Andrew Coyne recently drew much attention when he mused in the National Post about the merit of abolishing the charitable tax credit so registered charities could have free rein to engage in political activities. However, the credit is arguably at far greater risk from the abusive tax shelters that have been seen over the last decade or so. Those shelters saw the siphoning off of hundreds of millions, if not billions, of dollars in resources from charitable work and into private pockets.
The schemes were structured in various ways, but basically entailed a donor receiving more money from his or her claim of a donation tax credit than the value of what was actually given to a charity or other qualified donee by way of a gift.
The federal government responded to the abuse aggressively. As well as an extensive audit initiative and litigation of cases associated with the schemes, it brought in a range of legislative measures.
One key statutory change was a new deeming provision. It set the value of certain donations at the cost to the donor, rather than the fair market value (unless that was lower), if the property donated had been acquired less than three years prior to the donation, or had been acquired with a view toward its being donated.
As well, in its 2011 budget the federal government established the category of “Ineligible Individuals” and provided the Canada Revenue Agency (CRA) with discretion to refuse registration, revoke registration or apply other sanctions where an “ineligible Individual” potentially controlled or managed the resources of a registered charity or group that sought registered charity status.
The definition of Ineligible Individuals includes:
- tax shelter promoters whose schemes have led to a registered charity’s status having been revoked within the last five years; as well as
- those who govern, direct or manage a charity that has been subject to revocation for a serious breach of Income Tax Act (ITA) requirements within the last five years.
This makes it an effective tool for CRA to deal pro-actively with tax shelter abuse. That’s to the benefit of the sector, since exploitation of the donation credit provisions of the ITA on the scale seen in the early years of the 21st century could undermine public confidence in preferential tax treatment of charities and donations to them. It also massively diverts resources from genuine charitable work.
Unfortunately, the measures extend far beyond just tax abuse situations. A person with a conviction for a criminal or “relevant” offence or someone who governed, directed or managed any registered charity whose status was CRA makes clear it has discretion as to whether to sanction a charity connected to an ineligible individual, and that it will examine situations on a case-by-case basis to determine how to respond. revoked on the basis of what may reasonably be considered to have constituted a serious breach of the ITA requirements for registration are all caught under the definition. Given the number of possible “relevant” offences and the number of registered charities that have their registration revoked for cause each year, that potentially puts a large group of people under scrutiny and an immense amount of discretion in CRA’s hands.
In August, CRA released a Guidance on how it will administer the legislation. The approach CRA sets out is quite reasonable in the circumstances and does its best not to saddle organizations with cumbersome compliance requirements.
CRA makes clear it has discretion as to whether to sanction a charity connected to an ineligible individual, and that it will examine situations on a case-by-case basis to determine how to respond. It also indicates that it will deal with the organization, rather than the individual in question when it has a concern. Organizations that are not contacted do not have to meet any specific compliance obligations.
The new Guidance features a self-assessment questionnaire so someone can evaluate if he or she falls within the definition of an Ineligible Individual, but does not require the organization to pre-screen staff or volunteers. It also allows the organization to make representations as to its due diligence or other measures to limit the scope of responsibilities or activities of someone meeting the definition, or to provide information indicating that CRA is incorrect in asserting that an individual is ineligible.
That said, there will be challenges as the new regime is implemented. Among the issues that that spring to mind are:
- given the notice protocol proposed by CRA, what obligation does the charity have with respect to protecting the impugned person’s privacy in its follow up with the individual and CRA? and,
- if it becomes necessary to remove the person or alter the position or practices associated with him or her, can this be done without breaching corporate, labour or other laws to which the charity’s operations are subject?
Given this, it would seem prudent for charities prior to having, or when they have, an Ineligible Individual situation arise, to seek legal counsel to ensure it is or can be dealt with appropriately.
But getting back to Mr Coyne, his column is at least partly rooted in his skepticism about the appropriateness of a tax agency overseeing the operational aspects of organizations. Given the federal government’s broad taxation powers under the Constitution, there is no doubt that the federal government can and ought to protect the integrity of the tax system. But that is different from delving into the day-to-day decisions of charities. As has been noted here before, it is much more rarely that the government places – and the CRA enforces – constraints and transparency obligations on corporations or other taxpayers that enjoy the benefits of tax credits. This makes for, at best, a very unlevel playing field.
Under the Canadian Constitution, jurisdiction over the operational aspects of charities actually resides primarily with the provinces. The federal registered charity regime confers tax benefits over groups that are defined, at common law, as charities. Given the federal government’s broad taxation powers under the Constitution, there is no doubt that the federal government can and ought to protect the integrity of the tax system. But that is different from delving into the day-to-day decisions of charities. That’s why measures such as the ineligible individual provisions ought to be drawn as narrowly as possible.
In this regard, the 2011 Budget measures overreach. A better approach would have been to focus exclusively on preventing donation tax shelter abuse – a big enough problem in itself – and not burden the sector with trying to divine the meaning of, and the CRA trying to administer consistently and fairly, provisions which ought to be of no concern to the tax agency nor, indeed, the federal government.
About Peter Broder
