Why some charities lost their status in 2015.
By C. Yvonne Chenier, Q.C.
Every year the charitable registration status of a few charitable organizations, public foundations, private foundations or Canadian Amateur Athletic Associations is officially revoked by the Canada Revenue Agency (CRA). That means that the organization can no longer issue official donation receipts and is no longer eligible to receive gifts from other registered charities. With all the publicity around the audit of charities by the CRA, and with the new Canada Not-for-profit Corporations Act continuance deadline passing, I did a search on the CRA website to see if these factors affected the revocations in 2015. The results revealed a different story than what I expected.
Registration may be revoked because the organization chooses to give up its registration (revoked voluntary); does not file its annual return or does not file it on time (revoked for failure to file); fails to maintain its corporate status (revoked for other reasons); or is audited and found to be non-compliant with the requirements for registration (revoked as a result of an audit). In 2015 each of these reasons was used at least once for the approximately 1500 revocations.
Revoked voluntarily (almost 800 organizations in 2015)
An organization can apply for a voluntary revocation. This may be desirable because the organization does not want to continue operating, it has exhausted its resources, or perhaps due to an amalgamation, merger or consolidation. There are proper procedures to follow but any organization can end its own charitable status this way. In 2015 nearly 1% of the total number of registered charitable organizations chose to do so.
Revoked for failure to file (about 700 organizations in 2015)
If the organization fails to file a complete Information Return within six months of the end of its fiscal period, the CRA will take steps and the organization will eventually lose its registration. Even if just the financial statements are missing, it is not considered to be a complete return. Revocation for failure to file is usually a very distressing event for a charity and the CRA does not show any mercy for these non-files, especially after having sent out notices and demands to file over a 10 month period. The organization can reapply to CRA after paying a penalty but reregistration is not always easily obtained.
Revoked for other reasons (only 1 organization in 2015)
If it fails to maintain its corporate status its registration will be cancelled. The only one listed under this category in 2015 was Nanaimo Citizens on Patrol Society. Upon termination of its corporate status Nanaimo Citizens on Patrol Society, 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).
This is the category where one would expect to see the organizations who neglected to continue under the new Canada Not-for-profit Corporations Act maintain. Perhaps we will see many more under this category in 2016.
Revoked as a result of an audit (23 organizations in 2015)
Following an audit, the CRA may determine that the organization ceased to comply with the requirements for registration (other than failure to file). The reason given for some of the revocations in 2015 bear repeating. In most cases the CRA begins by stating that the audit “has revealed that the Organization is not complying with the requirements set out in the Income Tax Act” and then lists some of the particulars such as the ones below:
- the Organization failed to provide the necessary books and records of accounts, preventing CRA from determining whether the Organization’s resources were devoted to its charitable activities or whether any charitable activities were even undertaken.
- the Organization failed to maintain adequate books and records, provided undue benefits to the Rabbi and his family, devoted its resources on non-charitable activities, failed to comply with Regulation 3501 regarding the contents of its official donation receipts and failed to comply with subsection 149.1(14) providing a factual and complete Registered Charity Information Return (form T3010).the Organization failed to provide the CRA with its books and records for the purpose of inspection, audit or examination
- the Organization failed to devote all its resources to charitable activities carried on by the Organization
- the Organization failed to maintain adequate books and records, failed to issue receipts in accordance with the Act and/or its Regulations, conferred undue benefits, and failed to file an accurate Registered Charity Information Return (T3010).
- the Organization issued donation receipts for transactions that do not qualify as gifts, issued receipts otherwise than in accordance with the Act and its Regulations, did not devote all its resources to charitable activities, failed to maintain proper books and records and failed to file an accurate Registered Charity Information Return.
- the Organization failed to maintain proper books and records, failed to devote all of its resources to its charitable purposes and activities, issued improper donation receipts, failed to file an accurate and timely T3010 and failed to issue appropriate T4A slips.
- the Organization failed to maintain adequate books and records to support its reported revenue and expenditures, as well as to support its charitable activities. In addition, the Organization provided personal benefits to its Director and Treasurer, gifted money to a non-qualified donee, failed to issue receipts in accordance with the Act and/or its Regulations and made errors on form T3010, Registered Charity Information Return.
- the Organization failed to devote resources to charitable activities by providing an undue benefit, failed to file an information return as and when required by the Income Tax Act and/or its Regulations, and failed to maintain adequate books and records.
- the Organization failed to maintain adequate books and records, failed to issue receipts in accordance with the Income Tax Act, failed to devote its resources to charitable activities, provided undue benefits and failed to accurately file a Registered Charity Information Return (T3010).
- the Organization did not devote all its resources to charitable purposes and activities, failed to maintain proper books and records and failed to file an information return.
- the Organization failed to devote resources to charitable activities by failing to direct and control the activities of an agent and by carrying out activities outside the scope of its approved objectives; issuing receipts not in accordance with the Income Tax Act and/or its Regulations; failing to maintain adequate books and records; providing a personal benefit to a member of the Organization; and failing to file an information return as and when required by the Income Tax Act.
- the Organization has not kept proper accounting records; granted an unfair advantage to a person; did not devote all its resources to charitable purposes; issued official receipts for donations not comply with the provisions of the Act and did not provide accurate information in its T3010.
- the Organization lacks direction and control over the use of the Organization’s resources, failed to carry out its own charitable activities, failed to allocate the Organization’s resources towards its own purposes and activities, failed to maintain proper books and records and failed to file an accurate information return.
How do you keep your charitable status?
Follow some basic rules. CRA even provides a Checklist http://www.cra-arc.gc.ca/chrts-gvng/chrts/chcklsts/bscgdlns-eng.html
☐ Engage only in allowable activities.
☐ Keep adequate books and records.
☐ Issue complete and accurate donation receipts.
☐ Meet annual spending requirement (disbursement quota).
☐ File annual T3010 information return.
☐ Maintain the charity’s status as a legal entity.
☐ Inform the Charities Directorate of any changes to the charity’s mode of operation or legal structure.
One reason to avoid revocation – Revocation tax
Many directors and senior managers fail to understand that there is a consequence to any kind of revocation of charitable status, whether it is planned or forced. A charity becomes liable for revocation tax when its registration is revoked. The tax is equal to 100% of the value of the charity’s remaining assets after all debts and liabilities have been paid. There are ways to reduce the amount of revocation tax it owes but this must be approached with the utmost of caution.