Well, what is direction and control?

As a rule, having direction and control means the charity is the one that decides how its resources are to be used.

The CRA expects a charity will be the one that is making the decisions on what you might call the big issues such as the activity's overall goals, how the activity will be carried out, the area or region where it will be carried out, who benefits and so on.

And this is not to say an intermediary cannot provide advice or recommendations on how a charity should use its resources. Often local organizations, of course, have the best knowledge about an area and its needs.

Any charity would be well advised to take this advice into account when planning an activity with an intermediary but the charity must be free to accept or reject the advice as the Canadian charity chooses.

I'll mention now that we'll actually encounter a very specific exception to this requirement for direction and control a little later but we'll come back to that.

Does this mean the charity has to micro manage its intermediaries?

And when I talk about direction and control, I don't mean to give the impression the charity always has to be looking over the shoulder of the intermediaries. It's true that a charity must be the one that decides how the resources are to be used but an intermediary can make many of the day-to-day operational decisions on behalf of the charity.

Using its local knowledge to make the best decisions such as where to buy goods from, who to hire locally, who is most in need of help and so on. With this in mind, of course, the intermediary should still report back to the charity on the steps it has taken so that the charity can continue to monitor the use of its resources and make sure that they are used appropriately.

How can a charity direct and control the use of its resources?

We've been talking about direction and control, of course.

So now, the Income Tax Act certainly requires a charity to use its resources for its own activities but does not describe how a charity should prove or demonstrate that it has done so.

These measures of direction and control on the slide here are recommended by the CRA as a good way to demonstrate a charity's resources are being used for its own activities. For example, a charity could put a written agreement in place with the intermediary, implement the terms of those -- of that written agreement, monitor and supervise the activity being carried out, provide ongoing instructions when necessary and so on.

I should mention; it's entirely possible that a charity might be able to come up with a completely different set of measures of direction and control. Really, as long as the charity can demonstrate that its resources are being used for its own activities, the CRA should be satisfied.

And I'm just going to talk a little more in detail about just some of these measures of direction and control. I want to start with what is a written agreement?

And I would like to spend some time on the written agreement because a properly structured and implemented written agreement can be one of the best ways to demonstrate direction and control. A written agreement is a document that can establish the relationship between the charity and the intermediary. And the CRA always recommends having one in place.

Just having a written agreement on its own is not sufficient. If a charity created and signed a written agreement with a non-qualified donee but then didn't implement the terms and make sure the agreement was actually adhered to, then obviously that particular written agreement is not a very useful measure of direction and control.

The charity has to make sure that the written agreement is followed, whatever is put in place.

And this slide just lists what are the basic elements of a written agreement and also, I should note that these -- all of these elements are in the guidance that's available on our website as well.

Listed here are the very basic elements, including a description of activities, schedules, the right of inspection of the project and so on.

Really is a very short summary, a written agreement will describe the activity that is going to occur and all the terms and conditions under which it will be carried out so that everything is clear to all parties.

What is a description of activities?

And this is, again, one of the most important elements of direction and control.

It might appear very basic, but the CRA has certainly seen written agreements or proposals to work with intermediaries by charities that have almost no information on how the program is actually to be accomplished. And without that kind of detail, it can be impossible to determine whether the activity is acceptable, whether the activity serves a charitable purpose or not.

We recommend that a charity provide as much information as possible regarding the activity and how it is to be carried out. Basically, the more detailed, the better. For example, what the activity is, where it will be carried out, proposed budget and so on.

The description of activities will ideally be in the written agreement with the intermediary but, of course, the charity could also place the information on its own files in Canada.