Bad behaviour

  • Author : Robert Hayhoe
  • Author : Rahul Sharma
  • Date : December 2011
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 privileges1. 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 Act2 (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to be in breach of a requirement for charitable registration under the Act and for which its charitable registration was revoked within five years of the particular time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 organisation3.

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 decisions4.

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 18675 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.

Income Tax Act, s149.1(4.1)
Rules of the Supreme Court 1985, c1 (5th supplement), as amended
Income Tax Act s149.1(1)
To the best of our knowledge, the last administrative decision of the CRA Charities Directorate to be overturned by the Federal Court was made in 1983 and overturned in 1986: Native Communications Society of British Columbia v MNR [1986] 2 CTC 170, 86 DTC 6353
UK, 30 & 31 Victoria, c3

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