Government sues charity for repayment of funds advanced under contribution agreement

December 17, 2013 | Natasha Smith

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 funding.

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 recipient charity.

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 reasonable times.

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.

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