One of the questions that directors ask (or should ask) prior to taking on the role is the extent to which they may be personally liable for the debts of a charity. Directors almost never ask about the personal liabilities which could arise should the charity be revoked. And, while there are certainly fewer potential risks, from a policy perspective that might not be a good thing.
When a charity receives a NIR it begins a winding up period and a new taxation year. The now (almost) revoked charity also becomes liable for a tax equal to its assets less its liabilities. The amount of the tax can be reduced by expenditures on charitable activities and contributions to other eligible donees.
One often overlooked provision in the Income Tax Act deals with the shared liability that recipients of funds from organizations in this winding up period may have. Typically an organization will transfer funds to an eligible donee to reduce the taxes owing and then proceed with closing the charity; but there are cases where the organization continues to carry on its activities during the winding up period before the revocation is finalized. This may include payments for consideration or typical payments in the course of its charitable activities. Because of the shared liability provisions the CRA can pursue the recipient for repayment of the funds. Technically, this can go so far as to include situations where the recipient has in fact provided goods or services for payment.
Take for example, the circumstance where the organization had an ongoing contract with an advertising agency to provide marketing materials for the charity. As soon as the charity receives the NIR the advertising agency is actually liable to pay to the CRA all the amounts received by it from the charity since the time that the NRI is sent. Surely, this is an inappropriate overreach.
It is old law that governments have a role to play in protecting charitable property. And so it is understandable why the law was drafted so the CRA may go and pursue the repayment of their revocation tax from organizations and individuals that received funds for which charitable receipts were originally issued. Aside from the point that the role of protecting charitable property is actually a provincial jurisdiction there is a fundamental problem in the design of the provision.
From a practical perspective, the difficulty is that the recipient of the funds may simply not know have done anything offensive to ‘earn’ the liability and may not even know of the danger. (The CRA may in fact realize this as we have never actually seen this provision enforced). The NIR is not sent to those whom the charity owes money and it can be some time after that that the CRA website is updated to indicate the organization’s new status. Even then one can hardly expect that those providing services to charities must check the organization’s status before accepting payment.
We should also point out that the payment of funds by the now revoked charity for services provided to it may be entirely proper. For example, an organization that has received its NIR must still provide the CRA with financial statements relating to its winding up and it may need the services of an accounting firm to do so. Even though this expenditure is not related directly to the charitable activities it is an entirely proper expense and not deserving of shared liability for the revocation tax between the service providers and the organization.
A more appropriate requirement would be that the directors be personally liable only for the improper direction of funds belonging to the now revoked charity to other sources. For example, if the directors are paying funds to complete the charity’s obligations, one should not expect that there be any liability on anyone. On the other hand, if the directors improperly direct that the funds be transferred to say an offshore organization or to partisan political purposes then it is the director’s who should repay the funds.
Notwithstanding the constitutional problems with federal regulation of the charitable sector it is only a matter of time before the Minister of Finance recognizes the gap in the law that currently exists and moves to fix it. In the meantime, those who accept funds from charities should make themselves comfortable with the prospect of shared liability for the payment of funds. To our knowledge, the provision has not until now been used by the CRA and one would hope would not be used where the charity purchases goods for services for fair consideration in order to carry on the activities of the organization during the winding up period. Nevertheless, the law is on the books and given the current atmosphere of vigilance it pays to stay informed.