In 2011, the Department of Finance introduced a Federal Budget containing a series of amendments to the Income Tax Act (Canada) (the "ITA") designed to provide the Minister of National Revenue (the "Minister") with a discretionary power aimed at restricting the influence of "ineligible individuals" in the governance of registered charities and Registered Canadian Amateur Athletic Associations ("RCAAAs"). The new legislation furnishes the Minister with the power to revoke a registered charity or RCAAA's registration, or to prevent an organization from acquiring such status, if any "ineligible individuals" are found to be involved in the governance of the organization.1
The definition of "ineligible individual" is broad. It encompasses not only individuals convicted of offences relating to "financial dishonesty", but also anyone who was a director of, or who controlled at any time, a registered charity or RCAAA involved in a "serious breach" of the requirements for registration under the ITA and which registration was subsequently revoked. The legislation does not define "serious breach". As a result, the Canada Revenue Agency (the "CRA") has a broad administrative discretion to revoke or withhold registration in the absence of judicial or other guidance.
The policy and constitutional basis—or lack thereof—underlying these provisions has been addressed elsewhere.2 This paper will provide an introduction to the provisions themselves, discuss the CRA powers and how it is anticipated that the Charities Directorate is likely to wield them, and considers the implications arising from the ambiguity in this legislation. Finally, it will provide some practical suggestions for navigating these as yet uncharted waters.
B. INELIGIBLE INDIVIDUALS AND CRA POWERS
Where the CRA determines that an ineligible individual is a director, trustee, or officer, or that he or she otherwise controls a registered charity or RCAAA (either directly or indirectly), the penalties can be significant. The Minister is given the discretion to revoke the organization's registration or to suspend the organization's ability to issue gift receipts for donations.3 In addition, if an organization applying for registration as a charity or RCAAA includes an ineligible individual as a director, trustee or officer, the Minister has the discretion to refuse to register the charity or RCAAA.4
Though interpretation is clearly an issue, the legislation is not particularly complex. "Ineligible individuals" are essentially divided into four categories:
1. Those convicted of a "relevant criminal offence"
These individuals would include anyone convicted of a criminal offence inside or outside Canada (where, if outside, the offence would be criminal under the laws of Canada) which relates to financial dishonesty (including tax evasion, theft or fraud) or is relevant to the operation of a registered charity or RCAAA. An exception applies if the individual has been given a pardon or record suspension for the offence in question.
2. Those convicted of a "relevant offence"
These individuals are identified as anyone convicted of an offence (other than a "relevant criminal offence") within the preceding 5 years which relates to financial dishonesty or which is relevant to the operation of the registered charity or RCAAA. In other words, the legislation captures both regulatory and criminal offences. Examples of offences which relate to "financial dishonesty" include offences under charitable fundraising legislation, consumer protection legislation or securities legislation.
According to the CRA, the purpose of the "offence" provisions is to protect public resources and the charity or RCAAA itself. In the Director General's speech at the National Charity Law Symposium in 2012, she noted "the significant public investment" in the charitable sector, including the tax exemption of charities, government funding and the credits and deductions to individuals donating to such entities.5 Having an individual who has been convicted of financial dishonesty places the finances of the charity at risk and, in doing so, places the integrity of the charitable sector itself at risk. Similar concerns are raised by allowing an individual to be in a position of control if that individual has been convicted of an offence relevant to the operations of a particular charity or RCAAA. The legislation is designed to combat these concerns.
3. Those who are "promoters" of a "tax shelter"
This category includes any individual who sold, issued or promoted the sale of a tax shelter, or who acted as an agent or advisor in such a sale or promotion, that involved a registered charity or RCAAA. To fall into this category, the registration of the registered charity or RCAAA with which the promoter was involved is required to have been revoked within the preceding five years for reasons included or related to participation in the tax shelter.
The definition of "tax shelter" under the ITA is complex, but at its root it is essentially an arrangement (typically involving a promoter, a buyer and a charity) where the buyer acquires property under the arrangement and gifts that property to a registered charity or other qualified donee in circumstances where it can reasonably be considered that a certain amount represented to be deductible by the person in respect of the scheme would be greater than the cost of the investment.6 Such an arrangement is not permitted to be promoted unless it is registered.7
The CRA's desire is to prevent a registered charity or RCAAA from engaging in activities that could be considered to be a non-charitable purpose or a purpose inconsistent with its registration status in the case of an RCAAA.8 Participation in a tax shelter falls into this category and could result in a registered charity or RCAAA having its registration revoked. If so, the application of the "ineligible individual" provision would taint all individuals involved in the shelter.
4. Those involved in a "serious breach"
This includes any individual who was a director, trustee, officer or similar official of a registered charity or RCAAA, and anyone who otherwise directly or indirectly controlled or managed the registered charity or RCAAA during a period in which the charity or RCAAA engaged in conduct that could reasonably be considered to have constituted a serious breach of the requirements for registration under the ITA and for which the registration of the charity or RCAAA was revoked within the preceding five years.
This is the most ambiguous of all of the elements of the "ineligible individual" provisions and is discussed in greater detail later in this paper.
The triggering circumstance for the CRA to take disciplinary action against a registered charity or RCAAA occurs when an ineligible individual is in governance role in the organization, including occupying a position such as a director, trustee or officer, which could include senior management. However, the CRA has considerable discretion with regard to the application of the legislation and has indicated that it plans to "proceed cautiously, and on a case-by-case basis", with greater haste given to cases involving circumstances such as "tax shelters and false receipting".9 The Charities Directorate has indicated that it does not intend to peremptorily apply these provisions without providing an opportunity for the applicant, registered charity or RCAAA to address its concerns. It has also stated that there will be no requirement for charities or RCAAAs to undertake criminal records checks on all proposed directors, senior managers or those who are otherwise in a controlling position.10
However, the CRA has also stated that in circumstances where it has voiced a concern about an individual, or where an individual's background has become "public knowledge" (so as to clearly fall within a category of "ineligible individuals"), the charity will be obliged to consider the issue.11
The caution to take from this discussion is the substantial degree of discretion afforded to the CRA by these provisions to pursue registered charities or RCAAAs in the manner it thinks fit. There is nothing to prevent the CRA from taking a uniquely aggressive stance in one particular circumstance or to prevent it from conducting itself in accordance with the guidelines that have been articulated. The breadth of power arising from the ambiguity in these provisions— particularly the "serious breach" provisions—is problematic for the charitable sector in terms of compliance.
C. SERIOUS BREACH
As previously discussed, qualification under the first three headings, namely convictions for a relevant offence or relevant criminal offence, or involvement in the sale, issue or promotion of a tax shelter, is reasonably clear. The real interpretive issue is with the phrase "serious breach". The only substantive qualification is that the serious breach must have resulted in the revocation of a registered charity or RCAAA's registration. As discussed below, presumably not all instances involving revocation could be considered "serious". Although the CRA has set out the following examples as examples of what it considers to be either "serious breaches" or "serious cases of non-compliance", there is no indication from the CRA that it intends to limit itself to these examples and the list should be taken as nonexhaustive:
1. providing undue benefit to directors: this would include a benefit conferred on a director that is not incidental (that is, unnecessary, unreasonable or disproportionate to the public benefit achieved) to the achievement of a charitable purpose;
2. improper receipting: an obvious example of this would be a deliberate instance of false receipting;
3. reaching certain thresholds of non-compliance: without specifying precisely what the thresholds would be, the CRA has said that the non-compliance would be "serious" if it is serious in absolute terms (that is, the amount is significant) or relative terms, that is significant considering the limited resources of the charity or RCAAA;
4. breaching the Criminal Code or a quasi-criminal statute: examples given are fraud and hate crime;
5. breaching the core requirements of the ITA: the CRA gives the example of the requirement that the organization be established for exclusively charitable purposes and notes that this type of non-compliance will not include less significant provisions, such as those requiring charities designated as charitable organizations to concentrate on operating their own programs rather than funding other charities.
6. failing to abide by the terms of a compliance agreement: the CRA may request a registered charity or RCAAA to execute a compliance agreement after an audit revealing a problematic level of non-compliance.12
This list provides some indication of what to expect, though it does not say much more than the breach is "serious" if it is serious. This is almost precisely what the CRA says with respect to non-compliance reaching "certain thresholds". With regard to providing remuneration to directors, giving some remuneration to a director qua director is not strictly prohibited in many Canadian jurisdictions, but the line where such remuneration becomes "undue" is not clear.
Presumably a small or inadvertent misstep in abiding by the terms of a compliance agreement would not be considered a "serious" breach, though the CRA has given no comfort on this question.
Given that a large number of charities and RCAAAs have their status revoked every year for failure to file the T3010 or T2052, whether by inadvertence or ignorance, it appears unlikely that a failure to file alone could be considered a "serious breach" of the requirements for registration under the ITA. The CRA has implicitly admitted that a failure to file is lower on the scale of breaches,13 and the Director General has noted that the CRA is "primarily concerned with deliberate non-compliance".14 In most cases the failure to file is due to lack of awareness or capacity, or internal communications issues, or a failure to update contact information. The situation is typically remedied soon after the entity is notified by the CRA. It is doubtful that a director would be considered an "ineligible individual" on the basis of being a member of the board of a charity which status had been revoked for failure to file.
Additionally, there is some concern in the charities sector that "innocent" directors or officers could be "tainted" should they join a registered charity or RCAAA either before or after a serious breach of the requirements for registration of which the incoming director had no knowledge or involvement. The wording of the provision suggests that the relevant period is the period that the individual "controlled or managed, directly or indirectly" the charity or RCAAA (this interpretation has been confirmed by the CRA) but begs the question of the application of this provision to an ongoing multi-year breach of which an incoming director, or any director for that matter, has no specific knowledge.15 The statement in the Director General's speech cited above is that "[t]here are no implications for any board members who were not board members at the time of violations".16
These comments were intended to provide a measure of substance to the more ambiguous provisions regarding "ineligible individuals", but room for uncertainty remains. For this reason we set out a number of practical suggestions below that may be of assistance unless and until either the CRA or the courts provide more comprehensive guidance on the legislation.
D. PRACTICAL SUGGESTIONS
The breadth of this legislation requires that charities and RCAAAs be more diligent in ensuring that they are fully apprised of the backgrounds of those individuals who apply to become directors or otherwise occupy governance positions within the registered charity or RCAAA. We recommend a number of procedures below which could be adopted to reduce the risk which could arise from having an ineligible person in a governance role.
There are a number of possible responses depending on the registered charity or RCAAA's level of comfort with this new legislation. These range from requesting each director or senior manager to annually self-report to requesting that each director and individual in a governance position to swear an affidavit testifying that he or she does not fit within any of the possible categories of ineligible individuals.17 However, perhaps a more practical response would be to ensure that the registered charity or RCAAA establishes a policy requiring everyone in a governance or controlling position be required to provide his or her relevant background information on becoming a director or employee and thereafter to require an annual self-report updating this information. If a director or individual in a controlling position is later found to have been unforthcoming about an issue, having had such a policy in place would be helpful in demonstrating that the organization exercised due diligence and should not be subject to sanctions.
In the event that an individual provides information indicating he or she may be an ineligible individual, further information should be gathered and legal advice sought. Having a person who may be an ineligible individual on the board of a registered charity or RCAAA or in a senior governance role presents a risk which requires a careful assessment of the situation and current state of the law. For example, the CRA has indicated a willingness to allow an individual to continue to act as a director or otherwise control or manage the operations of a registered charity or RCAAA assuming that appropriate safeguards are in place and that the CRA's concerns have been addressed.18
The CRA has also indicated that it does not intend to move to revocation without providing the registered charity or RCAAA with sufficient time to respond to the CRA's concerns.19 In most cases, the appropriate response will be a request for the individual to resign. In others, it may be appropriate for the individual to remain as a director. At this stage, however, one cannot know with certainty what the CRA will require in the form of "appropriate safeguards" for action short of resignation.
If a director refuses to resign, and the registered charity or RCAAA does not feel strongly about challenging the CRA's assessment of the situation, then corporate legislation would need to be reviewed to determine the threshold and procedure for the removal of the director. It is further noted that there may be a constitutional or human rights issue with respect to the CRA's attempt to revoke or refuse registration on the basis of the character or other attributes of a volunteer or employee.
It is also important to keep in mind that if the "ineligible person" is an employee of the registered charity or RCAAA (as opposed to a director), then his or her legal entitlement to reasonable notice may complicate the matter. Reasonable notice may take the form of either actual notice or pay in lieu thereof. In addition, human rights legislation may prevent the registered charity or RCAAA from refusing to continue to employ the person because of a criminal or summary conviction offence which may or may not be related to the person's employment. This being said, given that "relevant criminal offences" and "relevant offences" both must either be "relevant to the operation of a registered charity" or related to financial dishonesty, which is arguably always related to a charity or RCAAA's operations,20 if the particular individual meets the test for being an "ineligible individual" under the offences provision, he or she may also meet the exclusionary circumstances in the human rights legislation.
Our core suggestion is to be aware and to respond promptly. Though the CRA has said that there will not be any specific requirement for registered charities or RCAAAs to obtain criminal record checks,21 the registered charity or RCAAA should still be aware of the background of the individuals who comprise its board and occupy positions of governance within the organization. A screening policy should be in place. Registered charities and RCAAAs should also be sure to respond promptly when the CRA raises concerns, as this will in all likelihood lessen the potential impact. If a director or an individual in a governance position may fit one of the ineligible individual categories, it is important to be proactive. Seek further information from the individual to ascertain the extent of the issue. If it is sufficiently serious, the individual's resignation or termination may be warranted prior to the CRA making a decision to take remedial action.
Widespread concern exists among registered charities and RCAAAs given the room for a liberal interpretation of what constitutes a "serious breach" and the Minister's associated discretion to revoke charitable status or to refuse to grant it altogether. This fear has been exacerbated by the potential for these provisions to be used in a manner interested parties may not be able to anticipate. Statements from the CRA to the effect that it will "proceed cautiously" are comforting to a certain extent, though much room for ambiguity remains.
As a result, charities and RCAAAs should themselves proceed cautiously. Directors of registered charities and RCAAAs need to be aware of these new provisions and take time to determine the most appropriate response for their organization should problems arise. At the very least a policy should be put in place requiring those in directorial and controlling positions to provide any relevant information on at least an annual basis to ensure that the CRA will be persuaded that the organization has been appropriately diligent in preventing the involvement of ineligible individuals within their organization.
It is unlikely that most charities will want a fight on its hands should the CRA find an ineligible individual on its board or in any other relevant position. As a result, the response of most charities or RCAAAs will likely be conservative, and the fallout from this legislation may involve a number of otherwise competent and useful individuals being excluded from holding senior positions in registered charities or RCAAAs that they would otherwise be suitable to occupy.
1 ITA, subsection 149.1(1) "ineligible individual."
2 Karen Cooper, "New Ineligibility Requirements for Directors, Officers and Staff of Registered Charities", 2012 National Charity Law Symposium (May 4, 2012).
3 ITA, subsection 149.1(4.1) and paragraph 188.1(2)(d).
4 ITA, subsection 149.1(25).
5 "Director General's Speech at the National Charity Law Symposium", 2012 National Charity Law Symposium (May 17, 2012).
6 Subsections 248(1) and 237.1(1) of the ITA
7 Subsection 237.1(4) of the ITA.
8 One example is the case of "Healing and Assistance not Dependence Canada": CRA document 2009- 06-08B.
9 Director General's Speech, supra note 5
12 "Safeguarding Charitable Assets through Good Governance", Canada Revenue Agency, online: < http://www.cra-arc.gc.ca/gncy/bdgt/2011/qa22-eng.html >; and "Guidelines for applying sanctions, Canada Revenue Agency, online: < http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/nwsnctns-eng.html >.
14 Director General's Speech, supra at note 5.
17 The Canadian Council of Christian Charities has prepared a sample declaration along these lines: http://www.cccc.org/news_release/114.
18 "Safeguarding Charitable Assets through Good Governance", supra at note 5.
20 Director General's Speech, supra at note 5
21 "Safeguarding Charitable Assets through Good Governance", supra at note 18.
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.