Changes to Charity Rules
Adam Aptowitzer, January 30, 2006
The advent of 2006 will bring with it the fulfillment of several proposed changes that affect charities and which have been promised or in the planning stages for some time. Considering that the Charities Directorate is more determined and more capable than ever to be an effective enforcer of the law it is important for charities to have a basic idea of the changes in store for them. Here are the five changes charities should keep in mind as we begin the New Year.
1) Changes to Receipts
In addition to the information required on charitable receipts prior to 2005, receipts issued after the beginning of 2005 are also required to show
The “Canada Revenue Agency” and “http://www.cra-arc.gc.ca/charities”. The new development for 2006 is that while the CRA has stated they will not penalize charities for not including the information for receipts issued in 2005, they “expect” charities to conform to the new regulations by January 1, 2006.
2) Intermediate Sanctions
Before the passing of Bill C-33 last year, the CRA’s sole punishment for a charity that broke the rules was deregistration. As the penalty was too draconian for anything but the most severe infractions it was rarely imposed by the CRA. Bill C-33 implemented a variety of lesser penalties for infractions (although deregistration still remains an option of the CRA). This year will likely see the first impositions of these penalties. Below is a chart of the new penalties.
3) New Tax Dispute Resolution Mechanism
Starting in June 2005, (although practically speaking 2006 will likely see the first cases), the tax dispute resolution mechanism for individuals and corporations will apply to charities.
The process of levying a penalty will likely begin with an audit of the charity. Where the CRA sees fit to levy a penalty, the charity will receive an official Notice of Assessment. If the charity objects, it will have 90 days to file a Notice of Objection with the CRA. In the normal course, the CRA will assign the file to an internal ‘Appeals Officer’ who will review the CRA’s position in light of any submissions made by the charity and included with its Notice of Objection. If the charity disagrees with the Appeals Officer’s decision, it will have 90 days to file a Notice of Appeal in the Tax Court of Canada. Appeals from the Tax Court go to the Federal Court of Appeal. Questions of registration/deregistration or annulment go straight to the Federal Court of Appeal.
The imposition of a new deadline schedule on charities, a group otherwise unaccustomed to dealing with this dispute resolution mechanism, is bound to lead to confusion and missed deadlines. Fortunately, there are mechanisms that allow a charity to file beyond the deadline under certain circumstances. The imposition of these penalties is new for both the CRA and charities and therefore it is critical for charities going through the process to have a professional legal advisor from the audit stage through the Tax Court and Federal Court of Appeal level.
4) Disbursement Quota Changes
The disbursement quota is a complicated calculation that stipulates how much each charity must spend on their charitable objects in a year. In 2005, the government passed changes to the disbursement quota that, among other things, further complicated the calculation and dealt with donations of ten year gifts, the definition of ‘enduring property’, and transfers between charities. As a charity’s spending requirements for 2006 are based on amounts collected in 2005, this year will see the first impact of the changes in 2005. Given that it still lies with the CRA to deregister a charity that fails to disburse its quota, charities should speak with a qualified professional advisor to ensure that they have properly calculated the quota with the new changes.
5) Possible Implementation of Proposed Changes
There are a variety of changes that the Liberal governments tabled in 2005 and preceding years, which are waiting official passage into law. Many of these relate to the use of tax shelters as a way to provide increased donation credits for donated dollars. The CRA policy is to begin enforcement of these provisions from the date of their announcement (when passed they are usually passed retroactive to their date of announcement). However, with the change in government it is possible that some of these provisions will not become law. The more cynical among us may argue that as there is no real difference between the Conservatives and Liberals on these issues, we will see the Conservatives pass the majority if not all of the provisions. However, if this analysis is wrong, we may see the entire sector thrown into disarray before the end of the year.