National Charity Law Symposium
May 4, 2012
Cathy Hawara, Director General
Thank you, Terry for that kind introduction. I also want to thank you for inviting me, again, this year to the National Charity Law Symposium. This is the third year I have had the pleasure of standing before you and I’m very grateful for the opportunity this afternoon to provide you with some insight into not only what the Canada Revenue Agency (CRA) has been doing over the last year but also what will no doubt keep us busy over the year to come!
The past year has been another productive one for us. While continuing to manage and deliver our program, we finalized our Strategic Business Plan for the next three years. As a result, we now have a number of initiatives underway to improve how we manage and deliver our program, including the development of more robust communications and outreach strategies, enhancements to how we manage information, and how we display it on our website. As well, as we discussed this morning, Budget 2011 included a number of important changes to the Income Tax Act. These were meant to strengthen the integrity of the charitable sector and enhance the regulatory framework of gifts to all qualified donees. No small task for the Charities Directorate!
What I thought I would do with the time I have today is update you on our progress in implementing the Budget 2011 measures and also go over the more recent Budget 2012 proposals related to charities – while we are still in the process of developing implementation plans for the new budget measures, I think it’s important that I outline for you some of our preliminary thinking.
Now two of your earlier presenters, Robert Hayhoe and Karen Cooper, have already discussed the measures of Budget 2011, so I apologize if some of my remarks overlap with what you heard this morning. But hopefully I will be able to address some of your questions and concerns about how the CRA is implementing the changes.
The first change introduced by Budget 2011 that I’d like to talk about is the extension of the application of some of the registered charity rules to a number of other qualified donees. Generally, in order to be eligible to issue official donation receipts, “qualified donees” are now required to be on a publicly accessible list that we at the CRA maintain. I am pleased to be able to tell you that several lists have already been completed and were made available to the public on our website at the beginning of this year. These include the list of registered Canadian amateur athletic associations, or RCAAAs, recognized Canadian municipalities, prescribed universities outside Canada, and foreign charitable organizations in receipt of gifts from Her Majesty in right of Canada. This means donors can now verify whether these qualified donees are listed and can issue receipts.
We are still working to establish the lists of municipal or public bodies performing a function of government and low-cost housing corporations for the aged. Unlike the others, these last two entities will need to apply to be added to the list the CRA will maintain, in order to become or continue to be qualified donees. We are currently developing the process for these entities to make that request. During the transition period, their status as “qualified donees” remains unchanged.
Budget 2011 also tightened the rules related to an RCAAA’s purpose and function. It also removed the requirement that it be a non-profit organization, creating a separate tax-exemption for RCAAAs. Previously, an RCAAA’s primary purpose and primary function had to be the promotion of amateur athletics in Canada on a nation-wide basis. Under the new rules, its purpose and function must now be exclusively to promote amateur athletics in Canada on a nation-wide basis. However, the ITA was also amended to allow RCAAAs to carry-on related business activities, limited non-partisan political activities, and to allow for the involvement of professional athletes.
Other changes affecting RCAAAs include the authority for CRA to disclose certain information to the public, such as governing documents, names of directors, and notifications of registration or revocation. This brings them closer in line with what we can disclose about registered charities.
I’m pleased to let you know that new webpages providing RCAAAs and other listed qualified donees with specific information on how these changes affect them were published to the CRA website in January. These same webpages allow donors to verify whether an entity is a qualified donee. Also, the application to register an RCAAA, Form T1189, was updated and the revised version of the form has been available on our website since February of this year.
Finally, I can also confirm that there is no change to the RCAAA annual information return (Form T2052). We do intend to review the return, but that process is unlikely to begin before late fall or early winter.
Now I’d like to move on to another significant change of Budget 2011 which affected existing registered charities and RCAAAs. I’m referring to the new registration eligibility requirements relating to past conduct of individuals involved with an organization.
Until this year, a criminal history or past misconduct of an individual with significant influence over an organization, such as a director, was not a statutory ground for refusal of registration or for revocation of a charity or RCAAA - this, in spite of the fact that we sometimes knew that the director of one organization had also been the director of a separate organization that had its registration revoked for serious and deliberate non-compliance, such as issuing fraudulent donation receipts. These new provisions will assist us in keeping out those who seek to abuse the registration system for charities.
The Income Tax Act now gives the CRA the discretion to refuse to register or revoke the registration of an organization, or to suspend an organization’s authority to issue official donation receipts, if a member of the board of directors, a trustee, officer or equivalent official, or any individual who otherwise controls or manages the operation of the organization is considered to be an “ineligible individual,” as defined in subsection 149.1(1).
There are two categories of ineligible individuals: one covers individuals convicted of an offence; the other refers to individuals involved with an organization which was revoked in the previous five years for a serious breach of the Act or for promoting a tax shelter. Both of these raise a number of interesting operational challenges.
And the key question for both you and for us is: how will we establish if an individual is “ineligible?”
With regard to criminal history, the legislation provides that an individual is ineligible if convicted of a relevant criminal offence or a relevant offence.
At the end of the day, the result is that any conviction for an offence that involves a form of financial dishonesty will always be relevant, whether or not the offence is considered criminal. This makes a lot of sense when you consider the significant public investment in the charitable sector: registered charities are tax exempt; government funding continues to be a primary source of revenue for many registered organizations; and, of course, credits and deductions from donation receipts also represent forgone revenue for the Government of Canada. So the integrity of the system is placed at risk when people with a history of financial dishonesty are able to secure registration for their organizations.
Where an offence does not involve financial dishonesty, the determination of relevance may depend on an analysis of the specific facts of the situation. More specifically, whether the offence, if repeated by the individual, could inflict harm on the organization or its beneficiaries.
This particular aspect of the definition of “ineligible individual” – the aspect relating to a conviction of an offence – represents some new ground for the Charities Directorate. We intend to strike an appropriate balance between protecting the public interest and respecting individual privacy. We are working in consultation with our legal advisers to develop processes to apply these measures. We will also be consulting with representatives of the sector as we move forward.
With regard to individuals involved with an organization that had its status revoked for a serious breach, as I mentioned before, we are primarily concerned with deliberate non-compliance. This provision gives us discretionary authority, and our intent is to administer it in a way that strengthens our risk-based approach to compliance. A careful reading of the provision and related definitions reveals that only those individuals controlling or managing an organization at the time a serious breach of the Act was committed, when that breach resulted in revocation, will be considered ineligible individuals. There are no implications for any board members who were not board members at the time of the violations.
I want to assure you that our intent is to proceed cautiously, and on a case-by-case basis when applying these new eligibility provisions. However, there may be circumstances, such as tax shelters and false receipting cases, when we will enforce the new rules even as we continue to fully develop our processes. I am sure our ongoing concern about these issues comes as no surprise to you.
I would also add that while we recognize that many registered charities working with children or other vulnerable groups may already be requiring background checks on their officials, employees, and volunteers, not all organizations have the capacity to do so. In addition, Budget 2011 made it clear that charities were not expected to undertake background checks in order to demonstrate compliance with the new provisions. That said, there may be cases where a charity or RCAAA has been made aware of certain concerns about an individual, or where an individual’s background is or has become public knowledge. In those instances, failure to take appropriate action could result in the denial of the application for registration, suspension of receipting privileges, or revocation of registered status.
To conclude on this point, we are moving forward deliberately and prudently and will be consulting with the sector. But we are prepared to act quickly where there is serious deliberate non-compliance. I would add as well, that while our role as regulator does not extend directly to issues of governance, there is, with these new provisions, some overlap. Both the common law and relevant related statutes oblige directors to put the best interests of the organization ahead of their own (particularly in exercising their fiduciary duties), to be diligent in familiarizing themselves with all aspects of their organization, and to protect the organization’s interests and property. So, to my mind, the general thrust of these provisions are not inconsistent with existing rules.
Finally, another change introduced by Budget 2011 is the requirement to file an information return with the CRA (and this does not refer to a T3010) when a qualified donee returns donated property for which a receipt was issued. I want to point out that this new rule merely allows the CRA to reassess the donor in circumstances where a receipt has been issued and tax credits or deductions have been claimed by the donor. This is not meant to encourage or sanction the return of property to a donor. In fact, registered charities that return donated property may be found to have made a gift to a non-qualified donee, in contravention of the Income Tax Act. We are also cautioning registered charities especially to keep in mind that provincial and federal legislation, as well as common law, may affect their ability to legally return property.
Let me now turn to some of the highlights of Budget 2012 that relate to registered charities. As you know, the 2012 Budget proposes several measures related to compliance and transparency with respect to political activities carried on by registered charities and RCAAAs. Changes have also been introduced to the qualified donee provision for charitable organizations outside Canada to which Her Majesty in right of Canada has made a gift.
I should clarify at the outset that these are two separate, independent measures. We have seen some media reports that have mistakenly linked the two together – the implication being that foreign charities not operating within the “national interest of Canada”, would no longer be considered a qualified donee. I will speak to each of these changes and explain exactly what has been proposed.
First, for political activities, there is no change to the existing legislation setting out the allowable limits, which is generally 10% of resources for non-partisan political activities that further a charity’s purposes. However, a charity that funds another qualified donee for the purpose of enabling political activities would now be required to count that donation against its own 10% limit.
In addition, new intermediate sanctions will be introduced for violating the rules governing political activities and for failing to provide a complete and accurate information return. Currently, the only legislative sanction available to the Charities Directorate for dealing with non-compliance in the context of political activities is revocation. These new intermediate sanctions will give the Directorate an additional tool with which to encourage charities to comply with existing legal requirements. In the case of excessive political activity, in other words, devoting more than 10% of resources to political activity, or engaging in partisan political activity, which might involve supporting or opposing a candidate in an election, the sanction would be a 1-year suspension of receipting privileges. If a charity fails to provide a complete and accurate information return, its ability to issue official donation receipts could be suspended until the filing deficiency is corrected.
So those are the changes being proposed to the ITA itself.
Budget 2012 also proposes to increase transparency by requiring more information about political activities, including the extent to which funding from foreign sources is used to carry on political activities. In order to accomplish this task, we will be making changes to the Registered Charity Information Return (Form T3010).
- We currently ask whether the charity carried on any political activities during their fiscal period. If the answer is yes, we will now require the charity to complete a new political activities schedule.
- We already ask charities to disclose the total amounts received from foreign sources. Of that, we will now also ask the charity to enter the amount received from foreign sources for political activities.
- Next, the financial information sections of the Return (Section D for small charities and Schedule 6 for large charities), will also be slightly changed to include information about the total amount of gifts to qualified donees that were intended for political activities.
- The Qualified Donees Worksheet that is used to document gifts to QDs will also be amended to include information about gifts intended for political activities. For each such gift, charities will be required to identify the dollar amount, as well as provide a description of the political activity.
- The most significant change will be the introduction of a political activities schedule (though this might more accurately be referred to as a “re-introduction” since there was a political activities schedule in the 2002 version of the T3010 return). Three components to the schedule are contemplated:
- First, if the charity devoted resources (financial, human, or property) to political activities in the year, we will ask the charity to indicate the types of activities involved. We will also provide a list of examples for the charity to consider, including media ads, demonstrations, calls to action, social media campaigns, etc.
- In addition, we will ask the charity to explain the relationship between its political activities and its charitable purposes.
- Finally, if the charity received money from foreign sources specifically to carry on political activities, the charity will be asked to indicate:
- the amount it received;
- the nature of the political activity; and
- the country of origin of the donor (using the existing country codes contained in the Activities Outside Canada schedule)
If all goes according to plan, we hope to have the revised return available early in 2013. And that’s a quick overview of our current thinking on the T3010 changes related to increased reporting and transparency.
The Budget also announced that the Charities Directorate would be provided with additional resources to allow us to enhance our education and compliance activities in the area of political activities; I’d like to take a few moments to outline some of our plans in this area.
Let me first say that as the rules relating to political activity apply to all registered charities, our efforts in this regard will extend to the charitable sector as a whole. Secondly, our approach to increasing compliance in the sector has always focused on the entire compliance continuum. This includes education and outreach, monitoring, and then verification and audit activities. Our approach to the issue of political activities will be no different.
Some very preliminary thoughts on the issues at hand - in 2010, fewer than 500 charities reported having conducted any political activity in the year. Without having done a lot of analysis as yet, that number seems low to us. Does this mean that some charities may not understand the rules, or understand the difference between a charitable expenditure and an expenditure on political activities? That distinction can be a very fine one in some circumstances. I believe that we have an important role to play in providing charities with the information and tools that they need to understand the rules under which they must operate. That will be our focus in these early days.
We also want to take this opportunity to try different approaches to compliance, using a combination of individualized outreach and audits.
We’ll be looking to develop simple and practical self-assessment tools, to help charities better understand the rules relating to political activities. These could include a suite of examples, illustrating what is a political, as opposed to charitable, activity, as well as helpful information about how to calculate and report the expenditure. We will also ensure the content of our current program of charity information sessions and webinars is updated to include these tools. Information sessions devoted to the issue of political activity will also likely be organized, to ensure that charities have timely and ready access to the information and resources they need to comply with the rules.
We also plan on conducting more proactive monitoring of charities’ political activities and where we have concerns with what we are seeing, we will use some of our existing tools – for example, sending out an educational letter to remind charities about the rules relating to acceptable political activity.
We also intend to expand our use of restricted books and records audits. As some of you may know, we primarily use these restricted scope audits for educational purposes with newly registered charities. The objective is to make sure the charity is on the right track and has the information it needs. For the first time, we will use this approach for dealing with activities issues, specifically political activities.
These activity reviews could be initiated for a number of different reasons, including as a result of voluntary disclosures or of our own monitoring of charities. Our hope is that these reviews will accomplish a number of different objectives:
- Allow us to gather more information with respect to political activities in charities and what’s actually happening on the ground;
- Provide charities with an opportunity to better understand the rules and bring themselves into compliance with the Act.
As with other areas of our program, where there are serious concerns of non-compliance, full audits remain an important compliance tool. Where warranted, these reviews can evolve into more comprehensive audits. In the case of political activities, we would be looking at issues like partisan political activity or excessive expenditure of resources.
We are also very much aware of the attention the issue of political activity has garnered in the past few months and I can assure you that we intend to conduct ourselves with fairness, professionalism, and integrity.
For those who are interested in learning more about the rules relating to political activities and registered charities, I encourage you to view the webcast on political activities that is available on our website. I also encourage you to recommend the webcast to your clients.
Finally, I will turn now to the changes that have been proposed to the provision for charitable organizations outside Canada to which Her Majesty in right of Canada has made a gift.
In general, a donation made by a Canadian to a foreign charitable organization is not eligible for a charitable donation tax credit or deduction. However, a foreign charitable organization that receives a gift from the Government of Canada may apply to be registered as a qualified donee under the Income Tax Act. As a qualified donee, the foreign charitable organization may issue official donation receipts for gifts received from Canadian donors. In addition, a foreign charitable organization that becomes a qualified donee is eligible to receive funds from Canadian registered charities.
Budget 2012 has proposed a modification to the rules for registering foreign charitable organizations as qualified donees. The amendment would require that a foreign charitable organization applying for qualified donee status:
- has received a gift from the Government of Canada;
- meets the definition of a charitable organization in Canada; and
- pursues activities related to:
- disaster relief,
- urgent humanitarian aid, or
- other activities in the national interest of Canada.
To anticipate one of your questions, you might ask what would be considered “activities in the national interest of Canada”? Well, we will be developing guidance in consultation with our colleagues from the Department of Finance, but I can provide you with one example. There is a hospital in Germany that has treated Canadian soldiers wounded in Afghanistan. Given the important role it plays, the hospital would likely be considered to be carrying on activities in the national interest of Canada. It would also likely qualify as a charitable organization if it were resident in Canada. Therefore, if it received a gift from Her Majesty in right of Canada, it would be eligible to be listed as a qualified donee.
The Minister of National Revenue will have the discretionary authority to grant qualified donee status to a foreign charitable organization meeting these criteria, following consultation with the Minister of Finance. In the coming months, we will work closely with our colleagues from the Department of Finance to develop the necessary procedures that will need to be in place when the legislation comes into force.
So there you have my report on the Budget 2011 and 2012 measures related to registered charities and other qualified donees. As I’m sure you can imagine, 2011 was a very busy year for us and 2012 is shaping up to be the same.
I thought it was important to seize this opportunity to give you a sense of our current implementation plans for the measures related to political activity. Those plans are still very much in the preliminary stages, and hopefully we will be able to continue the dialogue as we move forward.
Thank you for your time and I hope you enjoy the remainder of the symposium.
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