In the legal profession, we know what to do if we have made a mistake. Those that regulate us (Law Societies across the country) remind us about our professional obligations, how to control the damage and the importance of seeking help as soon as a mistake is discovered. So, what do we advise our non-profit and registered charity clients when they tell us they have made a mistake, or more commonly, when we have found through our review of their organization that they have made a mistake involving the provisions of the Income Tax Act ?
Upon reflection I have found that if our client is a non-profit organization our advice is like telling them to go to a confessional, confess their wrongdoings, do the penance doled out and then they will be absolved of their sins. However, if the client is a registered charity, our advice is more like sending them to sit on Santa’s knee and say they have been good most of the year but have done a few bad things. One can only hope that that Santa will only remember the good things when the time comes for the presents. But there are no guarantees.
I make this observation, because it describes the difference between going to the CRA as a non-profit organization to take advantage of the Voluntary Disclosure Program (“VDP”)[1] and what is available for registered charities who want to come clean with the CRA Charities Directorate about something that could affect their coveted registered charity status. There is no VDP for registered charities in this situation. Any registered charity can search the CRA Charities Directorate website for “voluntary disclosure” and will only stumble across “voluntary compliance” in the Charities and Giving A-Z index of topics listed under resources for registered charities. There one finds information about “bringing charities back into compliance” (“BCBIC”).[2] The Voluntary Disclosure Program provides pages of information for a taxpayer to review, but for a registered charity, the BCBIC is a one-pager about approaching the CRA Charities Directorate and correcting compliance issues. No further information is provided to make anyone feel that there is any structure around the process.
The CRA has been made aware of this difference through the efforts of the Canadian Bar Association and indeed, a submission was made when the CRA asked for comments on proposed changes to the Voluntary Disclosure Program. For those of us who advise non-profits and registered charities there is a desire to have a structure for BCBIC as well as VDP, so that similar comfort levels could be achieved in any kind of disclosure. The Voluntary Disclosure Program is in fact changing effective March 1st, 2018, to narrow the eligibility criteria to access the VDP and impose additional conditions on applicants making it more difficult for those who intentionally avoid their tax obligations to benefit from the VDP.[3] However, not much will change for non-profit organizations and there is nothing in the changes revealed to date that will affect registered charities.
Non-profit organizations that are not registered charities may consider the Voluntary Disclosure Program when it is discovered that they have failed to file correct returns if required of them under the Income Tax Act. These returns could either be T2 returns or T1044 returns or both depending on what kind of assets and income the non-profit actually has. As the website says, the VDP gives a second chance to change a tax return previously filed or to file a return that should have been filed. At the end of the process, the CRA, under the Voluntary Disclosure Program, can grant relief from prosecution or from paying penalties. For example if the non-profit organization has to file a T1044 information return and fails to do so on time, the basic penalty is $25 a day to a maximum of $2,500 for each failure to file.[4] It is worthwhile to get this waived.
However, in the case of charities taking advantage of the BCBIC when registered charity status could be in jeopardy, the process and outcome is not so clear and does not come with the same kind of comfort. As the BCBIC website says, you need to “begin discussions” with the CRA Charities Directorate and provide all sorts of information in writing. There is no specific form like there is with the VDP. The charity will need to zero in on the instance of non-compliance with the following information:
- a complete and accurate description of the non-compliance including:
- the duration and extent of the charity’s involvement;
- the amount of resources involved – this includes financial, physical, and human resources; and
- an explanation of how the non-compliance arose. [5]
Some comfort can be taken that at this time (unlike the changes that will be in effect for the VDP after March 1, 2018) a charity or its advisor can still contact the CRA Charities Directorate with this information on a no-name basis.
Unlike the Voluntary Disclosure Program, correcting non-compliance is not as certain for BCBIC. The webpage simply states a few options that the CRA may consider to enforce compliance by a registered charity. However, the CRA clearly says on that same page that there are some situations that are too serious to enable a charity to maintain its registered status after the CRA becomes aware of some compliance issues.[6] There is no exhaustive list so a registered charity will not know in advance if a situation is serious or not.
Perhaps registered charities can get some help by reviewing the list of reasons that charities have been stripped of their charitable status in the past upon the CRA discovering certain things in an audit or by other ways they have of finding out this information. In 2017 the CRA revoked the charitable status of organizations ranging from private family foundations to public charities for the following reasons (this is just a sampling):
- did not devote all of its resources to charitable purposes and activities.
- did not maintain adequate accounting records
- did not retain adequate books and records
- conferred unacceptable and non-ancillary benefits of private interest
- issued receipts that were not in compliance with the provisions of the Act and its Regulations
- produced inaccurate information returns
- provided personal benefits to its employees
- gifted to non-qualified donees
- failed to file the T3010 Registered Charity Information Return in prescribed form
- not devoting all of its resources to its own charitable activities
- failing to properly demonstrate that individuals it was providing financial assistance to qualified as beneficiaries in the charitable sense
- gifting resources to a non-qualified donees
- providing undue benefits to directors,
- provided a private benefit to its president
- issued official receipts for income tax purposes that were not in accordance with the Act
- demonstrated a lack of direction and control
- delivered non-incidental private benefits
- lacked direction and control over the use of resources
- failed to carry out its own charitable activities.
- did not devote all its resources to charitable purposes and activities
- failed to demonstrate that it was constituted for charitable purposes
- failed to demonstrate that it devoted its resources to charitable activities carried on by itself
- issued a receipt for a gift or donation on behalf of a non-qualified donee
- failed to provide the books and records necessary to conduct our audit
- not complying with the requirements set out in the Income Tax Act
- no longer meets the requirements necessary for charitable registration
- failed to devote its resources to its own charitable activities
- failed to provide adequate documentation to demonstrate on-going and active direction and control over funds purportedly sent to carry out its activities outside of Canada
- failed to file an accurate information return
- did not devote its resources to charitable activities that it carried on itself
- provided funds to non-qualified donees
- conducted non-charitable activities
- conducted non-incidental and ancillary political activities
- conducted partisan political activities
- failed to maintain proper donation receipts
- inaccurately completed its charity return.
- Upon termination of its corporate status the Organization ceased to exist as an entity at law and as such no longer qualifies for registration as a charity under the Income Tax Act, subsection 248(1).
As the CRA would say and has said as it revoked charitable status for defalcations and other misdeeds described above “for all of these reasons, and for each reason alone, it is the position of the CRA that the Organization no longer meets the requirements necessary for charitable registration and should be revoked in the manner described in subsection 168(1) of the Act.” (Emphasis added).
Conclusion
Non-profit organizations that find they have done something wrong should go ahead and review the possibility of taking the steps and finalizing the process under the VDP. Registered charities that have done something on the list above or have done something else wrong could consider approaching the Charities Directorate, before CRA makes the first move. However, as the message on the Charities Directorate website indicates for the BCBIC, there are no guarantees. So as they say, proceed at your own risk.
[1] https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/voluntary-disclosures-program-overview.html
[2] https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/compliance-audits/bringing-charities-back-into-compliance.html
[3] https://www.canada.ca/en/revenue-agency/news/2017/12/backgrounder_-_voluntarydisclosuresprogram.html
[4] https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4117/income-tax-guide-non-profit-organization-information-return.html
[5] https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/compliance-audits/bringing-charities-back-into-compliance.html
[6] ibid