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The Perplexing Guide
Adam Aptowitzer, July 18, 2007
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| The Canada Revenue Agency has finally released the guidelines by which it intends to apply the ‘new’ intermediate sanctions rules to charities. I have written before about the intermediate sanctions rules and the legislative regime under which they will be applied. In those articles I mentioned that the application of the intermediate sanctions was at the discretion of the CRA as technically the CRA has the ability to impose the relevant new penalty, revoke or suspend the charity’s registration, or do nothing. These new guidelines are intended to help the CRA choose when to do each action. |
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| The internal CRA guidelines constrain the CRA to follow a progression of increasingly severe actions when it is determined that a charity is not in compliance with the Income Tax Act (the “Act”). The scale is (1) educating the charity (2) forcing the charity to sign a compliance agreement (3) applying an intermediate sanction (4) suspending the charity and (5) revoking the charity’s registration. Education means that the CRA would simply educate “the charity” on proper procedure (as proper is determined by the CRA). A compliance agreement is an agreement that is in theory negotiated between the charity and the CRA which stipulates that the charity is not in compliance with the Act and will take steps to comply in the future. The intermediate sanctions are generally financial penalties. |
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| In deciding the severity of the penalty, the guidelines stipulate that the CRA will take into account factors such as the provisions with which the charity is not in compliance, previous cases of non-compliance, aggravated non-compliance and the threshold either in absolute terms, such as the dollar value of expenditures or the percentage of expenditures devoted to non-charitable activities. |
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| In all likelihood the guidelines will become a moot point. Unlike the courts which have a tradition stretching back hundreds of years in both law and equity (loosely fairness) the CRA has no experience in administering these penalties and is not generally concerned with fairness. The CRA’s role is to apply the Act, and there is generally little discretion to decide which penalties to apply and when to apply them. What the CRA may consider a just and fair penalty for an act of non-compliance may, in fact, be grossly disproportionate and result in the charity’s effective end. |
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| Charities may suffer bigger problems as an indirect result of the CRA’s actions rather than directly. When the CRA imposes an intermediate sanction on a charity it will also post on its website the name of the charity, the sanction being applied and the reason for the sanction. Thus, a charity which may have an instance of a rather small or perhaps unintentional issue of non-compliance, such as incorrect information on a donation receipt, may be publicly humiliated. This humiliation may, in fact, be much more serious than the actual sanction. |
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| I would further point out that the CRA retains the right to suspend any charity that it feels has engaged in non-compliance. A suspension may be as good as a revocation given that once the donors hear that a charity is suspended they are not likely to donate to the charity at another point. |
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| Moreover, in the relatively common situation of failure to file the annual T-3010 form there is a situation that is inherently unfair. In this case, the CRA generally revokes the charity’s registered status but leaves it the opportunity to re-register. However, once the charity decides to remedy its non-compliance and voluntarily re-register for charitable status the CRA imposes a $500 penalty on the charity. Thus, the CRA is applying both revocation and the intermediate sanction penalty. |
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| While it is doubtful the CRA even has the authority to apply both penalties the bigger problem is that it makes a mockery of the system of progressively serious penalties. Not only does failure to file not merit revocation but to pair the most serious penalty with the most minor is simply a cash grab at the expense of non-filing charities. |
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| In summary, any charity that is subject to any of the CRA’s potential weapons should immediately contact counsel and deal with the sanction as a potential moral threat to the charity. We consider the intermediate sanctions to be extremely dangerous to the charitable sector, and suspect that there will be many cases of litigation in order to settle the proper administration of these sanctions. |
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| If your charity has been the subject of any sanction by the CRA please contact us for information. |
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