As previously discussed in Part I of this article, the June 2011 federal budget includes a proposal relating to "ineligible individuals" that gives the Canada Revenue Agency the discretion to refuse or revoke an organization's charitable status when its directors, trustees or officers are involved in specific situations, including criminal activity, charity gifting tax shelters, or involvement with a charity whose registration was revoked for serious non-compliance within the last five years. 

The budget provision sets out that that a charity's registration can only be revoked or denied:

1. After a charity or association has been notified by CRA regarding its concerns in respect of an individual; and
2. The charity fails to take adequate remedial action.
   

What is "adequate" remedial action?

If the CRA notifies a charity that one of the people who controls it is an ineligible individual, the charity must take "adequate remedial action." The CRA will presumably release guidance on what is adequate remedial action after receiving such notification.

If someone has been convicted for issuing millions of dollars of false receipts just removing the person as president of the organization but leaving the person responsible for receipting is probably not "adequate."

On the other hand if a person previously convicted of violating securities legislation is a volunteer driver for a hospital, and has no other involvement in the organization (such as receipting, signing cheques, etc), then it will probably not be a problem.

We will have to wait and see what the Charities Directorate suggests as its approach.  In most cases, I think when a charity brings this issue to the attention of the "ineligible individual," the person will probably resign quickly to avoid further discussion.

Background checks

The new provisions of the budget do not require charities to conduct any additional background checks of prospective directors/trustees. Some in the sector are concerned that it may be difficult or impossible for a charity to know whether an individual is involved in certain criminal or other unacceptable conduct. That is correct.

However the provision does not impose any new requirements for background checks. It only requires taking adequate remedial action in the unlikely event that CRA notifies your charity that an ineligible individual is involved.

In reality, many diligent charities with access to Google or other Internet search engines will have probably already done some background checks on board members, or asked them for references. For example, board members who will have access to vulnerable beneficiaries, such as children, would probably have completed a criminal background check.

Sample declaration

The Canadian Council of Christian Charities has prepared a useful, brief document for charities, titled Declaration of Not Being an Ineligible Individual. As mentioned previously, the budget has created no additional legal requirement to carry out background checks, and there is no requirement to use a form such as this. But from a practical standpoint, it may be a good idea for a charity to spend a few minutes conducting a Google search to check the background of a member, and to ask each individual to sign a declaration.

By signing a declaration form, the burden and obligation to be up-front with the organization is put on the shoulders of the person who will be taking on an important role within the organization. 

Conclusion

The confidentiality provisions of the Income Tax Act make it difficult for CRA, without this kind of a provision, to disclose such matters to a charity.  Practically, this provision is less about taking away or denying charitable status and more about the ability of CRA to be able to disclose to a charity that one of those who are involved with its leadership has been involved with serious non-compliance, without contravening the confidentiality provisions of the Income Tax Act.

One of the best messages that this proposal sends is that those who want to abuse charities may be restricted in terms of their future participation in the charitable sector.

For a more detailed discussion of these provisions of the federal budget, see "2011 Federal Budget Provisions on ‘Safeguarding Charitable Assets through Good Governance' and being an ‘ineligible individual'" at www.canadiancharitylaw.ca.

This article is for information purposes only. It is not intended to be legal advice. You should not act or abstain from acting based upon such information without first consulting a legal professional.

Mark Blumberg is a lawyer at Blumberg Segal LLP in Toronto, Ontario. Contact him at mark@blumbergs.ca or at 416-361-1982 x237. For more information, visit his websites, www.canadiancharitylaw.ca  or www.globalphilanthropy.ca