There was a time, perhaps 30 years ago, when charities worried little about the Canada Revenue Agency (CRA). Charities were assumed to do good so the regulatory approach was light. Absent fraud, the CRA was unlikely to revoke charitable registration. This has changed – the CRA is now willing and able to impose sanctions on charities. While involvement in donation tax shelters is the most serious charity misbehavior in CRA'S view, CRA is also concerned about various other issues, some of which include foreign activities, advocacy activities and fundraising expenses.
In recent years, an industry grew designed to reduce tax otherwise payable by allowing people to claim large charitable donations without much cash outlay. While the underlying schemes varied, they often involved a taxpayer somehow acquiring something (art, pharmaceuticals, food, etc.) at a deep discount, then donating it to a Canadian charity that would then claim to use the donation in charitable activities, often without much genuine charitable impact. Although relatively few charities participated, some of those that did issued hundreds of millions of dollars of donation receipts – the net reduction was material to federal revenue.
CRA has denied the donations claimed by donors and has revoked the status of many charities involved in donation shelters. While some donors have appealed, taxpayer success has been limited. More generally, these donation tax shelters have caused CRA staff to be very suspicious of the charitable sector. As a result, the CRA is holding charities to a standard that is much higher than ever before.
Canadian charities are permitted to carry on most charitable activities outside of Canada. However, Canadian charities may not give money to a foreign charity. While this may seem sensible to ensure accountability, it fits awkwardly with larger international charities. Rather than make a grant to a sister organization that is active in some area, a Canadian charity is required to instead either spend its money on its own charitable activity there or to enter into a complex agreement with the foreign sister organization. The CRA has been willing to revoke charitable registration of a Canadian charity that does not have the right agreement with its foreign sister organization, even if the Canadian charity can show that the funds were all spent in a charitable manner.
A charity is permitted to carry on advocacy in support of its charitable mission, but is not permitted any partisan political activity. A charity may carry on limited non-partisan political activity (activity designed to change the law or public policy of Canada or another country (or of any other government). While the CRA is sometimes willing to be flexible on this issue, one notorious CRA charitable registration revocation was of a charity that advocated against torture.
Until recently, tax law required a charity to spend generally in each year at least 80% of prior year charitable donations. This operated to limit the fundraising expenses of most charities. While this 80% rule has been repealed, the CRA has replaced it with a policy suggesting that fundraising costs must be reasonable. The CRA's policy, which sets out when fundraising is reasonable, has not yet resulted in registration revocations yet, but we expect that this will happen in the future.
CRA, annoyed by the participation of a few charities in donation tax shelters, has developed a new and more aggressive approach to compliance in the donation area, but also in other areas like foreign activities, advocacy/political activities and fundraising expenses. This is unfortunate. Had charities not participated in donation tax shelters as some did, the whole of the charitable sector would have faced a more friendly regulatory environment.
Robert Hayhoe SUPPLIED