Maintaining Charitable Status
The charitable and not-for-profit sector clearly plays an important role in Canadian society in fields as diverse as education, health care and research, arts and culture, social services, the environment, sports, and international development. There are more than 85,000 registered charities in the country. The sector employs more than two million Canadians and makes a significant contribution to the GDP of the country. It would be difficult to imagine what our lives would be like without the services provided by charities and not-for-profit organizations.
Because of the significant tax advantages associated with charitable giving, registered charities are monitored closely by CRA. The old 80% "disbursement quota," which was eliminated in 2010, provided a specific target for charities in the past, as does the continuing requirement to spend 3.5% of capital on charitable activities. However, the first test in the definition of "charitable organization" in the Income Tax Act is the requirement that "all of the resources... are devoted to charitable activities carried on by the organization itself." This provides CRA with a strong mandate for monitoring this sector, even without the disbursement quotas.
It is interesting to note that in the past year (June 2011 to May 2012) fifty-one charities had their status revoked by CRA following audits. This is encouraging news as it is a very small percentage of the total sector. The list of charities that had their status revoked is available on the CRA website in the Charities Listing section, along with reasons for revocation. A common theme emerges upon reading the summary of reasons - it is only very serious offenders that lose their charitable status. The following is a list of some of the recurring reasons:
- Failure to keep adequate books and records to allow CRA to verify revenue and expenses, and to support charitable expenditures
- Participation in donation tax shelter arrangements
- Failure to substantiate the values recorded on donation receipts, or in one case, that the property even existed and was transferred to the charity
- Failure to file the charity annual information return
- Use of charity assets for the personal benefit of one of the directors
- Excessive payments to non-qualified donees
- Loss of corporate status
In the 2012 federal budget, the Minister announced a penalty for promoters of donation tax shelter arrangements. In addition, there have been many successful challenges in the courts of tax shelter arrangements using charities. This is welcome news for the sector, as these arrangements taint the good name of the sector and may lead to further revocations.
In addition, the 2012 budget indicated that they will in the future be paying more attention to political activities carried on by charities, and donations from foreign sources. A charity is allowed to engage in political activity as long as the activity represents a limited portion of its resources, is partisan, and incidental and ancillary to the purposes and activities of the charity. A couple of the charities whose status was revoked in the past year were found to be contributing to organizations typically associated with offshore terrorist activities. It would be interesting to determine if this influenced these proposals.
While the threat of revocation always lingers, for those charities that operate in the true spirit and intent of the legislation and manage their resources with care, the risks are quite low.
Judy Moore, CA is a Tax Partner in the Toronto office of Collins Barrow.
Information is current to June 27, 2012. The information contained in this release is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.