The Canary in the Charity Mineshaft
By Adam Aptowitzer
In our last edition our colleague Joel Sector wrote an important article regarding officer's liability under the new Canada Not For Profit Corporations Act. The article struck a chord and did its job in alerting a large number of officers of charities to potential liabilities. However, given the relative strength and activity of the CRA in enforcing the Income Tax Act, perhaps even greater attention should be paid to the CRA's recent actions in leveling a crippling fine against the President of a charity for her role in, amongst other things, signing inaccurate donation tax receipts.
In a case which we recently argued at the Tax Court of Canada (and in which we are currently awaiting a decision) the CRA has assessed penalties on the director and President of a charity who had signed receipts for donated time share weeks. As it turned out, the legal requirements to create the weeks in the relevant jurisdiction (the Turks and Caicos) were never met and so the underlying property could not be donated. The situation was perhaps unique in that the individual who signed the receipts was a lawyer who had also been involved in planning the structure which had resulted in the tax receipts. And so, part of the question which must be answered is whether, in the circumstances of this case, the individual reasonably could be expected to know that the property had never been donated.
The case will likely decide a number of open questions which affect the directors of charities (and most particularly signatories to donation tax receipts). The first is whether the provision in question (section 163.2 of the Income Tax Act) is criminal in nature or more in the nature of an administrative penalty. And if criminal is the individual entitled to Charter protections and does the matter proceed to Tax Court or go via criminal court. Fundamentally, this argument hinges on the fact that the penalty is both without a time limit and without a monetary limit. In the case we argued the penalty on the individual signatory was almost $550,000.
Once the preliminary questions are answered there are additional questions of fundamental importance to the charity sector. For example, under what circumstances could the signatory to a receipt reasonably be expected to know the receipt was inaccurate and when can one individual be responsible in law for the statements made on receipts signed by someone else. And perhaps the most impactful (which is saying quite a bit indeed) is whether there exists an ongoing responsibility for the individual signatory of a receipt to take some action if and when they realize the receipts they signed were inaccurate.
Most lawyers are well aware that the precedential value of a case may be limited by the specific facts. Indeed, the facts of this case are unique and the decision of the Court may have limited application towards other charity workers. However, the mere fact that the CRA has assessed such an onerous penalty against an individual for her work in a charity (noting especially that no bad faith has been alleged) should be enough to alert the charity community to the potential dangers this case presents.
We will advise the charity community about the results of the case when they become available and imagine that should the case be decided unfavourably for the director of the charity, significant discussions regarding the effect such a decision could have on charities will be undertaken all over the country.