ABOUT THE AUTHORS: Robert Hayhoe TEP is a
Charities Partner and Rahul Sharma is a Charities and Tax Associate
at Miller Thomson LLP in Toronto, Canada
The 2011 Canadian federal Budget included some unexpected and
punitive governance rules. These give the Canada Revenue Agency
(CRA) discretion to revoke the charitable registration of a
Canadian charity that has a board director or senior manager who
has engaged in certain kinds of legally inappropriate behaviour in
a context other than that of the charity.
The rules respond to a perceived threat caused by a pattern of
the same individuals engaged in abusive practices involving
registered charities. Charities that contravene the new rules may
immediately be subject to a revocation of their charitable
registration or a suspension of their receipting
privileges. As such, it is crucial that
all registered charities carefully consider these rules and comply
with them. Nonetheless, the harsh penalties that may be imposed
pursuant to these rules raise serious concerns over whether
parliament has gone too far in terms of regulating charities,
including overstepping constitutional boundaries.
Ineligible individuals
Integral to the new rules is the definition of an ‘ineligible
individual’, which will be added to the definitions contained in
s149.1(1) of the Income Tax Act (the
Act). For a registered Canadian charity or a Canadian amateur
athletic association, an ‘ineligible individual’ is one who, at a
particular time, has been:
- found guilty of a relevant criminal offence and who has yet to
receive a pardon
- found guilty of a relevant offence within five years of the
particular time
- a director, trustee, officer or like official of a registered
charity or registered Canadian amateur athletic association during
a period in which the charity or association may reasonably have
been considered to be in breach of a requirement for charitable
registration under the Act and for which its charitable
registration was revoked within five years of the particular
time
- in control of or who managed, directly or indirectly, in any
manner whatsoever, a registered charity or registered Canadian
amateur athletic association during a period in which the charity
or association may reasonably have been considered to be in breach
of a requirement for charitable registration under the Act and for
which its charitable registration was revoked within five years of
the particular time; or
- a promoter with respect to a tax shelter which involved a gift
to a registered charity or Canadian amateur athletic association
that had its registration revoked within five years of the
particular time for reasons that involved its participation in the
tax shelter.
‘Parliament has arguably gone too far in its regulation
of charities’
The definition is intentionally broad. It captures a wide range
of individuals who were in some way involved in charities that had
their registration revoked by the CRA for failing to comply with
the Act’s registration requirements five years prior to any
particular date. Charities that had their registration revoked for
reasons of private benefit or impermissible support of political
purposes, for example, would fall into this category.
Charities that are revoked because of a change in the legal
definition of charity through no fault of their own would also be
caught. Their officers, directors, managers, or any other
individuals who had influence over them, would consequently also
fall under the definition of ‘ineligible individuals’ and, under
the new rules, potentially be barred from serving as officers or
directors of new charities, or influencing or controlling new
charities, for a five-year period. Charities or Canadian amateur
athletic associations that contravene the rules risk having their
registrations revoked or their receipting privileges suspended by
the CRA under new sections 149.1(4.1)(e) and (4.2)(c).
‘Ineligible individuals’ also means those who were convicted or
found guilty of ‘relevant offences’, which, under the Act, include
offences, whether criminal or regulatory, and whether committed in
Canada or elsewhere, that involve financial dishonesty or are
otherwise relevant to the organisation.
Individuals found guilty of regulatory offences involving
financial dishonesty are barred from exercising any control or
influence over a registered charity within five years of their
conviction. However, the five-year period does not apply to
individuals found guilty of criminal offences involving financial
dishonesty, such as fraud or money laundering. Under the new rules,
these individuals will only cease to be ‘ineligible individuals’
when and if they receive a formal pardon from the federal
government. If pardon procedures are more heavily restricted or
made partially unavailable in the future, individuals convicted of
financial offences may remain indefinitely ‘ineligible’ to serve on
charitable boards or otherwise exercise a position of influence
with registered charities.
Note that a Canadian charity with an ineligible individual is
not penalised automatically: rather the Canada Revenue Agency will
have discretion to penalise.
New concerns
The definition of ‘ineligible individuals’ is problematic for
three main reasons. First, when applied to the new sections of the
Act, it imposes a potential ban on all the directors and officers
of a charity that had its registration revoked. It does not follow
that all of these people were necessarily involved in the
wrongdoing or statutory breaches that led to this revocation.
Nonetheless, the definition makes this unfounded assumption and
implicates individuals who might have never, at least not
intentionally, failed to comply with the Act. Interestingly, if the
definition of ‘ineligible individual’ was limited to the first two
of the bullet points above, innocent officers and directors would
not be affected.
Logically, it is not true that all charities with revoked
registrations were controlled, influenced or run by individuals
with low moral standards. Presumably, these are the individuals, or
‘rogues’, that parliament is looking to penalise and keep out of
the charitable arena for a five-year period. Although in many
instances a charity may have been deregistered by the CRA because
of abusive activity, this is not an absolute.
Second, the definition is problematic because, even if an
individual was previously involved in wrongdoing with a registered
charity, including the previous commission of a criminal offence
involving financial dishonesty for which they did not receive a
pardon, it does not follow that the individual remains engaged in
financially dishonest activity with another charity. This is
another unfair supposition that, particularly in the case of a
relevant criminal offence for which a pardon has not been issued,
indefinitely disqualifies an individual from benefiting a charity
by serving as an officer or director.
Third, the discretion given to the CRA is deeply troubling. A
charity ought to know if it is exposed to revocation of charitable
status without hoping (or being forced to ask whether) the CRA is
prepared to allow its continued registration. The concern is
particularly severe given that the Federal Courts in Canada have
given the CRA Charities Directorate almost complete administrative
law freedom of action and have only rarely been willing to overturn
charity tax administrative decisions.
It also remains an open question whether the new rules are
ultra vires the Canadian federal parliament as an
unjustified intrusion into the provincial domain. Section 92(7) of
the Constitution Act 1867 provides Canadian
provinces with the exclusive jurisdiction to make law in respect of
‘hospitals, asylums [and] charities’. Although in the Act, the new
rules may be interpreted as imposing an interdiction on who may
serve as an officer or director of a charity or otherwise exercise
influence and control over the charity. As most Canadian charities
are incorporated under provincial law, the constitution of their
officers and boards of directors is also a decidedly provincial
matter. The fact that the penalty for having an ‘ineligible
individual’ is discretionary may be further evidence that it is
aimed at regulating behaviour, not tax, and is therefore ultra
vires.
Clearly, charities that do not observe the rules risk losing
their receipting privileges or their charitable registrations
altogether. As such, registered charities, although provincially
incorporated, will understandably not want to risk having any
‘ineligible individuals’ as directors or officers.
Careful application
For non-share-capital organisations or trusts looking to become
registered charities in Canada, it is imperative that their
application is not made by an ‘ineligible individual’. Once
registered, it is also important that charities ensure ‘ineligible
individuals’ do not serve as directors, officers, trustees,
managers or in any other official capacity that provides them with
control or influence over the charity.
While the CRA will be carrying out a consultation on how it
should apply the new ‘ineligible individual’ rules, here are some
preliminary views on how Canadian charities should begin to comply.
Currently registered charities should regularly canvass their
boards of directors, officers, trustees and/or managers to ensure
that no individual falls under the definition of an ‘ineligible
individual’. It may be necessary for charities to receive otherwise
personal or confidential information about the tax compliance
positions of other charities from directors, officers and managers
in this regard. Canadian charities should also keep track of their
boards of directors and officers. If a charity does have an
‘ineligible individual’ in a position of control or authority,
either the person should be removed immediately or the approval of
the CRA should be sought for the individual to remain on the board
or as part of the management team.
Prior to the introduction of ‘ineligible individuals’, the CRA
lacked the ability to refuse to register or deregister charities
that were run by persons known to abuse the privileges that came
with charitable registration, so a controlling mechanism was
required. Although parliament’s motives may have been legitimate in
implementing the rules, in so doing, it has arguably gone too far
in its regulation of charities. Nonetheless, organisations either
currently registered or hoping to register as charities in Canada
should pay close attention to the new rules and ensure that they
are and remain compliant, given the serious consequences of falling
offside.