On August 27, 2014, the Canada Revenue Agency ("CRA") published guidelines to the "ineligible individual" rules under the Income Tax Act. These rules provide the CRA with the discretion to refuse or revoke the registration of a "registered organization" (defined to include registered charities and registered Canadian amateur athletic associations), or to suspend its receipting privileges, based on the past actions of a director, officer, trustee, or person who controls or manages the registered organization or who made the application to obtain the organization's registered status. The CRA's authority in respect of the ineligible individual provisions of the Income Tax Act is limited to making determinations regarding the registration status of a registered organization, and does not extend to the sanctioning of the ineligible individuals themselves.
WHO IS AN "INELIGIBLE INDIVIDUAL"?
Generally, an individual is an "ineligible individual" if he or she:
- has been convicted of an offence (criminal or non-criminal) that is related to financial dishonesty or is relevant to the operation of the organization, such as fraud, forgery or the misappropriation of funds; or
- was connected to an organization whose registration was revoked for a serious breach of the registration requirements, such as the issuance of fraudulent receipts or participating in abusive gift tax shelters, and the connection is through holding a position:
-
- as a director, trustee, officer, or like official with the revoked organization;
- of control or management of the revoked organization (directly or indirectly); or
- as a promoter of the tax shelter that caused the revocation of registration.
The "ineligible individual" designation lasts for five years from the date of conviction, except in the case of a criminal offence whereby the designation remains in place until a valid pardon has been granted or a record of suspension ordered.
HOW DOES THIS AFFECT THE CHARITY?
There is nothing in the Income Tax Act that prevents an "ineligible individual" from serving a position with a registered organization (i.e. director, officer, controller or manager). For this reason, there is no process in place to allow a registered organization to obtain a pre-approval or clearance authorization from the CRA. Similarly, there is no requirement for a registered organization to disclose the involvement of an "ineligible individual" to the CRA.
If the CRA believes that an "ineligible individual" poses a risk to a registered organization's beneficiaries and/or assets, it will notify the registered organization. The registered organization will have an opportunity to respond with evidence addressing (i) whether the person is actually an "ineligible individual"; (ii) the measures the organization has in place to minimize any risk; and/or (iii) the benefits arising from the individual's contribution to the organization. In some cases, it may be difficult satisfy the CRA that risks have been mitigated without removing the individual from his or her current position within the registered organization.
The CRA will then use its discretion to refuse or revoke the registration of the registered organization, suspend its receipting privileges for one year, or take no action.
WHAT STEPS SHOULD A CHARITY TAKE?
Unless the CRA notifies a registered organization that it is considering taking action regarding an "ineligible individual", there are no steps that are required to be taken. Nonetheless, there are procedures that can be taken by the registered organizations in order to protect themselves from becoming affiliated with ineligible individuals. For example, the Income Tax Act does not require an individual to advise a registered organization of his or her status as an ineligible individual. Therefore, it may be prudent to include a provision in the registered organization's by-laws requiring all officers and directors (and the like) to disclose their status as an ineligible individual, therefore, allowing the registered organization the ability to proactively mitigate any risks that may result from becoming associated with such an individual.
The CRA's guidelines can be found at: http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cgd/cg-024-eng.html?utm_source=charities&utm_medium=eml
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.
