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 average charity.

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 certain circumstances.

What makes someone ineligible?

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 Canada);
• 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 result; or
• 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 Revenue Agency 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 involved with.

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 federal government.

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 offenders?

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 hopefully result.

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:

• the non-compliance 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);
• the non-compliance involves breaches of the Criminal Code (such as fraud or hate crime) or other quasi-criminal statutes;
• the non-compliance 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.
  

Conclusion

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 mark@blumbergs.ca or at 416-361-1982 x237. For more information, visit his websites, www.canadiancharitylaw.ca  or www.globalphilanthropy.ca