( Disponible en anglais seulement )
On December 30, 2016, the Canada Revenue Agency (“CRA”) published its Report on the Charities Program 2015-2016 (the “Report”). Referred to by Bob Hamilton, Commissioner of the CRA, as a “means for CRA to improve its own transparency” on the regulation of charities, this is the first document of its kind released by CRA summarizing the programs and achievements of the Charities Directorate (the “Directorate”) for 2015-16 and setting out the Directorate’s future plans for regulating the charitable sector. Below is a summary of and commentary on the Report.
The Sector – Statistics and Registration
The Report provides readers with some interesting statistics about Canada’s charitable sector:
- There are 86,193 charities in Canada
- Receipted donations total $15.7B (including $2.4B in non-cash gifts)
- Over 40,000 charities operate using only volunteers
- 5,395 charitable organizations engage in foreign activities
- $3.2B was spent on foreign activities
The Report states that in 2015-16, of the 3,484 applications it received requesting charitable status, CRA granted registration to 1,670 new charities. The Report states that the primary reason for declining an application is the applicant’s failure to provide CRA with sufficient information to determine whether the proposed activities are charitable at law. This is consistent with our experience in which CRA almost always requests additional information after first processing a charitable application.
As the Directorate’s mandate is to ensure that the activities engaged in by registered charities are in fact charitable and because registered charities are provided with significant benefits (e.g., exemption from tax and the ability to issue donation receipts), organizations applying for charitable status should not be surprised when their applications are not immediately approved. CRA reviews applications for registration in considerable detail. Before applying for charitable status, a charity should have a firm idea of its activities and be prepared to provide CRA detailed descriptions of its programs. It is our recent experience that CRA now expects more detail in charitable applications than it has in the past.
Education First Approach
The Report confirms that, where appropriate, CRA will use an education-first approach when a charity under audit is found to be non-compliant. That means that CRA will look to educate charities on the rules before imposing a penalty or sanction. The Report confirms that 1% of registered charities are audited every year and that the most common reasons for audit include:
- random selection;
- complaints from the public;
- media articles and other public sources;
- information included in T3010 annual returns; and
- past non-compliance.
Depending on the size and complexity of the charity, CRA will either conduct (i) an office audit, whereby CRA examines the charity’s file, publicly available records, and some books and records at CRA offices; or (ii) a field audit, whereby CRA examines all books and records at the charity’s place of business.
Upon the conclusion of an audit, the Report confirms that CRA will issue an education letter for minor concerns, a compliance agreement for moderate concerns and, where it has serious concerns, CRA may impose an intermediate sanction or propose revocation of registration or annulment of registration. Unfortunately, the Report does not provide any insight into what CRA considers to be “minor”, “moderate”, or “serious” concerns.
The degree of non-compliance (e.g., the value of improperly issued receipts, or the extent of the inaccuracy in T3010 filings) will often determine the severity of CRA’s action. Historically, we have seen CRA issue education letters for non-compliance issues such as technical errors in T3010 filings, minor errors in the information listed on official donation receipts, and failing to provide CRA with updated governance documents. CRA has sought to have charities enter into compliance agreements for non-compliance issues such as providing funds to non-qualified donees, backdating donation receipts, and issuing donation receipts for gifts in-kind without proper appraisal of the gift. We have seen sanctions and penalties imposed for issues such as improper receipting (i.e., issuing receipts for services or secular tuition fees), failure to maintain adequate books and records, and failure to maintain direction and control over resources. Again, CRA maintains full discretion as to the intermediate sanction or final penalty proposed.
In some cases, a charity’s obligations under a compliance agreement may be negotiated, but it is important to note that, on a subsequent audit, CRA will consider whether an executed compliance agreement has been breached.
Objections and Appeals
The Report confirms the objection and appeals process for cases in which a penalty or sanction is formally imposed. Specifically, the charity has 90 days within which to file an objection with CRA’s Appeals Branch and, should the charity disagree with the decision of the Appeals Branch, it can appeal to the Federal Court of Appeal or the Tax Court of Canada within 30 days of the decision of the Appeals Branch. A charity must appeal to the Federal Court of Appeal where the Directorate has issued a Notice of refusal to register, Notice of intention to revoke, Notice of designation or Notice of annulment and to the Tax Court of Canada where the Directorate has issued either a Notice of assessment or Notice of suspension of receipting privileges.
During the period June 12, 2005 to March 31, 2016, the Report confirms that only 10 Notices of intention to revoke for cause were vacated on objection, while 100 were confirmed. Interestingly, however, where CRA imposed a revocation tax, 19 decisions were confirmed while 58 were vacated on objection.
The Report confirms the results of the 726 audits completed in 2015-16, as follows:
- 4 – Sanctions imposed
- 21 – Notices of intention to revoke registration issued
- 22 – Voluntary revocations
- 25 – Other actions taken (i.e., imposition of revocation tax)
- 40 – No action taken
- 59 – Registrations annulled
- 111 – Compliance agreements signed
- 444 – Education letters sent
The Report further confirms that the most commonly identified areas of non-compliance following audits were:
- incorrectly issued donation receipts;
- errors on T3010 Annual Returns;
- failure to keep proper books and records;
- engaging in activities that are non-charitable and/or operating for non-charitable purposes; and
- failure to file T4/T4A slips.
Additionally, the Report reveals that only 1.4% of the 1,429 charities that had their status revoked in 2015-16 incurred this sanction as a result of an audit. The most common reason that CRA revoked a charity’s status in 2015-16 was for failure to file its T3010 Annual Return. Notably, as previously reported, in the recent case of Opportunities for the Disabled Foundation v. Canada (National Revenue), the Federal Court of Appeal confirmed CRA’s position that a T3010 containing “serious” errors is considered to be a T3010 that has not been filed “as and when required” under the Income Tax Act. Accordingly, it appears that a charity’s charitable status may now be revoked on the basis of failure to file its T3010 where it has filed a T3010 containing serious errors.
Discussed below are measures the Directorate will be taking to try to curb instances of late filing/failure to file.
The Report confirms that, upon reviewing the effectiveness of its sector outreach program, the Directorate will be taking action in the following areas:
- Improving the Charities and giving webpages and online products;
- Use of social media and other electronic communications; and
- Working with the sector to increase the reach of its message.
The Report confirms that the Directorate has recently completed a post-implementation review of its arts and health guidance products which were issued in 2012 and 2013, respectively. Whether any changes will be made to these documents was not disclosed. As we do with all CRA Guidances, we will keep an eye on any new developments.
As previously reported, Minister Diane Lebouthillier announced in January 2016 that CRA would be winding down its political activities audit program. At that time, 30 audits had been completed, which resulted in five revocation decisions. The Report confirms that as of September 30, 2016, 42 audits have been completed. These additional 12 charities have been advised of CRA’s findings and have been given time to respond. Accordingly, the Report does not reveal the initial outcome of the additional audits. Twelve audits are still underway.
CRA has concluded its online and in-person consultations on the political activities rules. Now, a consultation panel, including Miller Thomson’s Susan Manwaring, will be tasked with using feedback from the consultations to make recommendations to CRA in, what the Report states to be, early 2017.
The Report confirms that the Directorate is currently working on a number of new guidance products, including updates to the following:
- Advancement of education
- Relief of poverty
- Protection of the environment
- Private benefit
- Related business
We will report on the updates to these products.
Charities are required to file their T3010 annual returns within six months of their fiscal year end. The Report confirms that late filing of annual returns is an “area of specific concern” for the Office of the Auditor General, as an internal review revealed that 1 in 4 charities do not file their annual returns on time. In an effort to encourage charities to file on time, the Report states that, beginning fall 2017, the Directorate will implement the following measures:
- filing reminders will be emailed to charities before their fiscal year end (and will continue to be emailed to charities four months after their year end, as is the current practice); and
- automated phone calls will be made to charities one month before their filing deadline (rather than two to three months after, as is the current practice).
Importantly, in order to receive email reminders, charities will need to provide their email addresses to CRA. We have found that CRA is now requiring charities seeking registration to provide a relevant email address at the application stage. For those charities already registered, an email address to which CRA will send these reminders (as well as other notifications) may be provided to CRA by contacting the Client Services Division of the Charities Directorate.
Pursuant to the Income Tax Act, CRA has the right to revoke the charitable registration of or refuse to register an organization that has one or more ineligible individuals on its board in senior management positions or in a position of control. The Report confirms that the Directorate intends to conduct an “in-depth review of the ineligible individuals issue”, in order to:
- determine the extent and impact of ineligible individuals;
- provide outreach and education to charities about ineligible individuals; and
- detect and address serious non-compliance of registered charities with ineligible individuals.
We query whether this last motive will result in an increase in the audit of charities.
Our summary of CRA’s guidance on ineligible individuals can be found here.
The Charities Modernization Project (CHAMP)
As previously reported, the 2014 Federal Budget proposed to provide the Directorate with $23M over five years to enable it to modernize its information technology. The Report confirms the following IT projects are scheduled to be completed by the end of 2018:
- launch of online application for charitable registration;
- e-filing capabilities for T3010 Annual Returns; and
- improved Charities Listings page.
The Report is a step in the right direction toward improving the transparency of the Directorate’s regulation of charities. Providing insights to the public on topics of priority to the Directorate and confirming the Directorate’s mandate to ensure compliance through proactive education is welcomed by charities and their administrators and legal/accounting services providers.
We will continue to update you as the Directorate progresses with the initiatives noted in the Report.