The 2012 Federal budget has an important piece on transparency namely “...to ensure that charities are accurately reporting in respect of all the activities in which they engage, the CRA will be granted the authority to suspend the tax-receipting privileges of a charity that provides inaccurate or incomplete information in its annual information return until the charity provides the required information.” This highlights the importance of charities not only filing the T3010 but being accurate and complete. If you don’t file your T3010 you will be revoked, but if you file an incomplete or innacurate T3010 you can be suspended. I have expressed concerns with some charities making ridiculous claims on their T3010 - that they have no fundraising costs is my favourite when they are organizing lots of expensive fundraising events, inflating gift-in-kind valuations etc. Well now just such a filing can get the charity in trouble. This follows the recent US IRS example where a charity was penalized for filing an inflated valuation of gifts in kind.
The US matter is referred to in an article “Update: IRS Levies Fine on Food for the Hungry Over Drug Valuations” at http://philanthropy.com/article/Update-IRS-Levies-Fine-on/130539/
I would have preferred that instead of focusing on foreign funds received by Canadian charities for political purposes when charities have to disclose already when they receive foreign funds and how much - that the Federal government look at the secrecy surrounding non-profit entities that are not registered charities. These non-profits are tax exempt and there is no public disclosure of their finances.
The Budget provides as follows:
“Further, to ensure that charities are accurately reporting in respect of all the activities in which they engage, the CRA will be granted the authority to suspend the tax-receipting privileges of a charity that provides inaccurate or incomplete information in its annual information return until the charity provides the required information.
(f) section 188.2 of the Act be amended by adding the following after subsection (2):
Suspension – failure to report
(2.1) If a registered charity or a registered Canadian amateur athletic association fails to report information that is required to be included in a return filed under subsection 149.1(14), the Minister may give notice by registered mail to the charity or association that its authority to issue an official receipt referred to in Part XXXV of the Income Tax Regulations is suspended from the day that is seven days after the day on which the notice is mailed until such time as the Minister notifies the charity or association, as the case may be, that the Minister has received the required information in prescribed form.”
The budget also provides:
“Enhancing Transparency and Accountability for Charities (p.204-205)
Economic Action Plan 2012 proposes measures to ensure that charities devote their resources primarily to charitable, rather than political, activities, and to enhance public transparency and accountability in this area.
The Government of Canada provides registered charities with generous assistance under the tax system in recognition of the valuable work that they perform. Registered charities are exempt from tax on their income and may issue official donation receipts for gifts received. In turn, donors can use those receipts to reduce their taxes by claiming the Charitable Donations Tax Credit (for individuals) or Charitable Donations Tax Deduction (for corporations). In 2011, federal tax assistance for the charitable sector was approximately $2.9 billion. At the request of the Government, the House of Commons Standing Committee on Finance is studying current and proposed incentives for charitable giving to ensure that the tax incentives are as effective as possible. Canadians have shown that they are willing to donate generously to support charities, but want to be assured that charities are using their resources appropriately. In this regard, charities are required by law to operate exclusively for charitable purposes and to devote their resources exclusively to charitable activities. Given their unique perspectives and expertise, it is broadly recognized that charities make a valuable contribution to the development of public policy in Canada. Accordingly, under the Income Tax Act charities may devote a limited amount of their resources to non-partisan political activities that are related to their charitable purposes. Recently, concerns have been raised that some charities may not be respecting the rules regarding political activities. There have also been calls for greater public transparency related to the political activities of charities, including the extent to which they may be funded by foreign sources.
The Canada Revenue Agency (CRA), as administrator of the tax system, is responsible for ensuring that charities follow the rules. Accordingly, to enhance charities’ compliance with the rules with respect to political activities, Economic Action Plan 2012 proposes that the CRA:
• Enhance its education and compliance activities with respect to political activities by charities.
• Improve transparency by requiring charities to provide more information on their political activities, including the extent to which these are funded by foreign sources.
These administrative changes will cost $5 million in 2012–13 and $3 million in 2013–14. It is also proposed that the Income Tax Act be amended to restrict the extent to which charities may fund the political activities of other qualified donees, and to introduce new sanctions for charities that exceed the limits on political activities, or that fail to provide complete and accurate information in relation to any aspect of their annual return.
Charities – Enhancing Transparency and Accountability (p. 436-439)
Under the Income Tax Act, registered charities are required to operate exclusively for charitable purposes and to devote their resources exclusively to charitable activities. Charitable purposes include the relief of poverty, the advancement of education or religion and certain other purposes as recognized by the courts.
A charity is, however, allowed to engage in political activity as long as the activities represent a limited portion of its resources, are non-partisan and are ancillary and incidental to its charitable purposes and activities. Concerns have been raised that some charities may be exceeding these
limitations and that there is currently no requirement for a charity to disclose the extent to which it receives funding from foreign sources for political activities. To support the administrative measures proposed in this Budget to enhance compliance and increase disclosure by charities regarding political activities, Budget 2012 also proposes to provide additional enforcement tools to the Canada Revenue Agency (CRA). These measures will also apply to registered Canadian amateur athletic associations. These measures will apply on Royal Assent to the enacting legislation.
Where a charity does not comply with its obligations under the Income Tax Act, the CRA generally takes a graduated approach to addressing non-compliance. First, the CRA works with the charity and provides it with an opportunity to comply voluntarily. If compliance issues become more serious, the CRA may apply intermediate sanctions, such as monetary penalties or a one-year suspension of the charity’s tax-receipting privileges. The CRA may also revoke the registration of a charity. Intermediate sanctions are not, however, currently available in the context of political activities.
Budget 2012 proposes to grant to the CRA the authority to suspend for one year the tax receipting privileges of a charity that exceeds the limitations on political activities. Further, to ensure that charities are accurately reporting in respect of all the activities in which they engage, the CRA will be granted the authority to suspend the tax-receipting privileges of a charity that provides inaccurate or incomplete information in its annual information return until the charity provides the required information.
Funding of Political Activities
Where a charity makes a gift to another qualified donee, the Income Tax Act currently treats the amount of the gift to have been devoted to its charitable purposes and activities, even if the gift is earmarked for political activities. This treatment allows a charity to indirectly pursue political activities beyond what would be permitted if it engaged in those activities directly. Budget 2012 proposes that, where a gift is made by a charity and it can reasonably be considered that a purpose of the gift is to support the political activities of a qualified donee, the gift will be considered to be an expenditure made by the charity on political activities.”
Practically speaking the biggest compliance issue for Canadian charities relating to political activities is that some charities don`t even acknowledge on their T3010 that they are doing political activities. See question C5 “Did the charity carry on any political activites during the fiscal period”. Only about 500 charites note on their T3010 they are doing political activities which seems very low. Also charities need to disclose what percentage of total expenditures are on political activities, whether inside or outside of Canada (line 5030 of the T3010). This is not changed by the budget.
The change with respect to gifts earmarked for political activities by one registered charity to another will probably have little impact on most charities even that do political activities - those recipient charities that are politically active are still constrained to spend only 10% of the their budgets on political activities related to their objects irrespective of where the funding comes from. Anyway for those concerned about US environmental funding this change does not affect the US charities.
Charities in this climate of heightened political awareness need to be even more careful to follow the rules set out in CRA’s guidance on political activity. http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cps/cps-022-eng.html Charities must also keep in mind that there may be Federal, Provincial and Municipal lobbying registration requirements that they must also comply with. Remember that the T3010 filing is extremely important - whether it is political activites, fundraising costs, or foreign activities - make sure that you are correctly completing the form. CRA now has another tool to make sure that charities are filing an accurate T3010 - namely the suspension of receipting privileges.
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.