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New "Due Diligence" Requirements Overly Burdensome for Charities

(Oct. 31, 2005) New provisions issued by the Department of Finance are overly burdensome to charities and can place them in jeopardy.

The proposal is subsection 248(40) of the July 18, 2005, draft legislation released by the Department of Finance. It would require that for any contribution of $5,000 or more, charities must make 'reasonable' inquiries regarding advantages received by the donor, tax shelters, intended use of the gift and other matters. Unfortunately, the definition of 'reasonable' is not defined in the proposal, and charities could face financial penalties if they fail to live up the requirement.

AFP is asking Canadian members to write to the department and request that it modify the proposal to place less of a burden on the charitable sector that simply does not have the resources, knowledge or training to fulfill the mandate.

Beyond Existing Resources, Training

One of AFP's key concerns with the proposal is that it requires charities to engage in activities and practices for which they are not trained and about which they have little knowledge and resources. As AFP noted in its letter to the Department of Finance:

'Employees of charities are trained to perform a variety of functions related to receiving gifts, administering gifts, providing programs and any number of tasks related to their mission. The requirements and questions included in subsection 248(40) are outside the realm of charities and their missions and will only force them to spend more resources on administration and less on programs.'

It is highly likely that the requirements will do little to prevent fraud or abuse. Donors who wish to take advantage of giving incentives will simply answer in the appropriate way, and charities will have little or no way of verifying whether these answers are correct or not.

Harmful to Charity-Donor Relationship

What is most damaging about the proposal, however, is that it introduces an adversarial relationship between the donor and the charity. Charities work to cultivate donors and build relationships with them, but the requirements contradict such relationship building. Iindeed, they mandate that a charity question a donor's intention when he or she is supporting the charity at a significant level ($5,000).

In its submission, AFP argued that charities should not be required to perform these duties and that they should fall into the province of charity regulators. The association agrees with a proposal by the Canadian Association of Gift Planners to create a section on the T1 Personal Income Tax Return whereby donors filing and claming credits in excess of a minimum amount are required to respond to a specific list of questions. These queries would focus on the value of the property gifted or whether an advantage was received.

A copy of AFP's submission to the Department of Finance can be found below in the "Attachments" section.

Your Action Needed

AFP encourages members to contact the Department of Finance and urge it to reconsider this proposal. A sample letter is provided below to assist you, but members are encouraged to personalize and rewrite the letter as much as possible.


Business, Property and Personal Income 140 O'Connor Street Ottawa, ON K1A 0G5

Attention: Tax Legislation Division

Dear Sir or Madam:

RE: July 18, 2005, Draft Legislation and Subsection 248(40)

I am writing to express my strong concerns with the requirements of charities laid out in new subsection 248(40) included in the July 18, 2005, draft legislation released by the Department of Finance. This subsection requires charities to ask donors certain questions related to advantages received, tax shelters, intended use of gifts and other issues if they contribute more than $5,000.

As the TITLE for the NAME OF CHARITY in CITY/PROVINCE, I can tell you that my organization, with its limited staff and budget, would be forced to divert resources in order to meet these requirements. In addition, we would have any way of verifying what people told us, and none of my staff have been trained or know how to determine if a person is telling us incorrect information.

However, I am most concerned about the proposal because it puts me, and my organization, in the very awkward position of having to question our most dedicated supporters about their intentions and integrity. In many cases, we have spent years building relationships with these individuals. Most people do not simply decide one day to give $5,000 to a charity they do not know. I believe that many of these donors would be quite angry or insulted if we, the charity they are supporting, start asking them these questions, even if we explain it is a federal requirement.

To me, this requirement is exactly why we have a regulatory body such as the Canadian Revenue Agency, which could perhaps use the T1 Personal Income Tax Return as a vehicle for asking these sorts of questions.

Charities now face enough challenges without having to openly question their donors and engage in activities for which they are not trained. Please reconsider subsection 248(40).

Thank you for your time and attention in this matter.



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