In most cases the application of law is conceptually simple the law is transgressed and a punishment applies. Unfortunately, in the charity world nothing is simple. When a charity is found to have transgressed the law the Charities Directorate may decide on a range of options. One widely used mechanism is the Compliance Agreement (a “CA”) in which the Directorate identifies the offence and the charity promises not to do it anymore. If (and when) the Directorate audits again it almost always moves directly to revocation if the charity is again (or still) offending in the same way.
While there is no provision in any law which states that contravention of a CA is in itself grounds for revocation this does not necessarily mean the CRA will not try. For example, we have seen situations where a charity was continually late in filing its T3010 annual return. The Directorate required the charity to sign a CA stating that it would file on time from then on. Predictably the charity continued to miss the deadline but did file within the grace period. Nevertheless, the Directorate issued a Notice of Intent to Revoke not on the basis of missing the deadline (because they did file in the grace period) but rather for breaching the CA!
The recent case of Opportunities for the Disabled Foundation v. Canada (National Revenue) 2016 FCA 94 is an example of another difficult situation. There the charity signed a CA indicating that its annual Information Return would be complete and accurate in every respect. However, in filing its later returns Opportunities was required to make decisions about the allocation of certain expenses. These types of decisions are necessary to prepare financial statements and it is not uncommon for the Directorate to take a different position.
Decisions to reallocate expenses from one category to another may well be matters of interpretation and so may seem arbitrary. Indeed, the Opportunities’ position was the CRA’s actions involved “…the arbitrary reallocation of expenditures by the CRA auditor”. Unfortunately, these matters of interpretation can have significant consequences if they serve as the basis for revocation.
Paragraph 168(1)(c) of the Income Tax Act requires that a charity file its annual information return “as and when required under [the] Act or a regulation”. In Opportunities, the Charity alleged that it filed its return in the proper form and by the deadline. The CRA’s position was that it was not in the form required by the Act because there were numerous and specific inaccuracies (or as described the Charity ‘arbitrary reallocations’). Put another way, the Charity breached the CA because the return was not complete and accurate in every respect – in the CRA’s opinion.
In deciding the case the Court stated that filing with inaccuracies is not filing ‘as required by the Act’ but that minor inaccuracies will not justify a revocation. While comforting, one wonders the legal basis for the Court’s position on this issue. And we are left in the dark as to what would constitute ‘major’ inaccuracies. Indeed there is no evidence in the case that the inaccuracies in the return are ‘major’ just that they are “numerous and specific”. Justice Ryer of the Federal Court of Appeal may have been channeling Justice Stewart of the US Supreme Court’s famous statement on pornography and could have borrowed his famous statement:
I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description [“hard-core pornography”], and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.
One of the major problems with the Court’s ruling is that charities are sometimes forced to take a specific position on the proper reporting of an issue. If the CRA disagrees with this position they can allege that the Charity filed an inaccurate return. So, even if the charity’s original position did not justify revocation the filing of a so-called ‘inaccurate’ return might. The same is true of an honest to goodness error on the return.
The difficulty then is one of risk management. Charities must take steps to resolve potential differences of opinion on the return. One way is to involve professional assistance in filing the return but another may be to append an additional document to the T3010 outlining the position taken by the Charity. Unfortunately, this is not part of the prescribed form and so it arguably is pointless to include it. But in issues of ambiguity one would hope a good faith attempt to file accurately would be taken into consideration.
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