publication date: Oct 5, 2011
author/source: Mark Blumberg
The 2011 Federal Budget released on June 6, 2011 contained a
number of provisions on charities and qualified donees which were almost
identical to the same provisions suggested in the March 2011 budget that was
not passed. Most of these provisions will have little to no impact on the
However, one section of the budget has received some
attention - the creation of a new designation called "ineligible individual." This
concept of an ineligible individual proposed in the budget will give the Charities Directorate
the discretion to
refuse to register an organization, or to suspend a registered charity from
giving out official donation receipts, or to revoke a registered charity under
What makes someone
An ineligible person is someone on the board of directors,
or a trustee, officer or equivalent official who:
Has been found guilty of a criminal offence
relating to financial dishonesty, including tax evasion, theft or fraud (in or
outside of Canada);
Has been found guilty of an offence within the
past five years relating to financial dishonesty, including offences under charitable
fundraising legislation, convictions for misrepresentation under consumer
protection legislation or under securities legislation (in or outside of
Was a member of the board of directors, a
trustee, officer or equivalent official of a charity or Canadian amateur
athletic association during a time when the organization engaged in serious
non-compliance and had its registration revoked within the past five years as a
Was a promoter of a gifting arrangement or tax
shelter that a charity or Canadian amateur athletic association was involved in
and had its registration revoked in the past five years as a result.
Once the Canada
has determined that someone is an ineligible individual and
has notified the charity of its concern about the ineligible individual, the
CRA will consider the precautions a charity takes to address these concerns.
If a charity does not take appropriate remedial action, then
it risks being denied charitable registration, getting its receipting privileges
suspended, or having its charitable status revoked. As the Department of Finance
notes in the budget, this provision does not create any new obligations on the
charity to conduct background checks on people involved with a charity.
What is the purpose
of this provision?
It appears there is a relatively small group of people who continually
abuse charities. One estimate I received from Finance is that about 500 people
are causing almost all the abuse in the sector. In some cases, these people may
control several charities, or continue to apply and obtain charitable status
regardless of CRA's lengthy efforts to deregister other charities they are
Unfortunately, this problem encompasses more than just promoters
of "abusive charity gifting tax schemes," which have issued about $6 billion
dollars worth of inappropriate receipts over the last 8 years, according to the
There are also people running "receipting mills," which
issue tax receipts without any sophisticated scheme, typically for a payment of
10% on the dollar for the receipt. These kinds of schemes allow a person to pay
$500 and receive a charitable receipt for $5000 - although they may get more
than just the receipt when CRA reviews their tax return. There are also other
schemes to issue inappropriate charitable receipts.
Does it catch other
However, it is important to point out that the misuse of
charities occurs in more areas than just receipting privileges. Charities deal
with some of the most vulnerable people in our country, including children.
For example, how would CRA handle a charitable application
from a person that has been convicted of pedophilia and has applied to open up
a summer camp for children in need? I understand that according to CRA it is
not clear that the Income Tax Act (Canada)
provides for CRA to take into
account the criminal conviction and then disclose such material to the charity
when evaluating and reviewing the charitable application. Many charities are at
risk for exploitation, and vulnerable beneficiaries are just one example.
After the implementation of these new provisions, it will be
clearer that these issues should be addressed. Improvements in the sector will
What is serious
non-compliance of a charity?
While those involved with charity generally understand
criminal offences such as fraud, they are less aware of what is "serious
non-compliance." CRA notes in Guidelines for applying the new sanctions
that serious cases of non-compliance
include those where:
reaches certain thresholds (either in absolute terms, such as the dollar value
of expenditures on non-charitable activities, or relatively, such as the
percentage of expenditures devoted to non-charitable activities);
involves breaches of the Criminal Code (such as fraud or hate crime) or
other quasi-criminal statutes;
involves breaches of the core requirements of the Income Tax Act (such
as the requirement that an organization be established for exclusively
charitable purposes, as compared to a less central provision, such as that
requiring charitable organizations to concentrate on operating their own programs,
rather than funding other charities); or
the organization is
not abiding by the terms of a compliance agreement.
When looking at this provision from an international
perspective, it appears that other countries take a much tougher stance on this
issue than the proposed legislation in Canada. For example, in New Zealand all
charitable applications must include a separate officer certification for every
trustee or director of a charity dealing with various issues, and in the UK,
various background searches and a declaration from each prospective director or
trustee are required.
This comparison illustrates that the Canadian legislation
takes a much less demanding approach and does not require that every director
provide certification. Instead of affecting over 500,000 directors of
registered charities, it will probably only affect a few hundred people.
If a charity is dissatisfied with a CRA decision to deny or
revoke its registration, it can appeal to the Federal Court of Appeal. The CRA
will be consulting with stakeholders to develop guidance for the public in
applying this new provision. The new measures will apply on or after the later
of January 1, 2012 or Royal Assent to the enacting legislation.
In Part II of this article, we will discuss what standards
and protection charities may wish to consider to respond to the possibility of
misuse of their assets or reputation.
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 email@example.com
or at 416-361-1982 x237. For more information, visit his websites, www.canadiancharitylaw.ca or www.globalphilanthropy.ca