The challenges for charities of disclosing fundraising costs

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It's not that often that charities law and criminal law intersect, but the decision of R. v. Gour, decided June 28, 2012, did just that. The case was about an individual, Adam Gour, who had contracted to fundraise for charity, and his and his contractor's failure to disclose the commissions that would be earned. The court concluded this was a fraud. The case is only six pages long, and makes for a compelling read.

The issue of paying fundraisers in the context of charitable donations has been a controversial one for some time. Under the Income Tax Act, charities are obligated to devote their resources exclusively to charitable purposes and activities. The Canada Revenue Agency (CRA), the agency which oversees charities, does not consider fundraising in and of itself to be a charitable purpose or a charitable activity that directly furthers a charitable purpose. The CRA has developed extensive guidelines for charities.

In 2010, the CBC reported, "In more than 200 cases, charities paid more than half the money they received from donors to external fundraisers… The CRA recommends that no charity spend more than 35 per cent of revenue on fundraising and can revoke the registered status of any organization whose expenses seem disproportionately high." Specifically, the policy states:

"85. Generally, a charity's fundraising ratio is an indicator of how the CRA is likely to approach a charity's fundraising:

-  Ratio of costs to revenue over fiscal period -- under 35%. 

 This ratio is unlikely to generate questions or concerns by the CRA.

-  Ratio of costs to revenue over fiscal period -- 35% and above

The CRA will examine the average ratio over recent years to determine if there is a trend of high fundraising costs. The higher the ratio, the more likely it is the CRA will be concerned the charity is engaged in fundraising that is not acceptable, requiring a more detailed assessment of expenditures.

-  Ratio of costs to revenue over fiscal period -- above 70%

This level will raise concerns with the CRA. The charity must be able to provide an explanation and rationale for this level of expenditure to show that it is not engaged in unacceptable fundraising.

86. While the ratios above refer to a global ratio over a fiscal period, a high fundraising ratio for an individual event may, on its own, be an indicator of unacceptable fundraising where the event forms a collateral non-charitable purpose, delivers a more than incidental private benefit, or is contrary to public policy or deceptive."

According to the CBC article, in more than 200 cases, charities paid more than half the money they received from donors to external fundraisers.

The CRA policy also indicates that registered charities cannot engage in fundraising practices that deceive the public. The policy states charities must not misrepresent, among other things, whether they have hired third‑party fundraisers, how they will be compensated, and what percentage of the funds will go to charitable work. 

In the Gour case, the accused fundraising contractor, subsequently convicted, had contracted with a "duly registered charity," Kare for Kids International, to fundraise for it. The court stated the money was intended for needy children with medical afflictions that generated expenses not covered by the provincial medical program, such as special equipment or family travel expenses.

This type of arrangement is not in and of itself unusual. The issue was that neither Gour nor his staff disclosed to potential donors how much would be retained in commissions, and appear to have been instructed by Gour to lie: if asked by potential donors, they were to represent themselves as volunteers. While the court concluded that "the vast majority of contributions were generated in circumstances where there was nondisclosure as opposed to incidents of active deceit," the failure to disclose the commission arrangement of between 14 to 35 per cent was a fraud under Canadian criminal law.

Defence counsel for Gour had argued that CRA "permits" a revenue/expenditure ratio of up to 35 per cent as being "unlikely to generate questions or concerns." The court's position was that the CRA policy "has nothing whatsoever to do with the fundraiser's obligation to disclose important circumstances such as a system of handsome fundraiser commissions to potential contributors."

The court was satisfied that the concealment of this "fundamental and essential" information about the commissions from apparent "volunteers" occurred, and that it was intended to mislead the reasonable contributor, satisfying the test for fraud. The court advised it would defer the total amount defrauded to the sentencing phase of the proceedings, but the $5,000 threshold required for conviction was conceded by the defence.

Interestingly, Kare for Kids International does not currently appear on CRA's charities registry and on its home page refers to itself as a "non‑profit organization" rather than a charity. However, the online donation form indicates it will provide a tax receipt for donations over $20, something only registered charities can do.

For charities and its fundraisers everywhere, it appears that to stay clear of fraud, they must actively disclose to potential donors their contractual relationships when canvassers or telemarketers come knocking or calling. The court concluded that had it been disclosed, the donations would have dried up. Charities do have to spend something on paying fundraisers, and CRA concludes that up to 35 per cent won't raise eyebrows. If indeed the donations do dry up for amounts that meet even that threshold, there is a real question about whether and how charities will fare with this requirement for active disclosure.

This column is the first of two parts on charities law.

Note: Pro Bono provides legal information designed to educate and entertain readers. But legal information is not the same as legal advice -- the application of law to an individual's specific circumstances. While efforts are made to ensure the legal information provided through these columns is useful, we strongly recommend you consult a lawyer for assistance with your particular situation to obtain accurate advice.

Submit requests for future Pro Bono topics to Read past Pro Bono columns here.

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