Budget features challenging charity rule changes
Date: September 3, 2012
Type: Commentary
Document:

The March 2011 Budget, which is expected to be re-introduced with the Conservative victory in the May 2nd election, featured several important changes to federal regulation of charities and other organizations eligible to issue tax receipts. The changes extend the powers of the Canada Revenue Agency (CRA) in a number of areas. While the new measures will give CRA the tools to deal with potential abuses, they will also mean a lot more red tape for both organizations and the regulator.


By Peter Broder

The March 2011 Budget, which is expected to be re-introduced with the Conservative victory in the May 2nd election, featured several important changes to federal regulation of charities and other organizations  eligible to issue tax receipts.  The changes extend the powers of the Canada Revenue Agency (CRA) in a number of areas.  While the new measures will give CRA the tools to deal with potential abuses, they will also mean a lot more red tape for both organizations and the regulator.

Perhaps the most significant change is introduction of a provision mandating CRA to refuse or revoke registration or suspend tax-receipting privileges of an entity based on the past conduct of a director or like official of the organization.  The legislation allows CRA to consider directors’ records of criminal offenses involving financial dishonesty (such as tax evasion, theft or fraud) or offenses “relevant to the operation” of the organization in making regulatory decisions.  It also lets CRA consider past conduct related to non-compliance with the federal regulatory regime governing registered charities or amateur athletic associations or involvement in illicit gifting arrangements or tax shelters.

Other than under anti-terrorism legislation, CRA’s authority over charities generally relates to assessment of a group’s purposes, rather than the characteristics of those running the organization. While in the past CRA has sometimes used the nature of a group’s proposed or actual activities or information about the members of its governing body as a means of determining that it does not have bona fide and/or exclusively charitable purposes, it has never had the power to act solely on the basis of past director conduct.  The new measure will change that.

Since the Income Tax (ITA) charity registration regime relies of the common law definition of charity, which gauges the charitability of an entity based solely on its purposes, this marks a major deviation from the historic approach to federal charities regulation.  It may be a forerunner to CRA getting involved in overseeing other aspects of charities in future.  However, since jurisdiction over charities is divided between the federal and provincial governments – with operational aspects of charities regulated provincially – it is not clear that the new provision is constitutional.  The new law could result in a judicial challenge to the limits of CRA’s authority.

Even more immediately problematic is the breadth of the provision.  Although there is undoubtedly merit (not to mention wide public support) for keeping fraudsters and thieves away from charities, barring anyone who has committed an offense relevant to the organization is open-ended and could include any number of things.  The phrase “relevant to the operation of a charity or association” is not defined in the draft legislation released in March, so it will be up to CRA, as the regulator, to determine what is meant to cover.

As written, the provision potentially poses difficulties for, among others, self-help groups working with addicts or inmates.  It is also unclear how CRA will treat directors with a history of a regulatory offence violation, such as breaches of occupational health and safety rules, where the violation might pertain to the work of the organization.

The Budget documentation suggests that this measure is not intended to impose an additional due diligence requirement on entities to do background checks on potential directors.  However, in practice it is not clear how this can be avoided, since organizational bylaws may not contemplate a process for removing directors once a problem has been identified.  So it will be highly advisable for organizations to keep such people off their board in the first place.

The provisions also address other issues about which there has been growing concern among charity regulators for some time.  As some Registered Canadian Amateur Associations (RCAAAs) have been involved is donation tax shelter schemes in recent years, the Budget provisions introduce a requirement that these organizations be constituted and operate exclusively for “the promotion of amateur athletics in Canada on a nation-wide basis”.  Previously they had to have this as their primary rather than exclusive purpose.

The proposed legislation would subject RCAAAs to the same Intermediate Sanction regime that applies to registered charities under the ITA. Again, the intention behind this measure is sound, but raises capacity issues for CRA, which – apparently for resource reasons – has not made significant use of the Intermediate Sanctions since they were put in place in 2004.

A third element of changes is introduction of new rules for Qualified Donees (QDs).  QDs are entities – such as RCAAAs, Canadian governments and municipalities, as well as certain overseas charities and agencies – which are eligible to issue tax receipts even though they are not registered charities under the ITA.  The Budget contemplated that publicly accessible lists of all QDs be created, so potential donors can know what organizations are eligible to issue official tax receipts.

Also proposed was that all QDs be subject to the same receipting rules and books and record requirements as registered charities.  The measure would make QDs not adhering to these rules subject to sanctions similar to those applied to registered charities.   Without rejecting the value of creating a more seamless and transparent system for treatment of QDs, this initiative will result in a massive new area of responsibility for CRA.

Short of imposing a matching receipting system for charitable donations it isn’t clear how CRA can effectively exercise oversight of the diverse and far-flung entities currently eligible to be QDs.    Even that wouldn’t address compliance with the Books and Records provisions.  And, leaving aside issues of finding non-compliance, enforcement of sanctions against QDs raises a host of jurisdictional and other issues.

Let’s hope that, if these measures do re-appear, their nuances are a bit better thought through than they were in March.  Especially in the face of expected cutbacks to both government and the sector, this is no time of regulatory overreach.

Peter Broder is Executive Director of The Pemsel Case Foundation.  A version of this article was first published in LawNowmagazine, and can be found at http://www.lawnow.org/ . The views expressed do not necessarily reflect those of the Foundation.