What is Anti-Avoidance Rules and Designated Gifts in Charitable Giving

Charities in Canada often support each other financially. A larger foundation might fund a smaller sister charity, or a parent organization might pass restricted gifts downstream to a related entity.

But when those charities are connected — sharing directors, or operating within the same organizational family — the Canada Revenue Agency has strict rules about how that money gets used.

These are called anti-avoidance rules. They exist to make sure funds don't simply circulate between related organizations without actually reaching charitable programs.

As a charity lawyer, I've seen many well-meaning charities get caught off guard by these rules — often because they misunderstood the timeline or the disbursement quota rate that applies to them. This guide explains what anti-avoidance rules are, how designated gifts work, and what your charity needs to do to stay compliant with the CRA in 2026.

What Are Anti-Avoidance Rules Under Canada's Income Tax Act?

Anti-avoidance rules are CRA requirements that apply when money moves between registered charities that are not at arm's length. Two charities are not at arm's length when they share directors, when one controls the other, or when they are part of the same organizational family.

The rule is straightforward: if a registered charity receives a gift from a non-arm's length charity, it must spend 100% of the fair market value of that gift on qualifying expenditures. Under paragraph 149.1(4.1)(d) of the Income Tax Act, the charity has until the end of the subsequent taxation year — that is, the fiscal year following the one in which the gift was received — to meet this obligation.

This is one of the most commonly misunderstood points in charity law. The deadline is not the end of the same fiscal year the gift arrives. The charity has the year of receipt plus the following year to spend those funds.

The money must go toward the charity's own charitable activities, gifts to qualified donees at arm's length, or grants to non-qualified donees that meet specific CRA criteria.

This rule exists for a clear reason. Without it, related charities could pass funds back and forth indefinitely without those funds ever reaching the charitable programs they were intended to support.

When the 100% spending rule applies:

• The recipient charity receives a gift from a non-arm's length registered charity
• The donor charity has not formally designated the gift on Form T1236
• The gift was received in the current or prior fiscal year and the spending deadline has not yet passed

Real-life example:

A private foundation gives $50,000 to a related public charity it controls through overlapping board members. The gift is received in the public charity's 2025 fiscal year. Unless that gift is formally designated by the foundation on Form T1236, the public charity must spend the full $50,000 on charitable activities by the end of its 2026 fiscal year. If it fails to do so, the CRA can impose a penalty tax of 110% on the unspent shortfall — or in serious cases, revoke the charity's registered status.

One important point many charities miss: this anti-avoidance spending requirement is entirely separate from the disbursement quota. Meeting your disbursement quota does not mean you've met your anti-avoidance obligation. These are two distinct requirements, and both must be tracked independently.

What Is a Designated Gift — And How Does It Work?

A designated gift is a formal classification under the Income Tax Act that changes the spending obligations for the recipient charity. When used correctly, it gives both donor and recipient charities more flexibility in how they manage inter-charity transfers.

The key thing to understand is this: it is the donor charity — not the recipient — that makes the designation. A recipient charity cannot retroactively turn a regular gift into a designated gift.

How to designate a gift — step by step:

1. The donor charity decides at the time of giving that the gift will be designated
2. The donor charity completes Form T1236 (Qualified Donees Worksheet) as part of its annual T3010 return — and because the form has no pre-printed checkbox for a designated gift, the donor must manually write "designated gift" and the designated amount on the blank line directly below the non-cash gifts line on the form
3. The donor charity notifies the recipient charity in writing that the gift is designated
4. Both charities retain all documentation in case of a CRA audit

The written notification to the recipient charity matters more than many people realize. The recipient needs to know whether a gift is designated in order to track its own spending requirements accurately and to file its T3010 correctly. A verbal agreement is not enough — document it in writing at the time the gift is made.

Real-Life Examples of Anti-Avoidance Rules and Designated Gifts in Canada

These rules can feel abstract on paper. Here are three scenarios I've seen play out in practice — each one illustrates a different way the anti-avoidance rules and designated gifts affect real Canadian charities.

Example 1: The Foundation That Forgot to Designate

A private family foundation in Ontario made a $75,000 gift to a related public charity — a youth mentorship program run by some of the same board members.

The foundation assumed the gift was routine. It didn't designate the gift on Form T1236. Nobody told the recipient charity anything about anti-avoidance rules.

At year-end, the public charity had only spent $40,000 of the $75,000 on programs. The remaining $35,000 sat in a reserve account.

When the CRA reviewed both T3010 returns, the public charity was flagged. Because the gift was non-arm's length and not designated, the unspent $35,000 triggered a 110% penalty tax. The foundation also faced scrutiny over why it hadn't reported the gift correctly on its T1236.

The fix: A simple written designation at the time of the gift would have exempted the recipient from the 100% spending requirement entirely.

Example 2: The Parent Charity That Miscalculated Its Disbursement Quota

A large federated charity in British Columbia had total non-charitable investment assets of $3.2 million. Its finance team calculated the disbursement quota at a flat 3.5% — which came to $112,000.

What they didn't account for was the two-tiered rate. Under the current rules, the first $1 million is subject to 3.5% ($35,000), and the remaining $2.2 million is subject to 5% ($110,000). The actual DQ obligation was $145,000 — not $112,000.

The shortfall of $33,000 resulted in a penalty assessment from the CRA.

The fix: Charities with investment assets over $1 million need to apply both tiers when calculating their annual disbursement quota — not a single flat rate.

Example 3: The Designated Gift Done Right

A national charitable foundation wanted to support a related regional charity running a food security program in Manitoba. The gift was $100,000 — significant enough that requiring the regional charity to spend it all within the following fiscal year would have been difficult.

The foundation's legal team designated the gift properly. They wrote "designated gift — $100,000" on the blank line below the non-cash gifts line on Form T1236. They sent a written confirmation letter to the regional charity the same day the gift was transferred.

Because the gift was properly designated, the regional charity had no anti-avoidance spending obligation. It was able to hold the funds and deploy them strategically over the following two program years — exactly as the foundation intended.

The lesson: A designated gift, done correctly and communicated in writing, gives both charities far more flexibility — and keeps both fully CRA compliant.

Anti-Avoidance Rules vs. Disbursement Quota — What's the Difference?

Many charity leaders confuse anti-avoidance rules with the disbursement quota. They are related, but they are not the same thing. Each requirement applies differently, and failing to understand the distinction is one of the most common compliance mistakes I see.

One important update for 2026: the disbursement quota is not a flat 3.5% rate for all charities. For fiscal periods beginning on or after January 1, 2023, Canada introduced a two-tiered DQ system:

• 3.5% on the first $1 million of non-charitable investment property
• 5% on any portion of non-charitable investment property exceeding $1 million

This matters significantly for well-endowed foundations and larger charities. Understating your DQ exposure can result in a 110% penalty tax on the unspent shortfall, or revocation under subsection 149.1(2), (3), or (4) of the Income Tax Act.

Here is a direct comparison of the two rules:

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The bottom line: if your charity receives a large non-arm's length gift and you also have disbursement quota obligations, you need to track both separately. One does not cancel out the other.

Benefits of Designated Gifts for Canadian Charities

When used properly, designated gifts give charities more flexibility in how they manage inter-charity transfers — without triggering the 100% anti-avoidance spending obligation. For charities operating within federated structures or family foundations, this can make a significant difference in how funds are allocated and timed.

Key benefits of using designated gifts:

• The recipient charity is exempt from the 100% anti-avoidance spending rule
• Funds can be held for a specific initiative or multi-year project
• Simplifies CRA compliance for charities with related organizational structures
• Enables strategic, targeted grant-making within family foundations or federated models
• Reduces the risk of year-end spending pressure for the recipient charity

One important caution:

The donor charity still cannot use a designated gift to meet its own disbursement quota. This is a common misunderstanding that can catch charities off guard during a CRA review. The designated gift provides relief for the recipient — not the donor.

Why Communication Between Donor and Recipient Charities Matters

Anti-avoidance compliance doesn't just depend on paperwork. It depends on both charities being on the same page — and that starts with clear, timely communication at the time the gift is made.

In my experience, problems arise when the donor charity designates a gift on its T3010 but forgets to tell the recipient. The recipient then plans its spending on the assumption that the full 100% rule applies — causing unnecessary confusion and compliance risk.

The fix is simple. At the time of the gift, the donor charity should send a written notice — a letter or email — confirming that the gift is designated under the Income Tax Act. This gives the recipient everything it needs to track spending accurately and file correctly.

A few things both charities should confirm in writing:

• The amount of the gift
• That the gift is being designated under the Income Tax Act
• The fiscal year in which the designation applies
• The donor's contact information for any CRA follow-up

Verbal agreements don't hold up in a CRA audit. Document everything, and keep it on file.

2026 CRA Compliance Reminders for Charities

The core anti-avoidance rules and designated gift provisions under the Income Tax Act have not changed in 2026. However, there are important compliance reminders every charity should review this year — especially those with related-party gift arrangements or significant investment assets.

What to watch for in 2026:

• The CRA continues to scrutinize inter-charity gift arrangements as part of its ongoing compliance monitoring program
• Charities with related-party transactions flagged on their T3010 may receive follow-up inquiries from the CRA
• The two-tiered disbursement quota (3.5% on the first $1M; 5% above $1M) applies to all fiscal periods beginning on or after January 1, 2023 — larger charities and foundations must confirm they are calculating this correctly
• Charities that received non-arm's length gifts in fiscal year 2024 have until the end of their 2025 fiscal year to spend those funds — confirm this deadline has been or will be met before filing
• Charities that received non-arm's length gifts in fiscal year 2025 have until the end of their 2026 fiscal year to meet the spending requirement
• If your charity operates within a group structure, now is a good time to review all inter-charity gift arrangements with legal counsel to confirm they are properly documented

If you're unsure whether a past gift triggers the anti-avoidance rule — or whether your designation was handled correctly — speak with a charity lawyer before your next T3010 filing.

Frequently Asked Questions About Anti-Avoidance Rules and Designated Gifts

What happens if a charity doesn't meet the anti-avoidance spending requirement?

The CRA can impose a penalty tax of 110% of the unspent shortfall. In serious or repeated cases, the charity may face revocation of its registered status under the Income Tax Act. This is why it's essential to identify non-arm's length gifts early and track spending against them — the deadline is the end of the fiscal year following the year of receipt, not the end of the same year.

When exactly does a charity have to spend a non-arm's length gift?

Under paragraph 149.1(4.1)(d) of the Income Tax Act, the spending deadline is the end of the subsequent taxation year — meaning the fiscal year after the one in which the gift was received. For example, if a charity receives a $50,000 non-arm's length gift in its 2025 fiscal year, it must spend that amount by the end of its 2026 fiscal year.

Can a charity designate a gift after it has already been received?

No. The designation must be made by the donor charity when it files its information return for the fiscal year in which the gift was made. Retroactive designations are not permitted under the Income Tax Act. If the deadline has passed without a proper designation, the recipient charity may already be in breach.

Does the anti-avoidance rule apply to all gifts between charities?

No. It only applies to gifts between registered charities that are not at arm's length. Gifts between fully independent, unrelated charities are not subject to the anti-avoidance spending requirement.

Can a charity use a designated gift to meet its disbursement quota?

No. Designated gifts are explicitly excluded from the donor charity's disbursement quota calculation. The donor must meet its disbursement quota separately through other qualifying expenditures.

What is Form T1236 and how is a designated gift recorded on it?

Form T1236 (Qualified Donees Worksheet) is used by donor charities to report gifts made to qualified donees. Because the form does not have a dedicated pre-printed checkbox for designated gifts, the donor must manually write "designated gift" and the designated amount on the blank line directly below the non-cash gifts line on the form. This manual notation is the required method under CRA's Form T1236 web instructions. The completed form is filed as part of the charity's T3010 annual information return.

What does "not at arm's length" mean in a charity context?

Two charities are not at arm's length if they are related in a meaningful way — for example, if they share common directors, if one organization controls the other, or if they are part of the same charitable family. The Income Tax Act and CRA guidance set out detailed criteria. If you're unsure whether your charity qualifies, a charity lawyer can assess the relationship before any inter-charity gift is made.

What is the disbursement quota rate in 2026?

As of fiscal periods beginning on or after January 1, 2023, the disbursement quota is two-tiered: 3.5% on the first $1 million of non-charitable investment property, and 5% on any amount exceeding $1 million. It is no longer a flat rate. Charities with large investment portfolios need to calculate their DQ carefully under both tiers to avoid a penalty.

Is the 100% anti-avoidance spending rule the same as the disbursement quota?

No. They are two entirely separate obligations. The anti-avoidance rule applies specifically to non-arm's length gifts and requires 100% of the gift to be spent by the end of the following fiscal year. The disbursement quota requires all registered charities to spend a percentage of their prior-year investment assets annually — using a tiered rate based on asset size. Both must be satisfied independently.

Conclusion

Anti-avoidance rules and designated gifts are not overly complicated once you understand the framework — but the legal details matter enormously. The statutory spending deadline, the two-tiered disbursement quota, the manual notation required on Form T1236, and the documentation between charities all require careful attention.

Getting one of these wrong — especially the spending deadline or the DQ rate — can result in a 110% penalty tax or, in serious cases, the loss of registered charity status.

If your charity regularly receives gifts from related organizations, or if you're unsure how to classify a past transfer, the best step is a legal review before your next T3010 filing. The cost of getting it right early is always far less than the cost of a CRA audit or penalty.

Have questions about your charity's anti-avoidance obligations? Contact B.I.G. Charity Law Group for a consultation.

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