Board Bulletin NOT-FOR-PROFIT ORGANIZATIONS

Transcription

1 NOT-FOR-PROFIT ORGANIZATIONS Board Bulletin February 2013 The new ineligible individual provisions considerations for directors of registered charities and Registered Canadian Amateur Athletic Associations Author: Margaret H. Mason Are you a director of a registered charity or an rcaaa? If so, do you know that the canada revenue agency can revoke the registration of a registered charity with an ineligible individual on its board or in a controlling position? Introduction The Income Tax Act 1 (the ITA ) provides the Minister of National Revenue (the Minister ) with the power to revoke a registered charity or Registered Canadian Amateur Athletic Associations ( RCAAAs ) registration, or to prevent an entity from acquiring such status, if any ineligible individuals are found to have sufficient control over the existing or proposed charity or RCAAA 2,3. 1 R.S.C., 1985, c. 1 (5th Supp.). 2 ITA, subsection 149.1(1) ineligible individual. 3 This alert will limit itself to a consideration of the application of the provisions to charities. 1

2 The definition of the ineligible individual is broad and catches not only individuals convicted of offences relating to financial dishonesty, but also anyone who was a director of, or controlled at any time, a registered charity or RCAAA involved in a serious breach of the requirements for registration under the ITA and whose registration was subsequently revoked. The legislation does not define what would constitute a serious breach. This gives the Canada Revenue Agency (the CRA ) a broad administrative discretion to revoke or withhold registration as it sees fit. Though the Charities Directorate of the CRA has indicated that it does not intend to peremptorily apply these provisions without providing an opportunity for the applicant, registered charity or RCAAA to address the concerns, the breadth of the provisions require Boards to be diligent in ensuring that they are apprised of the backgrounds of those individuals who are applying to become directors or to otherwise occupy positions of control within the charity or RCAAA, and it is recommended that a policy be put in place with regard to requesting relevant background information from all such individuals. Action Items Know who is on your board have a screening policy in place with regard to requesting background information Be aware these provisions could also apply to senior managers/employees Respond promptly if notified by the CRA that there is a concern with a certain individual, take immediate steps to deal with the request Be proactive if a director or an individual in a controlling position may fit one of the ineligible individual categories, seek further information from the individual to ascertain the extent of the issue. If the situation is serious it may be best to request that the individual resign Consult a legal advisor if an issue with a potential ineligible individual presents itself and you are unsure how to respond, contact a legal advisor and request advice The Canada Revenue Agency If the CRA determines that an ineligible individual is a director, trustee, officer or otherwise controls a registered charity or RCAAA directly or indirectly, the Minister has the discretion to revoke the entity s registration. 4 In addition, if an entity applying for registration as a charity or RCAAA includes an ineligible individual as a director, trustee or officer, the Minister has the discretion to refuse to register the charity or RCAAA. 5 The CRA has indicated that there is no requirement for charities or RCAAAs to undertake criminal records checks on all proposed directors, senior managers or those who otherwise control a charity. However, the CRA has also stated that in circumstances where the CRA has voiced a concern about an individual, or where an individual s background has become 4 ITA, subsection 149.1(4.1). 5 ITA, subsection 149.1(25). February 2013 Board Bulletin 2

3 public knowledge (so as to clearly fall within a category of ineligible individuals ), the charity is obliged to consider the issue. According to the CRA, a failure to take appropriate action could result in a number of responses ranging from revocation or denial of a charity s registration to the suspension of receipting privileges. 6 The CRA has indicated that it plans to proceed cautiously, and on a case-by-case basis in the application of the provisions above, with greater haste given to cases involving circumstances such as tax shelters and false receipting. 7 That said, the provisions are broadly drafted and certainly provide the CRA with a substantial degree of discretion to choose to pursue charities in any manner it thinks fit. Ineligible Individuals Ineligible individuals are divided into four categories as follows: Conviction for a relevant criminal offence : Any individual convicted of a criminal offence: inside or outside Canada (where, if outside, the offence would be criminal under the laws of Canada) which relates to financial dishonesty (including tax evasion, theft or fraud), or is relevant to the operation of a registered charity or RCAAA provided that if the individual has been given a pardon or record suspension for the offence in question an exception applies Conviction for a relevant offence : Any individual convicted of any offence: inside or outside Canada (where, if outside, the offence would be an offence under the laws of Canada or a province) within the preceding five years which relates to financial dishonesty (e.g. offences under charitable fundraising legislation, consumer protection legislation or securities legislation), or is relevant to the operation of a registered charity or RCAAA Tax shelter: Any individual who sold, issued or promoted the sale of a tax shelter, or who acted as an agent or advisor in such a sale or promotion: that involved a registered charity or RCAAA, and the registration of the registered charity or RCAAA was revoked within the preceding five years for reasons included or related to participation in the tax shelter Serious breach: Any individual who was a director, trustee, officer or similar official of a registered charity or RCAAA, or otherwise directly or indirectly controlled or managed the registered charity or RCAAA: during a period in which the charity or RCAAA engaged in conduct that could reasonably be considered to have constituted a serious breach of the requirements for registration under the ITA and for which the registration of the charity or CAAA was revoked within the preceding five years 6 Hawara, Cathy. Director General s Speech at the National Charity Law Symposium. National Charity Law Symposium. Toronto, Ontario, 17 May Ibid. February 2013 Board Bulletin 3

4 Questions for Directors to Ask 1. Does a director or senior manager have a criminal record or otherwise been convicted of an offence that either relates to financial dishonesty or is relevant to the operation of a charity or RCAAA? 2. Has a director or senior manager ever been involved with the promotion or sale of a tax shelter which resulted in the revocation of a charity s registration? Serious Breach The only qualification on the definition of serious breach is that it must have resulted in the revocation of a registered charity or RCAAA s registration. The CRA has listed the following as examples of serious breaches and serious cases of non-compliance : Breach or non-compliance Description Providing undue private benefit to directors A benefit conferred on a director that is not incidental (it is either unnecessary, unreasonable or disproportionate to the public benefit achieved) to the achievement of a charitable purpose Improper receipting This would include deliberate instances of false receipting Reaches certain (unspecified) thresholds May be either in absolute terms, with regard to the amount involved in non-compliance, or relative, for example a percentage of the expenditures of the charity Involves breaches of the Criminal Code or a quasi-criminal statute Examples given are fraud and hate crime Involves breaches of the core requirements of the Income Tax Act Example given is the requirement that an organization be established for exclusively charitable purposes This type of non-compliance will not include less central provisions, such as that requiring charities designated as charitable organizations to concentrate on operating their own programs rather than funding other charities Not abiding by the terms of a compliance agreement The implementation of a compliance agreement occurs after an audit of a registered charity or RCAAA which reveals a problematic level of non-compliance While these examples highlight what the CRA considers serious breaches, it is not an exhaustive list of all that could qualify. For example, while certainly the potential consequences of failing to file a charity s T Registered Charity Information Return are serious, it is unlikely that an inadvertent revocation for a failure to file a registered charity s tax return would qualify as a serious breach. Registered charities and RCAAAs are however advised to take due caution. February 2013 Board Bulletin 4

5 Questions for Directors to Ask 1. Has any director or senior manager held a similar position with another registered charity or RCAAA which had its registration revoked? 2. If so, could the breach be considered serious? Compliance Suggestions for Boards Possible responses to ensure compliance range from requesting each director or senior manager to annually self-report to requesting that each director and individual in such a controlling position swear an affidavit testifying that he or she does not fit within any of the possible categories of ineligible individuals. 8 The more practical response is to ensure that the registered charity or RCAAA creates a policy mandating that everyone in a directorial or controlling position be requested to provide all his or her relevant background information on becoming a director or employee and thereafter to require annual self-reporting/updating of the information. If a director or individual in a controlling position is later found to have lied about his or her background, having such a policy would be helpful evidence that the charity has acted diligently and should not be subjected to sanctions. In the event that an individual provides information indicating he or she may be an ineligible individual, further information should be gathered and a legal advisor consulted. Having someone who may be an ineligible individual on your board or in a controlling position presents a risk which requires a careful assessment of the situation and current state of the law. Conclusion The broad definition of what constitutes a serious breach coupled with the Minister s discretionary powers to revoke or to refuse to register has caused widespread concern amongst registered charities and RCAAAs given the potential for these provisions to be used in a manner they may not be able to anticipate. Directors of registered charities and RCAAAs should be aware of these provisions and should take time to determine the most appropriate response for their organization. At the very least a policy should be in place requiring that those in directorial and controlling positions provide any relevant information on at least an annual basis to ensure that the CRA will be persuaded that the organization has been appropriately diligent in preventing the involvement of ineligible individuals with their organization. 8 The Canadian Council of Christian Charities has prepared a sample declaration along these lines: news_release/114. This publication was originally published by Chartered Professional Accountants of Canada as a Director Alert. It has been reissued by Chartered Professional Accountants of Canada as a Board Bulletin. February 2013 Board Bulletin 5