Canada: The CRA's First Report On The Charities Program 2015-2016

A: Introduction

On December 30, 2016, the Canada Revenue Agency (the "CRA") released its first " Report on the Charities Program 2015-2016" (the "Report"). The Report represents an effort by the Minister of National Revenue and the Charities Directorate to increase the transparency behind the regulation of charities in Canada. The Report contains much useful information relating to the Charities Directorate –the division of the CRA that administers the charity provisions found within the Income Tax Act (Canada) (the "ITA") and which has an operating budget of approximately $29 million and approximately 250 full-time employees as at the date of the Report. Various functions performed by the Charities Directorate include:

  • Providing client service;
  • Engaging in communications and outreach;
  • Examining charity applications;
  • Processing annual returns;
  • Audit and enforcement; and
  • Policy and technical guidance

The Report discloses some useful statistics:

  • The total amount of receipted donations and non-cash gifts for 2015-2016 was $15.7 billion and $2.4 billion, respectively;
  • As of December 30, 2016, there were 86,193 registered charities in Canada; and
  • 40,000 registered charities operate using only volunteers

B: Applications to Register Charities

The Report indicates that less than half of the applicants for charitable status are ultimately registered. As such, it is crucial for organizations to ensure that they fulfill the requirements for charitable registration and prepare a proper application before submitting it to the Charities Directorate. In 2015-2016, while 3,484 organizations registered to be a charity and 326 organizations applied for re-registration, only 1,670 organizations were actually registered. Of the 2,140 not successfully registered, the reasons were because the applications were either:

  • Incomplete (1,165);
  • Abandoned (473);
  • Withdrawn (278); or
  • Turned down (84)

Applications can be turned down for numerous reasons; such as for a lack of information, failing to be established exclusively for a charitable purpose (i.e.: for the relief of poverty, the advancement of education or religion, or for some other purpose beneficial to the community), or for distributing charitable funds to non-qualified donees or inappropriately using funds for non-charitable purposes. Proper planning in advance of submitting an application for charitable registration to the Charities Directorate can help ensure an application is received on a timely basis and is ultimately successful.

C: Audits of Registered Charities

The Report also outlines the five most common concerns arising from audits of registered charities. The concerns include:

  • Incorrectly issuing donation receipts;
  • Information return errors;
  • Inadequate books and records;
  • Non-charitable purpose and/or activities; and
  • Non-filing of T4 or T4A slips

Failing to file an information return is the most common reason charitable status is revoked. Failing to file an information return does not just mean failure to physically submit the application, but also includes filing an information return that contains significant inaccuracies. Charitable organizations submitting their information returns should not only ensure the information returns are completed on-time, but should also ensure they do not contain significant inaccuracies and omissions.

Registered charities must also keep "adequate books and records" in Canada, and make them available for review by the CRA on its request. The Report indicates that audits often find that registered charities do not maintain complete books and records. Common issues include:

  • missing copies of donation receipts;
  • missing expense receipts; and/or
  • banking and accounting details that do not match the information on annual returns

Other deficiencies in books and records relate to maintaining and retaining appropriate records in accordance with corporate record-keeping requirements (letters patent/articles, by-laws, resolutions, meeting minutes, director/officer/member registers, etc.).

Among its other outreach activities, the Charities Directorate is currently developing a high-impact animated video-series to educate charities on maintaining adequate books and records, as well as educating them on gifting and receipting, fundraising, and other charity topics.

D: Consequences of Having a Charitable Registration Revoked

i. Tax and Reputational Consequences

Having a charitable designation revoked can result in numerous undesirable consequences. The principal effects of revocation include:

  • The organization cannot issue official donation tax receipts;
  • The organization does not qualify for the income tax exemption as a registered charity;
  • The organization must transfer all of its assets to an eligible donee or pay revocation tax (equal to 100% of the value of all remaining assets, after debts have been paid); and
  • The organization will not be a charity for GST/HST purposes which could affect:
    • the tax status of the organization's supplies
    • the way the organization calculates its net tax
    • the organization's ability to claim a rebate for GST/HST;
  • The organization will have its name and the reason for revocation published in the Canada Gazette and in the Charities Listings

If the organization uses its remaining assets for its charitableactivities or transfers them to an eligible donee before it is too late (i.e.: during the period the organization is winding-up its operations), the revocation tax may be zero.

The CRA can also annul an organization's registered charity status. Annulment is sometimes sought by a charity that the CRA proposes to deregister, as a way of avoiding the revocation tax. Receipts issued prior to an annulment continue to be valid if they were valid when issued.

ii. Liabilities of Directors and Officers of Incorporated Charities

As a matter of general corporate law, directors and potentially officers who breach their duties to a corporation are liable to the corporation for any loss the corporation suffers as a result. With respect to income tax law, directors of registered charities may be personally liable if the charity fails to comply with the many reporting requirements under the ITA, such as, the requirement to file annual charity information returns.

iii. Ineligible Individuals

Individuals connected to the organization whose registration was revoked could be considered "ineligible individuals" for the purposes of re-registration. An "ineligible individual" is a person who, among other things, was connected to an organization whose registration was revoked for a serious breach of the requirements for registration and the connection was as a:

  • a director, trustee, officer, or like official;
  • an individual in a position of management or control; or
  • a promoter of a tax shelter, and participating in that tax shelter caused the revocation of an organization's registration

The ITA does not prohibit ineligible individuals from being a director or employee. However, the ITA allows the CRA to consider whether or not to take action in relation to a registered organization or an applicant in such circumstances. The following table summarizes actions the CRA may take against ineligible individuals:

The ineligible individual... The CRA may...
Made the application for the organization Refuse to register
Is a director, trustee, officer, or like official of the organization Refuse to register / suspend receipting privileges for 1 year / revoke registration
Controls or manages the organization Refuse to register / suspend receipting privileges for 1 year / revoke registration

E: Conclusion

As noted in the Report, charities play an essential role in our society by working for the social well-being of Canadians and delivering key programs, often to those in most need. It would be prudent for organizations to consider the information provided in the Report so they do not fall afoul of the various requirements that come with becoming and being a registered charity. If in doubt, lawyers who practice in this area can assist charities in registration and with ongoing compliance.

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