The charitable sector has been very busy in 2011, and with
the dawning of a new year, charities will want to turn their attention to new
challenges ahead. The following is therefore a brief summary of five of the top
anticipated legal and risk management challenges for charities for 2012:
1. Anticipating
CRA’s New Fundraising Guidance;
2. Implications
of the 2011 Federal Budget Concept of “Ineligible Individuals” for Directors,
Officers, and Managers;
3. Working
with Intermediaries Inside and Outside of Canada;
4. New
Challenges Involving Inter-Charity Transfers; and
5. Reducing
Risks from the Discipline and Expulsion of Members.
1. Anticipating CRA’s New Fundraising Guidance
Canada Revenue Agency’s (“CRA”) Guidance (CPS-028): Fundraising by Registered Charities (“Guidance”) is in the process of being
revised into a new draft Fundraising Guidance. While the new Guidance is not
yet available, it is likely to be released early in 2012. The new Guidance is expected
to be a significant improvement but will be a longer document at approximately 38
pages compared to the current version’s 31 pages. Given this, it will be important
for charities to be familiar with the entire document, including all appendices
at the end of the Guidance, once it becomes publicly available. Although
improved, the new Guidance is anticipated to still be a complex document and
will therefore require careful reading. CRA has advised that the new Guidance will
not represent a new policy position but rather will provide information on their
current treatment of fundraising under the Income Tax Act (“ITA”) and
common law. The new Guidance will provide general advice only and will be based
on principles established by caselaw that fundraising must be simply a
means-to-an-end, rather than an end-in-itself. The new Guidance will apply to
all registered charities and to both receipted and non-receipted fundraising.
An organization that is carrying out unacceptable fundraising may result in a
denial of charitable registration or, for existing registered charities,
sanctions or even revocation of charitable status. Watch for the release by CRA
of the new Guidance early in the new year. For more details on the new Guidance,
see the presentation by Terrence S. Carter entitled “Complying with CRA's New
Fundraising Guidance” at http://www.carters.ca/pub/seminar/chrchlaw/2011/index.htm.
2. Implications of the 2011 Federal Budget Concept
of “Ineligible Individuals” for Directors, Officers, and Managers
The 2011 Federal Budget, which passed in the House of
Commons on November 21, 2011 and received second reading in the Senate on
November 24, 2011, includes several provisions that will be of significance to the charitable
sector. These provisions, entitled “Strengthening the Charitable Sector”,
introduced a number of changes to the regulatory regime affecting registered
charities. One of the most significant of these changes is the introduction of
provisions rendering certain individuals to be ineligible to serve on the board
of or in a senior capacity within a registered charity.
The “ineligible individual” provisions came as a result of
concerns from CRA that applications for charitable status were being submitted
by individuals who had previously been involved with charities that had their
charitable status revoked for serious non-compliance issues. The Department of
Finance has introduced the concept of “ineligible individuals” to the ITA,
which will enable CRA to withhold or revoke charitable status of organizations
that have ineligible individuals on the board or serving as a senior manager,
in order to better safeguard charitable assets.
As a result of ITA amendments, if an “ineligible
individual” is a member of the board of directors, a trustee, officer or
equivalent official, or any individual who otherwise controls or manages the
operation of the charity, then the charity may have its charitable status
refused or revoked or may have its authority to issue charitable receipts
suspended.
Unfortunately, the addition of the “ineligible individual”
provisions will now create another compliance burden for charities, their
directors, officers, as well as their managers in the operation of a charity.
This screening process may become a disincentive for individuals who would like
to serve on the boards of charities and may cause difficulties in the future
for charities trying to recruit new directors.
For more information, see Charity Law Bulletin. No 245 athttp://www.carters.ca/pub/bulletin/charity/2011/chylb245.pdf,
and Charity Law Bulletin No 253 athttp://www.carters.ca/pub/bulletin/charity/2011/chylb253.pdf.
3. Working with Intermediaries Inside and Outside
of Canada
Many charities run into difficulties when subjected to a
CRA audit in accounting for transfers of funds or property to third party
intermediaries that are not registered charities, whether the intermediaries are
located inside or outside of Canada. To avoid problems in this regard, CRA has
released two Guidances dealing with transfers to intermediaries.
Guidance (CG-004): Using an Intermediary to Carry out a
Charity's Activities within Canada (“Guidance 004”) was released by CRA on
June 20, 2011. Guidance 004 assists charities and applicants for charitable
status who are intending to conduct charitable activities through an
intermediary within Canada. For the purposes of Guidance 004, an intermediary
is defined by CRA as an individual or non-qualified donee (e.g. not a
registered charity). Guidance 004 clarifies that CRA’s administrative Guidance
concerning operating outside Canada applies equally within Canada as well.
In this regard, on July 8, 2010, CRA released Guidance
(CG-002): Canadian Registered Charities Carrying Out Activities Outside
Canada (“Guidance 002”). Guidance 002 updates and replaces the previous CRA
publication on foreign activities, RC4106 – Registered Charities: Operating
Outside Canada. Failure to comply with the provisions of Guidance 002
constitute one of the most common ways in which a charity operating outside of
Canada can be sanctioned or lose its charitable status.
In essence, both Guidance 002 and Guidance 004 say the
same thing, in that there are only two means available under the ITA by which a
registered charity can pursue its charitable purposes, either by making gifts
to a qualified donee (e.g. Canadian registered charities) or carrying out their
own charitable activities. If the charity is using a third party intermediary
to carry out the charity’s own activities, then the said two Guidances set out the
minimum requirements that CRA expects to see in place. Essentially, charities
cannot simply act as a passive funding body or conduit on behalf of a
non-qualified donee. Instead, charities must direct and control the use of its
own resources.
For more information on working through intermediaries in
Canada, see Charity Law Bulletin No 259 at http://www.carters.ca/pub/bulletin/charity/2011/chylb259.htm,
and for more information on carrying out activities outside of Canada through
intermediaries, see Charity Law Bulletin No 219 at http://www.carters.ca/pub/bulletin/charity/2010/chylb219.htm.
4. New Challenges Involving Inter-Charity Transfers
New inter-charity transfer provisions came into effect as
a result of reform to the disbursement quota (“DQ”) that occurred in the 2010 Federal
Budget. Subsection 149.1(4.1)(d) was expanded to include instances where a
charity receives a gift of property from a non-arm’s length registered charity,
and the recipient charity has expended an amount that is less than the fair
market value of the property on charitable activities by the end of the next
fiscal period. In essence, this provision establishes a 100% expenditure
requirement involving inter-charity transfers between non-arm’s length
registered charities. The consequence of failing to comply with these
provisions can lead to the revocation of charitable status or the charity may
also be liable for a penalty for that subsequent taxation year equal to 110% of
the difference between the fair market value of the property and the additional
amount expended. However, if the donor charity chooses to make the gift a
“designated gift” to the non-arm’s length recipient charity, the 100%
expenditure requirement will not apply.
As a result, before a charity makes a transfer of anything
(whether it be money, property, etc.) to a non-arm’s length registered charity,
such as between an operating charity and a parallel foundation, it will be important
to ask whether or not it will need to make the transfer a designated gift in
order to avoid the new 100% expenditure requirement. It should be noted that
this expenditure requirement is in addition to the 3.5% DQ.
5. Reducing Risks from the Discipline and Expulsion
of Members
Often charities, as well as non-profit organizations, will
want the ability to discipline or expel a member. However, those organizations
may not have thought through what is involved in doing so or what the
consequences are of improperly undertaking discipline or expulsion of members.
This issue will generally be a factor for open membership organizations, as
opposed to those that are closed membership. The legal risks include, but are
not limited to: possible liability for invasion of privacy, liability for
discrimination, liability for lack of due process, liability for lack of
natural justice, and enhanced membership rights under applicable corporate
legislation concerning discipline. Practical steps may be taken to avoid the
risks from disciplining or expelling members. These practical steps may
include: determining whether it is actually necessary for the organization to
discipline its members, advising applicants that the granting of membership
status is in the sole discretion of the board of directors, ensuring discipline
procedures reflect the principles of natural justice, and ensuring discipline
processes are as detailed as possible and set out in a written policy of the
organization or in its general operating by-law. This will be particularly
important for charities that continue under either the Canada Not-for-profit Corporations
Act, which came into effect on October 17, 2011, or under the Ontario Not-for-Profit
Corporations Act, which will come into effect at the end of 2012. Both Acts provide for the power
to discipline a member or terminate their membership, which power and the
circumstances and manner in which it will be exercised must be set out in the
articles or by-laws of the corporation.
For a more detailed description of the five challenges
described above, reference can be made to a presentation given to Imagine
Canada on November 8, 2011 by Terrence S. Carter, available at: www.carters.ca.
