As with any federal budget, the 2011 budget contained provisions that captured the attention of media and public alike. The changes to the governance of charities through amendments to the Income Tax Act (the "ITA") were not among such provisions. Consequently, some very significant matters, which create a real risk to the livelihoods of charities,1 went largely unnoticed. Effectively, the new provisions, which came into force in 2012, render certain individuals ineligible to sit on Boards of Directors of registered charities or to be employed in senior capacities within registered charities. Should a charity allow "ineligible individuals" to act in such capacities, the charity will risk refusal or revocation of charitable status or suspension of the charity's authority to issue charitable receipts. As such, prudent charities are well advised to become aware of these provisions and their implications, and to develop a process in order to minimize this new risk.

Details of the Provisions

The "ineligible individual" provisions came as a result of concerns from the Canada Revenue Agency (the "CRA") that it had no legal authority to consider the identity of individual applicants for charitable status in determining whether to grant status to a particular organization. That is, CRA was not able to refuse to grant charitable status on the basis of the applicants, even when individual applicants had been previously involved with non-compliant charities or had criminal records involving breach of public trust, such as fraud or misappropriation. The relevant amendments to the ITA have now provided CRA with the ability to consider such risk factors as well as many others, including the prior and current activities of senior staff. The "ineligible individual" provisions were affected through amendments to sections 149.1(1), 149.1(4.1), 149.1(25) and 188.2(2) of the ITA. Essentially, these provisions grant CRA the discretion to refuse or revoke charitable status or suspend authority to issue charitable receipts if an "ineligible individual" is a member of the board of directors, a trustee, officer or like official, or any individual who otherwise controls or manages the operation of a charity. The amendments define two types of "ineligible individuals": individuals who were convicted of a particular type of offence and individuals who were previously involved with charities that had their status revoked for particular types of misconduct.

With respect to conviction for particular offences, an "ineligible individual" is a person who:

  • Has been convicted of a "relevant criminal offence", which is an offence that relates to financial dishonesty, including tax evasion, theft, fraud or any other criminal offence that is relevant to the operation of the charity, for which a pardon has not been granted, including offences in Canada or similar offences outside Canada; or
  • Has been convicted of a non-criminal "relevant offence", which is an offence that relates to financial dishonesty, such as offences under fundraising legislation, consumer protection legislation or securities legislation or any other offence that is relevant to the operation of the charity, including offences in Canada or outside Canada, within the past five years.

With respect to previous involvement with revoked charities, an "ineligible individual" is a person who:

  • Has been a member of the board of directors, a trustee, officer, or an individual who otherwise controlled or managed the operation of a charity during a period in which the organization engaged in conduct that constituted serious non-compliance with obligations of registered charities, including improper receipting arrangements, abusive tax shelters, or providing undue private benefit to directors, and for which the charity had its status revoked within the past five years; or
  • Has been, at any time, a promoter of a gifting arrangement or other tax shelter in which a charity participated, and for which the charity has been revoked within the past five years.

Implications of the Provisions

The "ineligible individual" provisions clearly raise a great many questions for charities. Principal among these questions:

  • What exactly will be included in offences that are relevant to the operation of the charity?
  • What will CRA do if one of a charity's directors or senior staff is an "ineligible individual", will the charity face immediate revocation?
  • What can a charity do to protect itself from the risk of inadvertently having an "ineligible individual" in the position of director or senior staff?

At this point, these questions are largely unanswerable. Administrative guidance on the operation of these provisions appears to be in development at CRA, but no policy statement has been released to date. However, CRA and the Charities Directorate have released some comments on how the provisions will be implemented.

What is a Relevant Offence?

Though it is still very unclear how broadly "(criminal) offences relevant to the operation of a charity" will be defined, the Director General of the Charities Directorate had indicated that in addition to any form of financial dishonesty, a relevant offence will depend on an analysis of "whether the offence, if repeated by the individual, could inflict harm on the organization or its beneficiaries".2 As such, a relevant offence will depend on the purposes of the charity but also likely CRA's interpretation of "harm".

How will CRA Respond to an "Ineligible Individual"?

In speculating how CRA will respond to an "ineligible individual" in a position of control in a charity, it is important to note that the legislation grants CRA the authority to refuse, or revoke status or suspend receipting authority, but it does not require it to do so. CRA has indicated that it does not intend for revocation to be automatic if an "ineligible individual" is on the board or management of a charity. Instead, CRA has stated that it will work with the charity. The charity will be given the opportunity to address CRA's concerns and may implement safeguards that will satisfy CRA. In addition, the Director General has indicated that charities will not be required to undertake background checks in order to show compliance with the new provisions, but in situations where a charity has been made aware of concerns about an individual, or where an individual's background has become public knowledge, "failure to take appropriate action could result in the denial of the application for registration, suspension of receipting privileges, or revocation of registered status".3 Again, at this point it is unclear what sort of "appropriate action" would be expected on the part of the charity.

How can Charities Protect Themselves?

With respect to whether a charity can protect itself from the risk of revocation or suspension of receipting authority arising from the involvement of "ineligible individuals", the answer is also unclear. As noted above, CRA has indicated that it will work with charities on this issue, but it has also noted that it is "prepared to act quickly where there is serious deliberate non-compliance".4 This, of course, is an especially worrisome statement because serious and deliberate non-compliance could occur in relation to one board member or senior staff without the whole board being aware. Further, in many instances, without disclosure from the individual in question, it would be extremely difficult for the board to become aware that an existing or potential board member, or senior staff, is in fact an "ineligible individual". In addition to the challenges noted above with respect to relevant offences, other challenges include how to gain information about non-criminal offences, offences outside Canada and involvement with a charity that had its revoked for non-compliance.

Despite the limitations to doing so, Charities may still want to consider developing processes to address the issue "ineligible individuals" on their boards. One potential method of doing so would be to develop a questionnaire for new applicants to the board that addresses unpardoned criminal convictions as well as revocation of charitable status and non-criminal convictions, within the past 5 years. At the same time, a prudent charity will also want to develop an annual questionnaire for existing board members that addresses similar issues. Though charities might be inclined to question current and potential board member with respect to their current involvement with other charities, the potential human rights implications of doing so should be considered in formulating the questions. Finally, charities might also want to consider by-law amendments with respect to "ineligible individuals" that require the completion of the questionnaire upon appointment and reappointment, and that allow the board of a charity to remove a director who is ineligible.

From an employment law perspective, the development of a process to address the issue of "ineligible individuals" among a charity's paid senior staff presents some additional difficulties. As senior staff, such as executive directors, high-level managers and directors of finance, are included in the category of individuals who control and manage a charity, charities will need to be concerned with whether any such staff are or become "ineligible individuals" and how they will respond in such situations. Though a screening process could be implemented, similar to the process discussed above for directors, charities will need to ensure that they are not asking a potential or existing employee questions that could run afoul of human rights legislation.

However, if an existing senior staff is found to be an "ineligible individual", it is far from certain that the staff can be terminated for just cause for this reason alone, particularly in light of the discretion that CRA has with respect to how it will respond to such individuals. Ultimately, a charity could incur a significant financial cost in the termination of such employees. Charities might consider addressing this issue in the employment agreements of senior employees, such as including an expectation that they do not become ineligible or providing a process that will be followed in the event that they become ineligible, for example.

Conclusion

To date, there have been far more questions about these legislative amendments than there have been answers, and until CRA releases its guidance on the "ineligible individual" provisions, it is difficult for charities to know how to respond. However, what has been clear is that CRA is willing to act on these provisions even before it has fully developed its processes. As such, charities might be best served by considering these provisions and their implications immediately. Notwithstanding this recommendation, it should be noted that the "ineligible individual" provisions do not provide for a due diligence defence on this issue. Therefore, despite all the best efforts undertaken by a charity to ensure that "ineligible individuals" are not in positions of control within the charity, its registration or receipting privileges may still be at risk.

Footnote

1 Note that these provisions also affect Registered Canadian Amateur Athletic Associations (RCAAA's).

2 Cathy Hawara, "Director General's speech at the National Charity Law Symposium" (Speech Presented to Canadian Bar Association's National Charity Law Symposium, 4 May 2012); online: http://www.cra-arc.gc.ca/chrtsgvng/ chrts/bdgts/2012/dgspch-eng.html.

3 Ibid.

4 Ibid.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.