charity retains genuine authority to override that preference. If the charity simply follows donor instructions without exercising its own judgment, the CRA will treat this as a conduit arrangement regardless of how it is documented.

Charities that violate this rule face serious consequences.

The CRA can revoke their registered status for acting as conduits rather than operating their own charitable programs.

Implications for Shared Platforms and Fiscal Sponsors

Fiscal sponsorship arrangements face significant challenges under the anti-directed giving rule.

Many charities historically acted as fiscal sponsors by receiving donations earmarked for specific projects run by non-qualified donees.

These arrangements now require careful restructuring.

The charity must either exercise direction and control over the sponsored organization's activities or ensure grants qualify as proper qualifying disbursements without donor direction.

Shared fundraising platforms that pool multiple charities must also adapt their operations.

They cannot allow donors to designate funds for specific non-qualified donees through the platform.

The CRA clarifies that charities can still work with non-qualified donees as intermediaries.

The charity must direct and control how the intermediary uses the charity's resources rather than simply forwarding donor-directed funds.

Opportunities and Ongoing Challenges Under the New Regime

The new granting regime opens doors for Canadian registered charities to work with grassroots organizations.

It also introduces practical questions about maintaining accountability without excessive bureaucracy.

Charities must navigate these opportunities while meeting regulatory expectations.

Engaging With Grassroots Organizations

The regime allows charities to make grants to non-qualified donees, including grassroots organizations that lack charitable registration.

This change removes previous barriers that required strict direction and control arrangements.

Charities can now fund community groups, social enterprises, and local organizations that deliver public benefit.

Grants may also be made to for-profit entities that qualify as non-qualified donees, but this is a high-risk area. If the grant increases the value of a private business or confers a benefit on its owners, this constitutes a prohibited private benefit under the Income Tax Act. 

Charities must take particular care when granting to any entity with a commercial structure and should obtain legal advice before doing so. The same caution applies to grants made to organizations whose primary purpose includes non-charitable advocacy. 

While the previous political activity limits were abolished, a qualifying disbursement must still be applied exclusively to charitable activities. If a recipient organization's primary function is political or non-charitable advocacy, the charity must restrict the grant to a clearly defined and charitable-purpose project and document that restriction carefully. 

These partnerships let registered charities extend their reach into communities they might not serve directly.

The public benefit test requires charities to ensure their grants advance charitable purposes.

Charities must assess whether potential grantees will use funds for activities that align with charitable objectives.

This assessment happens before making the grant.

Grassroots organizations benefit from reduced administrative burden.

They no longer need to operate under the tight oversight that direction and control demanded.

The relationship becomes more collaborative rather than hierarchical.

Balancing Accountability and Flexibility

Charities face the challenge of proving accountability without reverting to direction and control practices.

The CRA expects charities to use accountability tools such as grant agreements, progress reports, and financial tracking.

These tools must demonstrate oversight without dictating how non-qualified donees conduct their work.

Charities need to monitor fund use and outcomes while respecting grantee autonomy.

The balance requires clear documentation of charitable purposes and measurable results.

Canadian registered charities must maintain records showing grants advance public benefit.

This includes tracking how funds are spent and what outcomes are achieved.

The documentation protects charitable status during CRA reviews.

Some charities struggle with determining appropriate oversight levels.

Too much control mimics the old regime, while too little risks non-compliance.

Each partnership requires tailored accountability measures based on grant size, grantee capacity, and activity complexity.

Conclusion

The shift from direction and control to the new grant regime marks a significant change for Canadian registered charities. Under the updated Income Tax Act provisions that came into effect in 2022, we now have more flexibility when working with non-qualified donees. The qualifying disbursement rules allow us to make grants without the strict oversight previously required. This creates new opportunities for partnerships and collaboration.

We must still meet certain requirements when making grants to non-qualified donees. The CRA's guidance document CG-032 outlines the expectations and compliance measures that apply to our grant-making activities. Understanding these rules is essential to avoid penalties or registration issues.

Many of us may need legal advice to navigate the transition from the old direction and control model to the new grant-making framework.

At B.I.G. Charity Law Group, we help Canadian charities understand and comply with the new qualifying disbursement rules. We provide guidance on grant agreements, compliance requirements, and CRA expectations. Dov Goldberg and our team work with organizations like yours to ensure you meet your legal obligations while maximizing your charitable impact.

Contact us at 416-488-5888 or email dov.goldberg@charitylawgroup.ca to discuss your charity's needs. Visit CharityLawGroup.ca or schedule a FREE consultation to learn how these changes affect your organization.

Frequently Asked Questions

The shift from direction and control to the new grant regime raises practical questions about compliance requirements, affected organizations, documentation standards, and potential risks that charities need to understand before making grants to non-qualified donees.

What changes are expected when the new grant compliance approach replaces the direction and control model for charities?

The new regime allows registered charities to make grants directly to non-qualified donees without exercising direction and control over their activities.

This represents a major departure from the previous system where charities could only provide resources to non-charities through strict oversight arrangements.

Under the qualifying disbursement rules that came into effect in 2022, charities can now transfer funds to organizations without charitable status while the recipient maintains autonomy over how they carry out the work.

The charity no longer needs to dictate the specific details of how activities are conducted or maintain ongoing operational control.

However, charities must still meet new due diligence and reporting requirements.

They need to assess the grantee's capacity and take reasonable steps to ensure funds will be used for charitable purposes.

This approach focuses on upfront evaluation and monitoring rather than continuous operational oversight.

The direction and control model remains available as an option.

Charities can still choose to work with non-qualified donees as intermediaries under the traditional framework if that better suits their needs.

Which types of Canadian charities and non-qualified donees will be most affected by the new grant-making rules?

Charities that previously avoided working with grassroots organizations due to the administrative burden of direction and control will see the most significant impact.

These include foundations and larger charities that want to support community-led initiatives but found the old requirements too cumbersome.

Non-qualified donees operating without charitable registration will gain new access to funding.

This includes unincorporated community groups, social enterprises, and advocacy organizations that pursue charitable purposes but do not hold registered charity status.

Grants to organizations whose primary function includes non-charitable advocacy require particular care. A qualifying disbursement must be used exclusively for charitable activities. 

If a recipient's primary purpose is political or non-charitable advocacy, the charity must restrict the grant to a specific charitable project and document that restriction in the grant agreement. 

Charities should seek legal advice before making grants to organizations with mixed or advocacy-heavy mandates. 

Shared platforms and fiscal sponsors face a unique situation under the new rules.

While they can continue operating as they always have under direction and control, they cannot receive grants on the condition that they pass funds to a specific trusteed group.

Funders must either grant directly to the shared platform without conditions or make the grant directly to the non-qualified donee with requirements to use the platform's services.

International non-qualified donees also benefit from these changes.

Canadian charities can now make qualifying disbursements to foreign organizations more easily than under the previous system.

What due diligence steps should a charity take to assess and document a grantee before issuing funds?

The charity must verify that the grantee's activities align with charitable purposes under Canadian law.

This requires reviewing the organization's mission, programs, and planned use of the funds to confirm they meet the legal definition of charity.

Assessing the grantee's capacity represents a critical step.

The charity should evaluate whether the organization has the skills, experience, and infrastructure to carry out the proposed activities and manage the funds appropriately.

Documentation of the due diligence process protects the charity in case of CRA review.

This includes keeping records of background research, reference checks, financial reviews, and any site visits or interviews conducted during the assessment.

The charity should examine potential risks associated with the grant.

This involves considering the grantee's financial stability, governance structure, and any legal or reputational concerns that could affect the proper use of funds.

For grants to organizations outside Canada, additional due diligence becomes necessary.

The charity must understand the local context, legal environment, and any restrictions that might prevent the grantee from carrying out charitable work.

What information and reporting should be included in a written grant agreement to meet CRA expectations?

The grant agreement must clearly state the charitable purpose of the funding.

This description should specify what activities the funds will support and how those activities contribute to charity under Canadian law.

Terms and conditions need to address how the grantee will use the funds and what restrictions apply.

The agreement should outline timelines, deliverables, and any limitations on how the money can be spent.

For most grants, a written agreement is a practical necessity rather than an optional measure. Under Section 230(1) of the Income Tax Act, the charity bears the onus of proving that a disbursement qualifies. 

Without a written agreement, the CRA will almost certainly treat the disbursement as non-qualifying. A written agreement is generally required for any grant that is not a one-time gift of $5,000 or less. 

Reporting requirements form an essential component of the agreement.

The charity should specify what information the grantee must provide, how often reports are due, and what documentation needs to accompany those reports.

The agreement must include provisions for monitoring and access to records.

This allows the charity to verify that funds are being used as intended and to gather information needed for its own compliance obligations.

Consequences for misuse of funds should be clearly stated.

The agreement needs to address what happens if the grantee fails to use the money for charitable purposes or does not meet the reporting requirements.

How should a charity monitor and document the use of grant funds during and after the grant period?

Regular reporting from the grantee provides the foundation for monitoring.

The charity should collect narrative updates and financial statements that show how the funds are being spent and what results are being achieved.

Site visits or check-in meetings offer opportunities to observe activities firsthand.

While not always required, direct engagement helps the charity assess whether the work is proceeding as planned.

Documentation of all monitoring activities creates an audit trail.

The charity should keep copies of reports received, notes from conversations, photographs, and any other evidence that demonstrates ongoing oversight.

The charity must respond to any concerns or red flags that emerge during monitoring.

If reports are late, funds appear misused, or activities diverge from the agreement, the charity needs to investigate and take appropriate action.

After the grant period ends, final reporting completes the documentation process.

The charity should collect a closing report and financial accounting that shows how all funds were spent and what outcomes were achieved.

What common compliance risks could lead to CRA concerns or penalties under the updated grant regime?

Inadequate due diligence before making a grant is a major risk. If a charity cannot show it took reasonable steps to assess the grantee and ensure funds would be used charitably, the CRA may consider the disbursement non-qualifying.

Accepting directed gifts creates serious compliance problems. The Income Tax Act prohibits a charity from accepting a gift that is expressly or implicitly conditional on the charity making a grant to a specific non-qualified donee. A charity that follows donor instructions without exercising its own independent judgment is acting as a conduit. This can result in revocation of registration, regardless of how the arrangement is documented.

Granting to for-profit entities without proper safeguards is a high-risk area. If a grant increases the value of a private business or confers a benefit on its owners, this constitutes a prohibited private benefit. Charities must seek legal advice before granting to any commercially structured organization.

Accepting directed gifts creates serious compliance problems. If a charity receives a donation on the condition that it grants those funds to a specific non-qualified donee, this violates the anti-directed giving rules.

Failing to report qualifying disbursements properly on Form T1441 can trigger CRA scrutiny. The form requires details about each grant, including the recipient's name, purpose, amount, and the location of activities outside Canada.

Granting to organizations that do not carry out charitable activities exposes the charity to penalties. The CRA expects charities to verify that grantees are pursuing valid charitable purposes, even if they are not registered.

Insufficient monitoring during the grant period leaves the charity unable to confirm proper use of funds. The CRA may question whether a disbursement qualifies if the charity cannot show it took steps to ensure the money was used appropriately.

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