Understanding Charitable Grants in Canada

Charitable grants are one of the most powerful tools a registered charity has. They allow an organization to fund other groups, programs, and initiatives that advance its mission — extending impact well beyond what the charity could accomplish on its own.

But grant-making in Canada is a regulated activity. The legal requirements depend on who receives the money, how much is being granted, and whether the activity takes place in Canada or internationally. Charities that do not follow the correct framework risk having disbursements disallowed by CRA — or, in serious cases, losing their registered status entirely.

This article provides a foundational overview of how charitable grants work in Canada, what the law requires, and what every charity board should know before approving a grant.

What Is a Charitable Grant Under Canadian Law?

Charitable grants are a core activity for many registered charities — but the term has a specific legal meaning that goes beyond simply "giving money to a good cause."

A charitable grant is a disbursement of funds by a registered charity to a third party to carry out an activity that furthers a charitable purpose. The grant must be tied to the charity's specific purposes — not just to a worthy cause in general — and the charity must be able to document that connection.

Grant-making is distinct from a charity's "own activities," where the charity itself directs and carries out the work, sometimes through an agent or intermediary. These two pathways — grants and own activities — have different legal requirements and compliance obligations. The distinction matters and must be documented in the charity's grant files.

Charitable grants are regulated primarily under the Income Tax Act (ITA) s. 149.1(1) and CRA guidance documents, including CG-032: Registered Charities Making Grants to Non-Qualified Donees (released December 2023, operative under the 2022 Budget Implementation Act).

Grants to Qualified Donees vs. Non-Qualified Donees: Understanding the Difference

The most important distinction in Canadian charitable grant-making is whether the recipient is a qualified donee or a non-qualified donee. These two categories are treated very differently under the ITA, and the compliance requirements are not interchangeable.

Grants to Qualified Donees

A qualified donee is an organization recognized under ITA s. 149.1(1) as eligible to receive gifts from registered charities. Grants to qualified donees are generally treated as qualifying disbursements without the same level of due diligence required for non-qualified donees.

Qualified donees include:

• Registered charities (other registered Canadian charities)
• Registered Canadian amateur athletic associations
• Registered journalism organizations
• Canadian municipalities and municipal bodies
• The Government of Canada, a province, or a territory
• Certain foreign universities that accept Canadian students
• United Nations organizations and its agencies

When a registered charity grants funds to another registered charity — for example, a private foundation granting to a charitable organization — the transaction is a qualified donee transfer. It is still subject to the granting charity's own fiduciary and governance obligations, but it does not require the full CG-032 due diligence framework.

Grants to Non-Qualified Donees

A non-qualified donee is any organization that does not hold CRA-registered charity status and is not otherwise listed as a qualified donee under ITA s. 149.1(1). This is the more complex and more heavily regulated category.

Examples of non-qualified donees:

• Unregistered community organizations and grassroots groups
• Foreign NGOs and international humanitarian organizations
• Social enterprises and co-operatives
• Indigenous organizations without charitable registration
• Municipal programs operated outside a municipality's direct authority

Grants to non-qualified donees must meet the qualifying disbursement test under ITA s. 149.1(1) and comply with the full CG-032 framework — including purpose confirmation, risk-tiered due diligence, and written grant agreements.

For a detailed guide to making grants specifically to non-qualified donees — including the CG-032 due diligence framework, documentation requirements, and common compliance pitfalls — see: Ensuring Grant Activities to Non-Charities Align with Your Charity's Purpose.

The Public Benefit Test: What It Is and What It Covers

The public benefit test is one of the foundational concepts in Canadian charity law — and one of the most frequently misapplied when it comes to grant-making decisions.

The public benefit test (ITA s. 149.1(1); CPS-024: Guidelines for Registering a Charity — Meeting the Public Benefit Test) is applied at the time of charity registration to determine whether a proposed charitable purpose qualifies for registration. It is not the operative test for whether a specific grant is permissible.

What the Public Benefit Test Requires

To pass the public benefit test at registration, a proposed charitable purpose must demonstrate two things:

1. It provides a tangible benefit — the activity produces a real, demonstrable benefit to those it serves
2. The benefit extends to the public or a meaningful segment of the public — not just a private or closed group

A purpose that benefits only the members of a private organization, or that primarily serves private interests, will not pass the public benefit test and will not qualify for charitable registration.

What the Public Benefit Test Does Not Do

The public benefit test does not determine whether a specific grant is permissible. Once a charity is registered, the question of whether a particular grant is an acceptable charitable expenditure is governed by the qualifying disbursement test under ITA s. 149.1(1) and CG-032 — not the public benefit test.

This distinction is important in practice. A funded activity may be charitable in a broad sense — feeding the hungry, supporting mental health, promoting literacy — but if it does not specifically further the granting charity's own stated purposes, the grant still fails the qualifying disbursement test.

The public benefit test asks: Is this purpose charitable enough to qualify for registration?

The qualifying disbursement test asks: Does this specific grant further this specific charity's specific purposes, and is there documentation to prove it?

Both questions matter. But they are asked at different stages and answered by different legal frameworks.

The Qualifying Disbursement Test: Three Conditions That Must Be Met

For any grant to a non-qualified donee, a registered charity must satisfy three mandatory conditions under CG-032 and ITA s. 149.1(1). All three must be confirmed before funds are transferred — not after.

Condition 1: The grant will be used for a charitable purpose. The activity being funded must fall within one of the four recognized categories of charitable purposes under Canadian common law: relief of poverty, advancement of education, advancement of religion, or other purposes beneficial to the community in a way the law recognizes as charitable.

Condition 2: The activity directly furthers the granting charity's specific purposes. It is not sufficient for the funded activity to be charitable in a general sense. It must specifically advance the charitable purposes set out in the granting charity's governing document. A charity registered to advance education cannot fund a food bank simply because hunger relief is also a charitable purpose.

Condition 3: The charity can maintain sufficient documentation. The charity must produce records demonstrating that conditions 1 and 2 have been met. Documentation is a legal requirement under ITA s. 230. If CRA audits a grant and the charity cannot demonstrate purpose alignment and charitable use, the grant may be disallowed.

Due Diligence Is Based on Risk — Not Dollar Amount Alone

CG-032 establishes a risk-based due diligence framework for grants to non-qualified donees. A common misconception is that the level of required due diligence is determined solely by the dollar amount of the grant. That is not accurate.

CRA requires charities to assess risk holistically before determining whether a grant falls into the Low, Moderate, or High tier. Grant value is one factor — but it is not the only one. A $4,000 grant to a newly formed, unregistered organization operating in a politically unstable region may carry a High risk profile even though it falls below the $5,000 Low-tier threshold. The charity's due diligence obligations would reflect that elevated risk, not simply the dollar amount.

Under CG-032's Risk Assessment Matrix, charities must evaluate the following factors in combination:

• Grant value — the size of the disbursement
• Grantee experience and track record — how established the organization is, whether it has delivered similar programs before
• Grantee governance — whether the organization has adequate financial controls, board oversight, and accountability mechanisms
• Geographic location and geopolitical context — whether the grant operates in a region with heightened instability, conflict, or limited regulatory oversight
• Private benefit concerns — whether the grant structure creates risk of benefit flowing to private individuals rather than the public

Only after assessing all of these factors does a charity determine the appropriate risk tier and the corresponding level of due diligence required.

The table below reflects the minimum due diligence tools associated with each tier — but the tier itself must be assigned based on the full risk picture, not the dollar amount alone.

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Source: CRA CG-032, Section 4 — Due Diligence and Accountability (Meeting the accountability requirements: assessing risk). Operative since June 23, 2022.

Even at the Low tier, a written grant agreement is required. Verbal agreements do not satisfy CG-032's accountability requirements, regardless of grant size.

For High-tier grants — whether high-value or high-risk — CRA expects charities to review the grantee's organizational capacity, conduct site visits or equivalent assessments, include clawback provisions in the grant agreement, and obtain audited financials where appropriate. Charities that assign a Low-tier classification to a grant that carries High-tier risk factors may face compliance consequences if that determination is audited by CRA.

The Two Grant-Making Pathways

Not every payment a registered charity makes to a third party is a grant under CG-032. Canadian charity law recognizes two distinct legal pathways for funding activities through external parties, and the compliance requirements differ significantly between them.

Pathway 1 — Grants to Non-Qualified Donees (CG-032) The grantee carries out its own activities. The charity's role is to fund, monitor, and document. The qualifying disbursement test under ITA s. 149.1(1) applies. The charity does not direct day-to-day activities but must maintain accountability through the grant agreement and ongoing reporting.

Pathway 2 — Own Activities Through an Intermediary The charity directs the activities and uses a third party as an agent to carry them out. The charity retains control over the work and is accountable for outcomes. CG-032's three-condition qualifying disbursement framework does not apply in the same way, but different documentation and oversight requirements do apply.

Choosing the wrong pathway — or failing to document which pathway applies — is one of the most common sources of CRA compliance risk for Canadian charities. Before structuring a grant arrangement, a charity should confirm which model applies and record that determination in its grant file.

The Anti-Directed Giving Rule: The Conduit Trap

One of the most serious — and most frequently overlooked — compliance risks in Canadian charitable grant-making is the anti-directed giving rule under CG-032 and the Income Tax Act. Charities that are unaware of this rule can inadvertently expose themselves to immediate loss of registered status.

What the Rule Prohibits

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. When a charity accepts donor-directed money and simply passes it through to a non-charity designated by the donor — without exercising its own independent judgment and discretion — it is acting as a conduit. This is a direct violation of the ITA and CG-032.

The conduit problem arises when:

• A donor instructs the charity to send their gift to a named organization that is not a qualified donee
• The charity accepts the donation with an understanding (express or implied) that the funds will flow to that named recipient
• The charity does not independently evaluate whether the grant furthers its own charitable purposes
• The charity retains no real discretion over how or whether the funds are disbursed

In these situations, the charity is not exercising its own grant-making authority — it is simply facilitating a transaction the donor has already directed. CRA treats this as a fundamental failure of charitable accountability.

Why This Matters

Acting as a conduit does not just put a single grant at risk. It puts the charity's registered status at risk. CRA can revoke a charity's registration for accepting and passing through donor-directed funds to non-qualified donees without independent discretion. The consequences are immediate and serious: loss of the ability to issue tax receipts, loss of registered status, and potential public disclosure of the revocation.

What Charities Must Do Instead

Registered charities must retain ultimate discretion over every grant they make. This means:

• The charity — not the donor — decides whether a grant is made and to whom
• The charity independently evaluates whether the proposed recipient and activity further its own specific charitable purposes
• The charity applies the full CG-032 qualifying disbursement framework, including due diligence and documentation
• The charity's grant agreement is with the grantee, not a mechanism for fulfilling a donor's conditions

A charity may accept a donation that is designated for a general program area (e.g., "international relief programs") without this constituting directed giving, as long as the charity retains full discretion to determine which organizations it funds and how. What it cannot do is accept a gift that effectively commits it in advance to granting funds to a specific non-qualified donee chosen by the donor.

If a charity is ever in doubt about whether a proposed donation arrangement crosses the line into directed giving, legal advice should be sought before the funds are accepted.

CRA Accountability Requirements for Grant-Making

CRA holds registered charities directly accountable for every grant they make. Accountability is not the responsibility of the grantee alone — the charity that authorizes and transfers the funds is responsible for ensuring those funds were used appropriately.

CRA's accountability expectations for charitable grant-making include the following:

Board-Level Oversight: Grant-making decisions above certain thresholds should be formally authorized at the board level and recorded in board minutes. Delegating unlimited grant authority to staff or committees without board oversight is a governance risk.

Written Grant Agreements: Every grant to a non-qualified donee requires a written grant agreement. The agreement must specify the charitable purpose, the permitted uses of the funds, reporting obligations and timelines, conditions for release of funds, and clawback provisions for high-risk or high-value grants.

Ongoing Monitoring: CRA expects charities to monitor how grant funds are used — not just at the point of disbursement, but throughout the grant period. For moderate and high-tier grants, this includes reviewing grantee progress reports and financial statements.

Right to Audit: Grant agreements should include a provision giving the granting charity the right to review the grantee's financial records related to the grant. This allows the charity to verify compliance if questions arise and supports the charity's own record-keeping obligations under ITA s. 230.

Annual Reporting: Grant-making activity is reported on a charity's T3010 annual information return. CRA reviews this information as part of its ongoing compliance monitoring. Significant discrepancies between stated activities and reported disbursements can trigger a compliance review.

International Grants: Enhanced Obligations Apply

Canadian charities can fund activities outside Canada. However, international grants to non-qualified donees carry enhanced obligations under CG-032, CRA Guidance CG-002: Activities Outside Canada, and the Charities Registration (Security Information) Act.

Grantee Screening Against Canada's Terrorist Entity List: Under the Charities Registration (Security Information) Act, registered charities must ensure their resources are not used to support or benefit terrorist entities. Before making any international grant, a charity must:

• Screen the grantee against Canada's current terrorist entity list
• Document the screening process and outcome in the grant file
• Refuse or suspend grants where a connection to a listed entity is identified

Making a grant to a terrorist entity — even inadvertently — can result in loss of registered status. The legal standard does not require intent. Screening must be documented, not just completed.

Geopolitical Risk Assessment: Grants to organizations in higher-risk regions require additional steps:

• Enhanced grantee vetting and organizational background review
• Restricted-use grant conditions specifying precisely how funds may be used
• Increased reporting frequency from the grantee
• Third-party verification or site visits where appropriate

Documentation: All international grants require records demonstrating that funds were used exclusively for the stated charitable purpose in accordance with the grant agreement. The standard mirrors domestic grants — but the risk profile is typically higher, and documentation must reflect that.

Avoiding Private Benefit: What Is and Is Not Acceptable

Charitable grants may incidentally benefit individuals or businesses. This is not automatically a problem — but private benefit must remain within legally defined limits.

Under CPS-024, private benefit is permissible only when it meets all three of the following criteria:

1. Reasonable — not excessive relative to the charitable purpose being served
2. Necessary — an unavoidable consequence of delivering the charitable activity
3. Proportionate — the charitable benefit clearly outweighs any private benefit conferred

An example of acceptable incidental private benefit: a grant to an unregistered literacy organization that pays staff salaries. Staff are compensated, but the primary benefit flows to students served by the program.

An example of unacceptable private benefit: a grant to an organization in which a board member of the granting charity holds a financial interest, structured in a way that primarily benefits that individual.

Excessive private benefit — even alongside genuine public benefit — can put a charity's registered status at risk under ITA s. 149.1(1). Charities should assess private benefit as part of their standard due diligence process for every grant.

Anti-Terrorism and Harmful Activities Rules

The obligation to prevent charitable funds from being used for harmful purposes is one of the most serious legal requirements in Canadian charity law — and one of the most understated in everyday grant-making practice.

Under the Charities Registration (Security Information) Act, a registered charity that makes available any property — directly or indirectly — to a listed terrorist entity can have its registration revoked. This applies regardless of whether the charity intended to support terrorism.

For domestic grants, this means charities must screen all grantee organizations against Canada's terrorist entity list before transferring any funds. This applies to every grant, not just large or international ones.

For international grants, the obligations are significantly more demanding. They include:

• Screening grantees against Canadian, UN, and applicable foreign terrorist entity lists
• Assessing whether funds could be diverted to terrorist entities or harmful actors in the grant region
• Including anti-diversion clauses in grant agreements that require the grantee to certify funds will not be used to support harmful activities
• Maintaining documentation of all screening activities and decisions

Beyond terrorism, charities must also ensure their grants do not fund activities that are illegal under Canadian law or contrary to Canadian public policy. A grant that funds an activity that would disqualify the charity's purposes — or that supports a harmful or illegal purpose — is not a qualifying disbursement and can be grounds for compliance action.

Required Documentation for Every Grant

Under ITA s. 230, registered charities must retain records sufficient to demonstrate that every grant was used for charitable purposes and furthered their specific charitable objects. Documentation is not a formality — it is what protects a charity in the event of a CRA audit.

Every grant file should contain, at minimum:

• Written grant agreement — specifying charitable purpose, permitted uses, reporting obligations, conditions, and clawback provisions where applicable
• Grantee due diligence file — scope depends on the risk tier (low, moderate, or high)
• Progress and financial reports from the grantee at intervals specified in the grant agreement
• Evidence of grant completion or milestone achievement
• Records demonstrating purpose alignment — showing the funded activity furthered the granting charity's specific purposes as stated in its governing document
• Terrorist entity screening record — required for all grants; must be dated and documented

Grant files should be retained for a minimum of six years following the end of the fiscal year in which the grant was made, consistent with CRA's general record retention requirements.

Working With a Charity Lawyer on Grant Compliance

CG-032 introduced the most significant changes to charitable grant-making in Canada in decades. Many charities that were following the previous direction and control model have not yet updated their grant agreements, due diligence procedures, or documentation practices to reflect the current framework.

A charity lawyer can review a charity's grant-making practices against CG-032's requirements, identify gaps in existing grant agreements, and help structure both domestic and international grant programs that meet CRA's compliance standard. Given the risk associated with non-compliant grant-making — up to and including loss of registered status — legal review before making a significant grant is a sound investment.

Charities with questions about their grant-making obligations under CG-032 are welcome to reach out to us at dov.goldberg@charitylawgroup.ca or 416-488-5888. Schedule a free consultation to discuss your charity's specific grant-making situation and ensure your organization is meeting its legal obligations under the current CRA framework. 

Frequently Asked Questions

What is the difference between a qualified donee and a non-qualified donee? 

A qualified donee is an organization recognized under ITA s. 149.1(1) as eligible to receive disbursements from a registered charity — including other registered charities, municipalities, and certain foreign universities. A non-qualified donee is any organization that does not meet those criteria. Grants to non-qualified donees are subject to the full CG-032 due diligence framework.

What is the public benefit test and does it apply to individual grants? 

The public benefit test (CPS-024) determines whether a charitable purpose qualifies for registration. It is not the operative test for whether a specific grant is permissible. That determination is made under the qualifying disbursement framework in ITA s. 149.1(1) and CG-032, which requires purpose confirmation, documentation, and risk-tiered due diligence.

What is the qualifying disbursement test? 

Under ITA s. 149.1(1) and CG-032, a grant to a non-qualified donee qualifies as a charitable disbursement only if: (1) it is used for a charitable purpose, (2) it directly furthers the granting charity's specific purposes, and (3) the charity maintains adequate documentation. All three conditions are mandatory.

How much due diligence is required before making a grant? 

Under CG-032, due diligence scales with grant value. Grants up to $5,000 require basic purpose confirmation and a written grant agreement. Grants of $5,001–$50,000 require standard grantee due diligence and documented purpose alignment. Grants over $50,000 require enhanced assessment, a grantee capacity review, and ongoing monitoring including audited financials.

Can a Canadian charity make international grants? 

Yes, but international grants require enhanced due diligence under CG-032 and CG-002. Charities must screen grantees against Canada's terrorist entity list, assess geopolitical risk, and maintain records demonstrating the funds were used exclusively for their stated charitable purpose.

What records does CRA expect for a grant audit? 

Under ITA s. 230 and CG-032, CRA expects a written grant agreement, a grantee due diligence file appropriate to the risk tier, progress and financial reports, evidence of grant completion, records demonstrating purpose alignment, and dated terrorist entity screening documentation.

What happens if a charity makes a non-compliant grant? 

A grant that fails the qualifying disbursement test under ITA s. 149.1(1) is not a permissible charitable expenditure. CRA can disallow the disbursement, issue a compliance order, or in serious cases impose sanctions including revocation of registered status.

What is the difference between a grant and an own-activities arrangement? 

In a grant arrangement under CG-032, the grantee carries out its own activities and the charity monitors compliance. In an own-activities arrangement, the charity directs the activities through a third party acting as an intermediary. Different documentation, oversight obligations, and legal frameworks apply to each pathway.

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