Five top legal and risk management challenges of 2012

publication date: Jan 10, 2012
author/source: Terrance S. Carter
The charitable sector has been the subject of several legislative changes in 2011, so charities will want to turn their attention to new challenges ahead. The following is a brief summary of five of the top anticipated legal and risk management challenges for charities for 2012.Terry Carter photo

Anticipating CRA's new fundraising guidance

Canada Revenue Agency's ("CRA") Guidance (CPS-028): Fundraising by Registered Charities ("Guidance") is being revised. While the new Guidance is not yet available, it is likely to be released early in 2012.

The new Guidance is expected to be a significant improvement, but will be a longer document at approximately 38 pages compared to the current version's 31 pages. Given this, it will be important for charities to be familiar with the entire document, including all appendices, once it becomes publicly available. Although improved, it is anticipated that the new Guidance will still be a complex document and will therefore require careful reading.

CRA has advised that the new Guidance will not represent a new policy position but rather will provide information on current treatment of fundraising under the Income Tax Act ("ITA") and common law. It will provide general advice only and will be based on principles established by caselaw that fundraising must be simply a means to an end, rather than an end in itself. It will apply to all registered charities and to both receipted and non-receipted fundraising.

Unacceptable fundraising may result in a denial of charitable registration or, for existing registered charities, sanctions or even revocation of charitable status. Watch for the release by CRA of the new Guidance early in the 2012.

Implications of the 2011 Federal Budget concept of "ineligible individuals" for directors, officers and managers

The 2011 Federal Budget provisions entitled "Strengthening the Charitable Sector" introduce changes to the regulatory regime affecting registered charities. Of significance are the provisions rendering certain individuals ineligible to serve on the board of, or in a senior capacity within, a registered charity. 

The "ineligible individual" provisions resulted from of CRA's concerns over charitable status applications submitted by individuals previously involved with charities that had their charitable status revoked for non-compliance. The Department of Finance has introduced the concept of "ineligible individuals" to the ITA. That concept will enable CRA to withhold or revoke charitable status where "ineligible individuals" are involved in certain capacities.

Specifically, if an "ineligible individual" is a member of the board of directors, a trustee, officer or equivalent official, or any individual who otherwise controls or manages the operation of the charity, then charitable status may be refused or revoked, or authority to issue charitable receipts may be suspended. 

Unfortunately, the "ineligible individual" provisions will create another compliance burden. This screening process may become a disincentive for individuals who would like to serve on the boards of charities, and may cause difficulties in the future for charities trying to recruit new directors.

Working with intermediaries inside and outside Canada

To avoid problems when transferring funds or property to third party intermediaries inside or outside Canada that are not registered charities, CRA has released two Guidances that need to be carefully considered.

Guidance (CG-004): Using an Intermediary to Carry out a Charity's Activities within Canada ("Guidance 004") assists charities and applicants for charitable status who are intending to conduct charitable activities through an intermediary within Canada. An intermediary is defined by CRA as an individual or non-qualified donee (e.g. not a registered charity).

Guidance 004 clarifies that CRA's Guidance concerning operating outside Canada applies equally within Canada as well. In this regard, CRA earlier released Guidance (CG-002): Canadian Registered Charities Carrying Out Activities Outside Canada ("Guidance 002").

In essence, both Guidances say the same thing. There are only two means available under the ITA by which a registered charity can pursue its charitable purposes: making gifts to a qualified donee (e.g. Canadian registered charities) or carrying out its own charitable activities.

If the charity is using an intermediary to carry out its own activities, then the Guidances set out the minimum requirements that CRA expects to see in place. Essentially, charities cannot simply act as a passive funding body or conduit on behalf of a non-qualified donee. Instead, charities must direct and control the use of their own resources.

New challenges involving inter-charity transfers

New inter-charity transfer provisions came into effect as a result of reform to the disbursement quota ("DQ") in the 2010 Federal Budget. Subsection 149.1(4.1)(d) was expanded to include instances where a charity receives a gift of property from a non-arm's-length registered charity, and the recipient charity has expended an amount that is less than the fair market value of the property on charitable activities by the end of the next fiscal period.

In essence, this provision establishes a 100% expenditure requirement involving inter-charity transfers between non-arm's length registered charities.

Failing to comply with these provisions can lead to the revocation of charitable status or a penalty for the subsequent taxation year equal to 110% of the difference between the fair market value of the property and the amount expended. However, if the donor charity chooses to make the gift a "designated gift" to the non-arm's length recipient charity, the 100% expenditure requirement will not apply.

As a result, before a charity makes a transfer of anything (whether money, property, etc.) to a non-arm's-length registered charity, such as a transfer between an operating charity and a parallel foundation, it will be important to ask whether or not it will make the transfer a designated gift in order to avoid the new 100% expenditure requirement.

Reducing risks from the discipline and expulsion of members

Often charities and nonprofit organizations will want the ability to discipline or expel a member. However, they should think through what is involved and the consequences of improperly disciplining or expelling members. This issue will generally be a factor for open membership organizations.

The legal risks include, but are not limited to, possible liability for: invasion of privacy, discrimination, lack of due process, lack of natural justice, and enhanced membership rights under applicable corporate legislation.

Practical steps that may be taken to avoid such risks may include determining the necessity of disciplining members, advising applicants that granting of membership is in the sole discretion of the board of directors, ensuring discipline procedures reflect the principles of natural justice, and ensuring discipline processes are as detailed as possible and in a written policy of the organization or in its general operating by-laws.

This will be particularly important for charities that continue under either the Canada Not-for-profit Corporations Act, which came into effect on October 17, 2011, or under Ontario's Not-for-Profit Corporations Act, which will come into effect at the end of 2012. Both Acts provide for the power to discipline a member or terminate their membership, if this power and the circumstances and manner in which it will be exercised are set out in the articles or by-laws of the corporation.

For a more detailed description of the five challenges described above, see

Terrance S. Carter is the managing partner with Carters Professional Corporation, and counsel to Fasken Martineau DuMoulin LLP on charitable matters. He is a member of Canada Revenue Agency's Technical Issues Group, past member of CRA's Charities Advisory Committee, Chair of the National Charity and Not-for-Profit Section of the Canadian Bar Association, and has been recognized as a leading expert in Canada by Lexpert and Best Lawyers in Canada.

Mr. Carter is also editor of, and www.antiterrorismlaw.can and a consulting editor of Charities Legislation and Commentary 2009

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