A recently-initiated lawsuit by the federal government against a
charity serves as a reminder to all charities of the importance of
accountability and record-keeping whenever receiving government
Canadian registered charities often apply to government agencies
for funding under various government initiatives. Applicant
charities are awarded such funding if the relevant government
agency determines, among other criteria, that the programs, tools,
resources, or services for which the charity is requesting funding
will further the relevant initiative. In some cases, funding
may be awarded in the form of an outright grant with no further
reporting required, but in many cases government contributions are
subject to specific terms and conditions around the use of the
funds and accountability. These terms and conditions must often be
met before payment in made, and the recipient organization is
subject to government audit of its use of such funding. The
terms of the contribution are generally set out in a form of
Contribution Agreement between the government agency and the
The Canadian Safe School Network (CSSN) is a federally
incorporated, Canadian registered charity with a mandate "to
reduce youth violence and make [Canadian] schools and communities
safer". Between 1999 and 2002, Human Resources Skills
Development Canada (HRSDC) (as it was then known), along with the
Canada Employment Insurance Commission (CEIC), entered into several
contribution agreements (the "Agreements") with CSSN to
develop various youth-targeted media tools addressing violence,
bullying and homelessness. On the basis of reports
generated by CSSN detailing the expenditures in support of each
project (the "Reports"), CSSN was periodically advanced
funding totalling $606,504.00. Under the Agreements, CSSN
covenanted to keep proper books and records that would evidence the
financial management of the projects, including project
expenditures and revenues. CSSN agreed to preserve these
books and records for a period of six years and to make them
available to HRSDC and CEIC for inspection and audit at all
Recently, on December 2, 2013, the Department of Justice (DOJ)
filed a statement of claim in the Federal Court seeking payment by
CSSN in the amount of $237,300.00. The basis for the claim is
the allegation that CSSN has refused, neglected, or has been
unable, on more than one occasion, to provide HRSDC with all
relevant books, accounts and records that would support the
expenditures set out in the Reports. Despite several written
requests, because the supporting documentation was never provided,
HRSDC's forensic accountants were unable to determine whether
$237,300.00 worth of expenditures, as noted in the Reports, were
used for the purposes for which they were advanced. As such,
the DOJ has claimed that the funding was advanced as a result of
fraud, misrepresentation, error or inadvertence. The
President of CSSN has also been named as a defendant in the
lawsuit, on the basis that he was determined by the DOJ to be the
directing mind of the charity and because he signed off on the
Reports certifying that he believed the information contained
therein to be true and correct to the best of his knowledge.
While this case is in its infancy and has not yet been decided,
it reminds not-for profit organizations and charities that when
entering into funding agreements, in particular with government
agencies, a proper account of expenditures must be kept in order
provide the appropriate level of transparency and to prove that all
funds received are spent in accordance with the arrangement.
Furthermore, if an organization is ever determined by CRA to be
keeping inadequate books and records, it may be subject to various
sanctions under the Income Tax Act, including revocation
of its charitable status. We will monitor significant developments
relating to this case and will provide future updates.
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.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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