TaxMatters@EY - April 2014
Charities: a CRA audit
Bob Neale, and Sharron Coombs, Toronto
Recently, the Canada Revenue Agency (CRA) released its 2014 Charities Program Update. The update comments on a number of CRA initiatives, including audits of registered charities.
Currently there are approximately 85,000 registered charities in Canada. During its most recent fiscal period, the CRA’s Compliance Division completed 799 audits, resulting in:
- 61 requiring no action
- 460 education letters
- 178 compliance agreements
- 1 penalty
- 30 revocations for cause
- 38 voluntary revocations
- 9 annulments
- 1 suspension
- 4 re-registration/pre-registration reviews
- 17 recorded as having other outcomes
The CRA’s charities website includes a description of its various audit programs. In general terms, the purpose of the audit program is to ensure the charity is compliant with its record-keeping and reporting obligations, including the issuance of donation receipts in prescribed form. In cases of non-compliance, the CRA has a number of corrective tools at its disposal, including the use of one or more of the following measures:
- Education letters: An education letter does not adversely affect a charity’s registration. The letter identifies where the charity has not complied with the Income Tax Act or CRA policy and provides guidance to the charity so that it can take the required steps to become fully compliant.
- Compliance agreements: The agreement outlines the non-compliance issues and the remedial actions that the charity has agreed to undertake. It sets out the timelines for the necessary changes, and outlines the consequences if the charity fails to abide by the agreement. Representatives of both the charity and the CRA sign the agreement.
- Sanctions: In more serious cases of non-compliance, sanctions may be imposed. Sanctions may include a temporary suspension of a charity’s tax receipting privileges and its status as a qualified donee or financial penalties. A list of sanctions can be found on the CRA’s website.
- Revocation of registration: This is generally a last resort and is used only in the most serious cases of non-compliance. In general terms, when a charity’s registration is revoked it loses its tax receipting privileges, it is no longer exempt from income tax and it must either transfer all its remaining property to an eligible donee or be subject to a revocation tax equal to the property’s fair value.
Frequent non-compliance issues
Areas of non-compliance identified during the audit process include:
- Lending registration numbers: A charity must account for all receipts issued under its name and registration number and report the corresponding donations on its annual information return and in its books and records. A registered charity should not issue donation receipts on behalf of another organization or lend its registration number. Lending one’s registration number may result in the suspension of receipting privileges and/or loss of registration status.
- Inadequate books and records: The CRA notes that inadequate books and records can range from minor oversights on the part of a charity to very serious infractions, including records that are deliberately altered, destroyed, hidden or not collected in order to conceal non-compliance. Adequate books and records will verify the donations made to a charity and to the disbursement of funds received on eligible activities.
- Inflated receipt amounts: The CRA notes that this may be an intentional or unintended result. For example, if a donation is a gift-in-kind it may be difficult to establish its fair market value. Charities should exercise caution when accepting gifts-in-kind and should not rely solely on the donor to estimate the value of a donated item. If the fair market value cannot be determined, the charity should not issue a receipt.
- Receipts with inaccurate or missing information: Inaccurate or missing information can be as simple as failing to show the donor’s address. It is important that charities be aware of the different information requirements for receipts issued for cash gifts and non-cash gifts (gifts in kind) as well as the disclosure requirements when a donor has received an advantage or benefit in return for his donation. The CRA’s website provides additional information regarding the information that must appear on an official donation receipt and sample official donation receipts.
- Abusive tax shelter gifting arrangements: Such arrangements typically promise individuals tax savings greater than their cost to participate in the scheme, thereby “profiting” from “donating” to a charity. Examples would include buy-low, donate-high schemes, gifting trust arrangements and leveraged cash donations.
The CRA encourages registered charities that may be non-compliant to approach the Charities Compliance Division and work with it to develop a compliance action plan. Recognizing that certain charities may be reluctant to initiate such discussions, it is permissible to commence the dialogue on a no-names basis.
Once the non-compliance review is complete, the CRA and the charity will develop an action plan that may require the charity to:
- Take corrective action in respect of past non-compliance, depending on the nature and severity of the non-compliance.
- Enter into a formal undertaking that identifies the areas of non-compliance and outlines the remedial actions that the charity must undertake. Such compliance agreements are negotiated on a case-by-case basis between the charity and the CRA.
- Provide a plan summarizing the actions that have been taken, and the corrective measures put in place to prevent future non-compliance.
The Department of Finance 2013 report on tax expenditures calculates the revenue forgone from the personal charitable donation tax credit and the corporate donation deduction to be in excess of $2.8 billion per year. It should be important to all to Canadians that this amount is well spent and to know that checks and balances are in place to ensure this is the case.
Whether you’re a director, a member of or a contributor to a registered charity, knowing that your charity is compliant with its tax obligations strengthens the good work that it performs.