Ensuring Grants to Non-Charities Match Your Purpose

Canadian charities have long used grants to extend their reach. But when those grants go to organizations that are not themselves registered charities — known as non-qualified donees — the rules are strict, and the stakes are high.

Since December 2023, CRA's Guidance CG-032 has set out a clear framework for how charities must handle these grants. A charity that gets it wrong risks more than a compliance warning. It risks its registered status.

This article explains what non-qualified donees are, how the Income Tax Act governs grant-making, and what steps a charity must take to ensure every grant dollar aligns with its charitable purposes.

What Is a Non-Qualified Donee?

Before a charity can make a grant, it needs to understand who it is giving to. Not all recipients are created equal under Canadian charity law.

A qualified donee is an organization to which a registered charity can make a gift and issue an official donation receipt. Qualified donees include other registered charities, the federal and provincial governments, and certain foreign universities. For a full breakdown of the difference between qualified and non-qualified donees and how each affects grant compliance, see Understanding Charitable Grants in Canada.

A non-qualified donee is any organization that does not fall into that list. This includes:

• Canadian non-profit organizations that are not registered charities
• Indigenous-led community organizations
• Small local groups and associations
• Foreign charities that are not on CRA's list of qualified donees
• Social enterprises and community benefit organizations

For many years, Canadian charities were limited in how they could support these groups. The 2022 amendments to the Income Tax Act (ITA) — and CRA's subsequent release of Guidance CG-032 in December 2023 — changed that. Charities can now make grants to non-qualified donees, provided they follow a specific accountability framework.

The Legal Framework: Income Tax Act and CG-032

Understanding the rules starts with the source documents. Two key references govern grant-making to non-qualified donees.

The Income Tax Act (ITA)

The ITA was amended in 2022 to allow registered charities to make grants to non-qualified donees. Before this change, charities could only work with non-qualified donees through a more restrictive "own activities" model (explained below).

Under the amended ITA, a charity may make a grant to a non-qualified donee as long as the grant is used exclusively for activities that further the charity's charitable purposes. The charity must also take reasonable steps to ensure the funds are used as intended.

CRA Guidance CG-032

CRA released Guidance CG-032 — Registered Charities Making Grants to Non-Qualified Donees — on December 19, 2023. This is the primary operational document for any charity making grants to non-qualified donees.

CG-032 sets out:

• The definition of a qualifying disbursement under the grants pathway
• The accountability tools a charity must use
• The three-tier dollar thresholds that determine the level of due diligence required
• How charities must document and monitor grant activities

Any charity making grants to non-qualified donees should treat CG-032 as required reading — not optional background.

Two Ways a Charity Can Support Non-Qualified Donees

There are two legal pathways a registered charity can use when working with organizations that are not qualified donees. Choosing the right one matters, because each comes with different obligations. For a broader overview of how charities use grants to support others, see our related article. 

Pathway 1 — The Grants to Non-Qualified Donees Model

Under this pathway, a charity makes a direct grant of funds to the non-qualified donee. The non-qualified donee carries out the activity itself. The charity's role is to fund, monitor, and document.

This is the pathway governed by CG-032. It requires written agreements, reporting requirements, and accountability measures that scale with the size of the grant.

Pathway 2 — The Own Activities Model

Under this model, the charity does not make a grant. Instead, it directs and controls the activities itself, using the non-qualified donee as an intermediary or service provider.

The charity must maintain direction and control over how its resources are used. The non-qualified donee is acting on behalf of the charity, not independently.

This model predates the 2022 ITA amendments and is still a valid option. But it places a heavier operational burden on the charity, since the charity must demonstrate ongoing direction and control.

Most charities working with non-qualified donees will find the grants pathway under CG-032 more practical — provided they implement the required accountability tools.

CG-032's Three-Tier Dollar Thresholds

One of the most practical features of CG-032 is its tiered approach to due diligence. The level of accountability a charity must apply depends on the size of the grant. Larger grants require more documentation and oversight.

The three tiers are as follows:

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These thresholds are cumulative per grantee per fiscal year. A charity making multiple smaller grants to the same non-qualified donee in the same year must add them together when determining the applicable tier.

The thresholds are also a floor, not a ceiling. CRA expects charities to apply additional due diligence wherever the risk profile of the grantee or the grant purpose warrants it — regardless of dollar amount.

Accountability Tools the CRA Expects

CG-032 does not just tell charities that they must ensure grants are used properly. It specifies the tools they should use to do so. These accountability measures protect the charity — and its registered status.

Written Grant Agreements

Every grant to a non-qualified donee should be governed by a written agreement. The agreement should set out:

• The charitable purpose the grant is meant to further
• How the funds must be used
• Reporting obligations for the grantee
• What happens if funds are not used as agreed
• Provisions for returning unused funds

Progress and Final Reports

For grants above $5,000, the charity should require the grantee to submit reports confirming how the funds were spent. For larger grants, interim reports during the grant period are also expected.

Site Visits and Monitoring

For enhanced-tier grants (over $50,000), CRA expects charities to take additional steps to verify that activities are being carried out as agreed. This can include site visits, interviews with project staff, or third-party verification.

Return of Unused Funds

Grant agreements should always include a clause requiring the grantee to return any funds not used for the stated charitable purpose. This is not just good practice — it is a CG-032 expectation.

Charitable Purpose Alignment Check

Before any grant is approved, the charity's board or grant committee should formally confirm that the proposed activity advances the charity's own stated charitable purposes. This check should be documented in board minutes or a grant approval record.

How to Ensure Grant Activities Align with Your Charity's Purposes

Alignment is not automatic. It requires a deliberate process — one that starts before a grant is approved and continues until the final report is filed. Here is a practical step-by-step approach.

Step 1 — Know Your Charitable Purposes

A charity's purposes are set out in its governing document — its letters patent, articles of incorporation, or constitution. These purposes define the boundaries of all charitable activity, including grant-making.

If a charity's purposes are narrow or outdated, grants to non-qualified donees may be difficult to justify. Charities that have not reviewed their purposes recently should do so before launching a grant program.

Step 2 — Assess the Proposed Activity

Before approving a grant, the charity should assess whether the activity the non-qualified donee will carry out directly advances the charity's charitable purposes. A vague or indirect connection is not enough.

Ask: If the charity carried out this activity itself, would it clearly fall within its charitable purposes? If the answer is not a clear yes, the grant may not qualify.

Step 3 — Conduct Due Diligence on the Grantee

CG-032 expects charities to know who they are funding. This means verifying:

• The grantee's legal identity and organizational structure
• Its capacity to carry out the proposed activity
• Whether it has any history of misuse of funds or governance problems
• Whether its own organizational purpose aligns with the activity being funded

The level of due diligence required scales with the size of the grant, as set out in the three-tier threshold table above.

Step 4 — Draft a Comprehensive Grant Agreement

A grant agreement is the backbone of CG-032 compliance. It should be drafted carefully and reviewed by legal counsel before it is signed.

The agreement should clearly connect the grant activity to the charity's purposes — not just in general terms, but specifically. If the charity's purpose is to provide food security programs in Northern Ontario, the agreement should specify how the grantee's activity advances that purpose.

Step 5 — Monitor and Document

Once a grant is made, the charity's obligation does not end. CG-032 requires charities to take reasonable steps to ensure funds are being used as agreed.

This means reviewing grantee reports when they come in, following up if reports are late or incomplete, and escalating any concerns to the board.

Step 6 — Evaluate and Record Outcomes

When the grant period ends, the charity should evaluate whether the funded activity achieved its intended charitable purpose. This evaluation does not need to be lengthy — but it should be documented.

If the activity did not advance the charitable purpose as expected, the charity needs to understand why and adjust its grant-making process accordingly.

Disbursement Quota Implications of Grants to Non-Qualified Donees

Grants to non-qualified donees are not just a compliance obligation — they also interact directly with a charity's disbursement quota (DQ).

Under the ITA, registered charities are required to disburse a minimum amount each year based on the value of their property not used directly in charitable activities or administration. The 2022 Federal Budget established a tiered DQ rate: 3.5% on investment property up to $1 million, and 5% on the portion of investment property exceeding $1 million.

Grants to non-qualified donees that qualify as qualifying disbursements under CG-032 count toward meeting this annual requirement. This means that a well-structured grant program can serve two purposes at once: advancing the charity's charitable purposes and satisfying its DQ obligation.

However, not every payment to a non-qualified donee automatically qualifies. The grant must meet the CG-032 framework — including the written agreement, purpose alignment, and accountability requirements — before it counts as a qualifying disbursement. An informal or undocumented payment does not qualify, even if the funds were genuinely used for a charitable purpose.

Charities that are approaching their DQ deadline and considering grants to non-qualified donees should seek legal advice to confirm that the proposed grants will meet the qualifying disbursement standard before they are made.

Common Grant-Making Mistakes — and How to Avoid Them

Even well-intentioned charities make avoidable mistakes when granting to non-qualified donees. These are the most common ones CRA looks for.

Citing the Wrong Guidance

Some charities — and some advisors — still refer to CG-019 when discussing grant-making to non-qualified donees. CG-019 is a guidance document about how to draft charitable purposes for CRA registration. It has nothing to do with grant-making.

The correct guidance document for grants to non-qualified donees is CG-032. Using CG-019 in this context is not just unhelpful — it signals to CRA that the charity does not understand its compliance obligations.

Skipping the Grant Agreement

Some charities make informal grants — especially to small community groups — without a written agreement. This is a significant risk. Without a written agreement, a charity has no legal mechanism to enforce how funds are used, require reporting, or recover unused funds.

Approving Grants That Do Not Align with Charitable Purposes

A grant does not align with a charity's purposes just because it sounds like a good cause. The activity being funded must directly advance the charity's specific stated purposes. Charities that approve grants based on general impressions rather than a formal alignment check are exposed to CRA scrutiny.

Failing to Monitor After the Grant Is Made

CG-032 is explicit: a charity must take reasonable steps to ensure grant funds are used as agreed. A charity that writes a cheque and never follows up has not met this standard.

Acting as a Conduit for Donor-Directed Funds

This is one of the most dangerous traps under the new grant regime — and one of the most commonly overlooked.

Under CRA's anti-directed giving rule, a registered charity cannot accept a donation that is expressly or implicitly conditional on the charity granting those funds to a specific non-qualified donee. If a charity simply funnels donor-directed money to a non-charity without retaining ultimate discretion and control over the grant decision, it is acting as a conduit. This is a direct violation of the Income Tax Act.

The risk arises in situations that may appear routine: a donor approaches a charity with a large gift and a request that the funds go to a named community organization the donor supports. The charity, eager to accommodate the donor, agrees. What the charity has done is accept a conditional donation — and used its registered status to pass that money through to a non-qualified donee it did not independently select or evaluate.

CRA's position is clear. A registered charity must exercise genuine, independent discretion over every grant it makes. The grant decision must belong to the charity — not to the donor. A charity that cannot demonstrate that it independently evaluated and approved the grant, regardless of donor involvement, is at serious risk of having its charitable status revoked.

To avoid conduit risk, charities should:

• Never accept a donation that is explicitly tied to a grant to a named non-qualified donee
• Document the internal grant approval process for every grant, separately from the donation acceptance process
• Ensure the board or grant committee independently evaluates and approves every grant on its merits
• Train fundraising and development staff to recognize and refuse conditional donation arrangements

If a donor wishes to support a cause served by a particular non-qualified donee, the charity may fund that work — but only after making an independent determination that the proposed grant advances its own charitable purposes. The donor's preference is not a compliance justification.

What Happens When a Grant Goes Wrong

When a charity fails to meet its CG-032 obligations, the consequences are not theoretical. CRA has a range of enforcement tools available, and it uses them.

The enforcement ladder typically works as follows:

Education Letters 

For minor or first-time issues, CRA may issue an education letter identifying the compliance concern and outlining what the charity must do to correct it. No penalty is imposed at this stage, but the letter creates a formal record.

Compliance Agreements 

For more significant issues, CRA may require the charity to enter into a compliance agreement — a formal commitment to correct identified problems within a set timeframe. Failure to comply with the agreement can accelerate further enforcement action.

Suspension of Receipting Privileges 

CRA may suspend a charity's ability to issue official donation receipts for a specified period. This is a serious sanction that can significantly disrupt fundraising operations.

Financial Penalties 

Under the ITA, CRA can impose monetary penalties for specific compliance failures, including failure to file a T3010 annual return or failure to maintain adequate books and records.

Revocation of Registered Status 

In the most serious cases — including repeated non-compliance, deliberate misuse of charitable funds, or operating outside a charity's stated purposes — CRA may revoke the charity's registered status entirely. Revocation triggers significant tax consequences, including a revocation tax on the charity's remaining assets.

Charities that identify a compliance problem with an existing grant program should act promptly. Voluntary disclosure to CRA, combined with corrective action, is generally treated more favourably than issues CRA discovers independently during an audit.

Sub-Granting by Non-Qualified Donees

A less commonly discussed risk arises when a non-qualified donee does not carry out the funded activity itself — but instead passes some or all of the grant funds to another organization.

This is known as sub-granting, and it creates a significant accountability gap.

When a charity funds a non-qualified donee under CG-032, the accountability framework is built around a direct relationship between the charity and the grantee. If the grantee then sub-grants those funds to a third party, the original charity's written agreement, reporting requirements, and monitoring obligations may not reach the organization actually carrying out the activity.

CRA's position is clear: the registered charity remains responsible for ensuring that all grant funds are used for its charitable purposes — regardless of how many hands the money passes through.

To manage this risk, charities should:

• Ask grant applicants directly whether they intend to sub-grant any portion of the funds
• Include a clause in the grant agreement requiring prior written approval before any sub-granting occurs
• Require the grantee to apply equivalent accountability standards to any sub-grantee
• Obtain copies of any sub-grant agreements as part of the reporting process

If a non-qualified donee cannot provide sufficient assurance that sub-granted funds will be properly accounted for, the charity should reconsider whether to fund that organization — or whether to restructure the grant to maintain a direct relationship with the organization actually carrying out the work.

Special Considerations for International Grants

Grants to foreign non-qualified donees carry a distinct set of risks that go beyond the standard CG-032 framework. Charities considering cross-border grants should approach them with additional care.

Heightened CRA Scrutiny 

CRA has historically applied greater scrutiny to international grant-making, given the reduced visibility into how funds are used abroad. Charities making international grants should expect to demonstrate a higher standard of due diligence than they would for a comparable domestic grant.

Foreign Regulatory Requirements 

Some countries impose legal restrictions on foreign funding of domestic organizations. A foreign non-qualified donee may be subject to foreign agent registration laws, restrictions on receiving funds from foreign charities, or reporting requirements under its own national law. A charity making an international grant should confirm that the proposed grant does not put the grantee in breach of its own legal obligations.

Currency and Transfer Risks 

Transferring funds internationally introduces risks around currency conversion, transfer fees, and the possibility that funds may be delayed or diverted in transit. Grant agreements for international grants should address how funds will be transferred and who bears the risk of conversion losses.

Enhanced Due Diligence on the Grantee 

For international grants, charities should go beyond the standard CG-032 due diligence steps. This includes verifying the grantee's legal status under foreign law, reviewing its governance structure, and — where practical — seeking references from other Canadian or international funders who have worked with the organization.

Sanctions Screening 

Canadian charities are subject to federal sanctions laws. Before making any international grant, a charity should screen the proposed grantee against applicable sanctions lists, including those maintained by Global Affairs Canada. Funding a sanctioned organization — even inadvertently — can expose a charity to serious legal consequences.

Working with a Charity Lawyer on Non-Qualified Donee Grants

Grant-making to non-qualified donees is one of the more technically demanding areas of Canadian charity law. The 2022 ITA amendments created a real opportunity for registered charities to extend their impact — but only if they follow the CG-032 framework carefully.

A charity that gets the process right can fund innovative community work, support grassroots organizations, and build partnerships that multiply its impact. A charity that gets it wrong can face compliance orders, public correction notices, or registration revocation.

We practise exclusively in Canadian charity and nonprofit law. If your organization is considering a grant program for non-qualified donees — or wants to ensure its existing grants meet CG-032 standards — contact B.I.G. Charity Law Group to schedule a free consultation. Call us at 416-488-5888, email dov.goldberg@charitylawgroup.ca, or visit CharityLawGroup.ca.

Frequently Asked Questions

Can a charity grant to an unincorporated community group?

Yes. An unincorporated community group is a non-qualified donee, and a registered charity can make grants to it under the CG-032 framework. However, unincorporated groups may present additional due diligence challenges, since they may not have formal governance structures, audited financial statements, or a legal mechanism for entering into binding agreements. Charities granting to unincorporated groups should take extra care to verify the group's identity, leadership, and capacity before making a grant.

Does CG-032 apply to in-kind grants?

CG-032 was developed primarily in the context of cash grants, but the underlying principle — that a charity must ensure all resources it provides to non-qualified donees are used for its charitable purposes — applies equally to in-kind contributions. Charities providing goods, services, or non-cash resources to non-qualified donees should apply the same due diligence and documentation standards they would use for a cash grant of equivalent value.

Can a non-qualified donee issue tax receipts to donors?

No. Only registered charities and other qualified donees can issue official donation receipts for income tax purposes. A non-qualified donee — even one receiving a grant from a registered charity — cannot issue tax receipts to its own donors. Donors who wish to claim a charitable tax credit must give directly to a registered charity.

What if a non-qualified donee uses grant funds for a purpose other than what was agreed?

If a charity discovers that grant funds have been used outside the terms of the grant agreement, it must act promptly. This typically means requiring the grantee to return the misused funds, terminating the grant agreement if appropriate, and documenting the steps taken to address the issue. Depending on the severity of the misuse, the charity may also need to notify CRA. A charity that ignores known misuse of grant funds risks being found to have failed its own CG-032 obligations.

How does a grant to a non-qualified donee differ from a gift under charity law?

A grant and a gift are legally distinct. A gift involves a voluntary transfer of property with no expectation of return or benefit. A grant, by contrast, is a conditional transfer — the recipient receives funds on the condition that they are used for a specified purpose, with reporting obligations and the possibility of clawback if funds are misused. This distinction matters because grants to non-qualified donees are governed by CG-032's accountability framework, while gifts to qualified donees follow a different set of rules.

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