Charity Law News - Hamilton Law Association

October 2014
Charity Law News
will have their registration revoked or
suspended.
David van der Woerd
Canada Revenue Agency Sheds
Light on How it Intends to Manage
Ineligible Individuals
O
n July 11, 2014 the Canada
Revenue Agency (CRA) announced its intention to revoke the charitable registration of the
Jesus of Bethlehem Worship Centre
(JBWC), a charity based in Etobicoke,
Ontario. CRA said that JBWC was to
be faulted for a number of misdeeds
revealed in CRA’s audit, including
that its board of directors included
two “ineligible individuals”, a new
definition under the Income Tax Act
following the 2011 budget. These
two persona non gratis’ were previously directors of The Heaven’s Gate
Healing Ministry at a time when seriously breached the Income Tax Act’s
registration requirements, for which
its registration was revoked in 2009.
CRA alleged JBWC’s other misdeeds
included not maintaining adequate
books and records, issuing improper
receipts, failing to file its T3010 information returns and supplying false
or misleading information when it applied for registration. However, this
is the first instance of CRA flexing its
“ineligible individual” muscles since
introducing this concept several years
ago.
Many have wondered what “ineligible individuals” were. The statute’s
definition and commentary left many
questions unanswered. The month
following the JBWC revocation,
CRA released a Guidance numbered
CG-024 to explain its position. It explained that the ineligible individual
provisions in the Income Tax Act came
into force on January 1, 2012. These
provisions give the CRA the authority
to refuse or revoke the registration of a
registered organization and to suspend
an organization’s receipting privileges
when an ineligible individual was a
board member or controlled or managed the organization.
Previously when organizations were
revoked for serious breaches of the
Act, including issuing false receipts
and participating in abusive tax shelter schemes, those who were in charge
when the breaches occurred could
turn around and apply for re-registration and establish new entities, and
the CRA could not refer to this history as part of its decision-making
process on the fresh application. The
new provisions give the CRA greater
discretion to determine which organizations will be registered, and which
Until the Guidance was published, organizations were being cautioned to
stay entirely away from any persons
who met the “ineligible individual”
definition. However, CRA recognizes that some of those people can
still provide important programming
insights into the welfare, needs, and
issues of certain beneficiary communities. Therefore in some cases CRA
understands that it may be appropriate
in some cases for an organization to
welcome an ineligible individual into
its operations. Exactly when that is,
may still be difficult to discern. The
onus will rest on the organization to
explain the role and contribution of
the ineligible individual if the CRA
expresses concern about him or her.
For example, they say that a registered
organization that provides counseling
services may explain that many people
in its anger-management group have
been convicted of assault. In that circumstance, a board member who is an
ineligible individual because of a conviction of a similar criminal offense
may be integral to helping the organization in hiring staff with appropriate
skills and to designing effective programs for the group.
What is the onus on organizations
to investigate whether “ineligible
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25
individuals” have infiltrated its ranks?
CRA noted that the new legislation
does not require registered organizations to do searches or to proactively
determine whether an ineligible individual was a member of the board or
controlled and managed the organization. Furthermore, it confirmed that
there will always be an opportunity for
an organization with an ineligible individual to explain why it is necessary
to keep that ineligible individual or to
outline what internal measures may
have been put into place to protect vulnerable beneficiaries and assets of the
organization. When the CRA intends
to take action because of an ineligible
individual, it will first explain how the
person is an ineligible individual, the
ineligible individual’s position in the
organization, and why an ineligible
individual provision is being invoked.
And the organization will have an opportunity to respond.
The guidance describes in more detail
who is an ineligible individual; when
an ineligible individual’s position in
an organization may threaten the registration or receipting privileges of an
organization; and how the CRA will
use its discretion. In general terms, an
individual is ineligible if he or she has
been convicted of an offence related to
financial dishonesty or that is relevant
to the operation of the organization or
that was connected to an organization
whose registration was revoked for a
serious breach of the Act. CRA says
a relevant offence is an offence under
provincial legislation, or under federal legislation that is not a criminal
offence, or an offence that would be
such an offence if it were committed
in Canada. Types of relevant offences
could include breaches of charitable
fundraising legislation, consumer protection legislation and/or securities
legislation and a person convicted of
a relevant offence would be ineligible
for five years starting on the date of
the conviction. A relevant criminal
26
offence relates to financial dishonesty
(such as misappropriation of funds,
intentional misstatements in financial
records, forgery or other alteration of
financial documents and/or fraud) or it
relates to the operation of the organization.
For greater clarity CRA specifically
references the following offences as
being on the naughty list:
•
Financing of Terrorism [sections 83.02–83.04]
•
Corruption and Disobedience
[sections 119–130]
•
Gaming and Betting [sections
201–209]
•
Offences Resembling Theft
[sections 335–342.2]
•
Robbery and Extortion [sections 343–346]
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False Journal
Pretenses
[sections
361–365]
•
Forgery and Offences Resembling Forgery [sections
366–378]
•
Falsification of Books and
Documents [sections 397–
402]
•
Offences Relating to Currency [sections 448–462]
Those that may have engaged in such
activity but dodged the Criminal Code
are not necessarily out of the woods.
CRA says that financial dishonesty
criminal offences can also be outside
the Criminal Code, such as, for example, tax evasion, a criminal offence
under the Income Tax Act.
The Act also allows CRA to sanction if
an organization has persons who were
previously with an organization which
had its registration revoked for a serious breach of the Act. What is “sePage 1
rious”? CRA explains. Any revoca-
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HLA Journal
October 2014
tion resulting from an audit is serious.
Examples will include revocation for
issuing fraudulent receipts, misappropriating assets, or participating in abusive gifting tax shelters. On the other
hand, a revocation for failing to file an
annual information return or due to a
lapse of a governing document is not
serious (unless there are repeated infractions).
An ineligible individual may be more
than a director. Usually the governing
documents of the organization will indicate who is responsible for making
decisions for an organization. These
positions may be elected or appointed.
Organizations may use different titles
for these controlling roles, such as director, trustee, or officer. When the Act
refers to a “like official” this may also
include a person who has governing
responsibilities or authority, whether
or not this is stated in the governing
document. For example, a member of
the clergy may have significant influence or a veto over the decisions of the
board of directors of a religious organization, even if the clergy member is
not a director of the organization; if
that is the case, the clergy member is
a like official. Other individuals not
holding any offices may also control
the organization if they have power or
influence over its affairs, directly or indirectly. For example, individuals may
be considered to have control if they
can change the board of directors or
reverse its decisions, make alternative
decisions concerning the actions of
the organization, directly or indirectly
end the organization or appropriate
the organization’s assets. Individuals
who manage an organization directly
or indirectly may include anyone who
performs managerial (rather than only
operational) duties, hires, disciplines,
and/or dismisses employees, prepares
budgets for the organization or varies staff assignments. Anyone falling
within these categories of an organization when the organization was revoked because of a serious breach is
an ineligible individual for five years
from the date of the revocation.
A promoter of a tax shelter that resulted in a revocation is ineligible for five
years from the date of the revocation.
A tax shelter is defined as either a gifting arrangement or the acquisition of
property, where it is represented to the
buyer or donor that the tax benefits
and deductions arising from the arrangement or acquisition will equal or
exceed the net costs of entering into
the arrangement or acquiring the property. A gifting arrangement where the
donor incurs a limited recourse debt
(one where the borrower is not at risk
for the repayment) related to the gift is
also a tax shelter. A “promoter” is given a broad interpretation It includes
persons who sell or issue participating
shares, promotes the sale, issuance, or
acquisition of, acts as an agent or adviser for the sale or issuance of, acts as
an agent or adviser to promote, sell, or
acquire, or accepts consideration for
his or her role in the tax shelter.
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27
If an organization houses an ineligible
individual, CRA can refuse to register
the organization, suspend its receipting privileges and/or revoke its registration. CRA will assess each case on
its own merit. Generally, the CRA is
particularly concerned with deliberate abuse of the registration system.
The CRA intends to administer the
ineligible individual provisions with
a view to limiting threats to beneficiaries and assets. The CRA has perceived patterns of abuse of the registration system and it intends to target
them. Before that decision is made
final CRA will set out its concerns
in writing and the organization will
be given an opportunity to respond.
The organization can also object after a decision has been made if it believes the CRA has misinterpreted the
facts or not correctly applied the law.
The CRA may also determine that
beneficiaries and assets have been adequately and appropriately protected
even if the organization has an ineligible individual on its board or in a
position to control or manage the organization, in which case registration
and receipting privileges will be unaffected. CRA may take the following
considerations in deciding the most
appropriate course of action, such as
what made the person ineligible, what
impact the conduct had (for example,
victim impact, dollar value), whether
there was repeated inappropriate conduct, the roles and responsibilities the
ineligible individual in the organization, the opportunity to repeat the conduct, the impact the conduct would
have (on beneficiaries and assets),
whether the organization has lessened
whatever risk the ineligible individual
may pose, whether the organization
is aware of the person’s past conduct
and that the person is an ineligible
individual, whether the ineligible individual’s roles and responsibilities
been appropriately restricted, whether
there appropriate financial controls
28
in place to safeguard assets, how the
safety of beneficiaries ensured, and so
on.
There are six appendices added to this
lengthy document. Appendix A is a
self-assessment questionnaire to help
one to determine if they are an ineligible individual. Appendix B provides
guidance on how an organization can
protect its beneficiaries and assets.
Appendix C contains various questions and answers, Appendix D, ac
checklist for registered organizations
regarding ineligible individuals, and
finally Appendices E and F, containing
definitions and authorities from the Income Tax Act.
Maintaining its momentum with this
new law and commentary, on September 13, 2014 CRA announced that it
revoked the registration of the Friends
and Skills Connection Centre, a charity based in Etobicoke, Ontario. Prior
to publishing the Guidance CRA already published its intentions in accordance with subsection 168(1) of
the Income Tax Act, stating in part
that their audit had revealed that the
Organization has not complied with
the requirements set out in the Income
Tax Act for a variety of reasons, such
as it failed to maintain adequate books
and records, failed to file an accurate
T3010 Information Return, and failed
to operate within the Organization’s
charitable mandate. Interestingly,
CRA also referenced that one of the
Organization’s directors during the
audit period was previously a director
of Faith Assemblies Mission International, at a time when it engaged in
conduct which constituted a serious
breach of the requirements for registration under the Act, for which its
registration was revoked in 2009. As
such, that director was an “ineligible
individual” as defined in the Act.
CRA was initially slow to use its new
ineligible individual firepower but
this summer we have seen a distinct
change in that. Ineligible individuals
pose new risks for charities. CRA appears to be ready to reference the use
of ineligible individuals to bolster its
case against offending charities. 
David A. van der Woerd practices at Ross & McBride LLP
(www.rossmcbride.com). David can
be reached at:
Ross & McBride LLP
1 King Street West,
P.O. Box 907
Hamilton, ON
L8N 3P6
905-572-5803 (direct line)
905-526-0732 (fax)
dvanderwoerd@rossmcbride.com
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