Top Ten Canadian Charity Law Compliance Issues, Part 1
By Mark Blumberg
This article is part one in a two-part series. See Part 2 here.
(May 22, 2012) A great deal has been written about legal compliance surrounding charities in Canada. Much of that material however, is highly specialized, hard to understand and sometimes esoteric. As a result, it can be extremely difficult for charities, employees and volunteers to focus in on the issues that are generally most important for charities.
A brief summary of the ten most important items charities and their boards of directors need to know about charity law in Canada is provided below.
1) CORRECT FILING OF THE T3010 REGISTERED CHARITY INFORMATION RETURN FORM
The T3010 is due six months after the charity’s year-end. Failure to file the T3010 within a few months of that date will result in a charity being deregistered and losing its charitable status, and consequently also losing its receipting privileges. It is important that Directors record the date on which their returns are due and ensure that the address the CRA has on file is current. Otherwise, CRA reminder notices may never arrive and a charity may be deregistered without any notification.
Charities must also make sure that they file the correct form and all necessary schedules and financial statements must be also be filed. For further information on the T3010 see: http://www.cra-arc.gc.ca/chrts-gvng/chrts/prtng/rtrn/menu-eng.html Also, at http://www.charityfocus.ca/EN/Pages/Home.aspx you can use the QuickPrep tool that will help in completing the T3010. The 2012 Budget gave CRA the power to suspend charity receipting for filing incomplete T3010 forms.
2) COMPLIANCE WITH THE FUNDRAISING GUIDANCE
Canadian charities must be careful to abide by their legal and ethical obligations when they conduct any fundraising activities. In 2012, CRA released its new Guidance on Fundraising by Registered Charities, found at this link: http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cgd/fndrsng-eng.html
Some of the limits on fundraising activities include any activities that are considered illegal, deceptive, or provide too much private benefit. The CRA will look at many factors including but not limited to resources devoted to fundraising relative to charitable programs; fundraising without an identifiable use or need; the charity’s fundraising expenses to fundraising revenue ratio; inappropriate purchasing or staffing practices; activities where most of the gross revenues go to contracted non-charitable parties; commission-based fundraiser remuneration; misrepresentations in fundraising solicitations or in disclosure of fundraising costs, revenues or practices; and fundraising initiatives or arrangements that are not well documented. CRA understands that all charities are different and when reviewing the fundraising activities of a charity, they will consider the size of the charity, causes with limited appeal, long-term donor development programs and whether a charity is involved with gaming activities. It is important that a charity’s fundraising program and its costs are transparent, accountable and properly disclosed to CRA and the public.
If fundraising is conducted by third parties, charities should not fall into the trap of entering what are claimed to be “standard form” or “boilerplate” fundraising agreements. CRA’s Fundraising Guidance sets out the necessary requirements for an appropriate written agreement and these guidelines should be followed.
3) PROPER ISSUANCE OF OFFICIAL DONATION RECEIPTS
Registered charities are not required to issue receipts. However, if charities decide to issue charitable receipts then they will need to ensure that every receipt issued is accurate and compliant with the requirements of the CRA. According to the CRA, when audits are conducted, it has been discovered that approximately 89 percent of registered charities are currently issuing receipts improperly. Many charities do not have all of the required elements on their receipts, or they are issuing receipts for services donated to a charity, which is inappropriate since “services” are not considered property. Some charities make the mistake of “lending their registration” to other organizations, which is also prohibited.
Even small mistakes in the form and content of a charitable tax receipt issued by a charity will be taken very seriously by the CRA. There are substantial penalties for inappropriate receipting. Here is information from CRA on “what is a gift” and receipting issues: http://www.cra-arc.gc.ca/chrts-gvng/chrts/prtng/rcpts/menu-eng.html Also, here are some CRA sample receipts: http://www.cra-arc.gc.ca/chrts-gvng/chrts/pbs/rcpts-eng.html I have a section at my website on receipting which includes a receipting kit.
4) AVOIDANCE OF ABUSIVE TAX SHELTER SCHEMES, FRAUDULENT RECEIPTING AND CHARITY SCAMS
According to the CRA, over the last eight years there have been approximately $5.7 billion dollars in donation receipts issued as part of "abusive charity gifting tax schemes." Approximately 1 percent of this amount was spent by these few registered charities on charitable activities and over 175,000 tax returns have also been filed as part of these schemes. Many of these gifting schemes involve a taxpayer receiving a higher tax receipt than the actual amount of their donation. For example, investing only $1000, but receiving a $5000 donation receipt. Over 100,000 Canadians have also filed tax returns with what CRA refers to as “fraudulent receipting.” In addition, there have been several other elaborate schemes used to abuse receipting privileges.
There are numerous types of inappropriate schemes that charities must avoid involvement with. They not only may be illegal, but also unethical, they undermine the confidence of the public in the charitable sector as a whole.
5) NON-QUALIFIED DONEES
In 2010, CRA released its Guidance “Canadian Registered Charities Carrying out Activities Outside Canada” and in 2011, released its guidance on “Using an Intermediary to Carry out a Charity's Activities within Canada.” If a Canadian charity is transferring resources to a group that is a non-qualified donee (i.e. it cannot issue official donation receipts) such as a foreign charity, or a Canadian non-for-profit in Canada that is not a registered charity, then the registered charity must be able to show that it has direction and control over the use of its resources.
Failure to maintain direction and control can result in a 105 percent penalty of the amount transferred and/or revocation of charitable status. More information about foreign activities is available at www.globalphilanthropy.ca. For charities conducting foreign activities or working with intermediaries in Canada, such charities should review the sufficiency of their direction and control.
Part 2 of this article, addressing the final five need-to-know compliance issues for charities and their boards of directors, will appear in the July issue of AFP eWire Canada.
Mark Blumberg is a partner at the law firm Blumberg Segal LLP in Toronto and works almost exclusively with Canadian nonprofits and registered charities on compliance issues. Mark is also the editor of CanadianCharityLaw.ca, a Canadian charity law website and globalphilanthropy.ca™ – a Canadian website dedicated to news about the Canadian charitable sector as well as legal and ethical issues for Canadian charities operating in Canada or abroad.
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.