A recent Tax Court of Canada (“TCC”) decision, Promised Land Ministries v. The Queen[1], serves as a reminder to charities of the importance of maintaining proper books and records. When a charity fails to maintain proper books and records, it is not meeting its responsibilities under the Income Tax Act (Canada) (the “Act”). In a worst-case scenario, this could cause the Canada Revenue Agency (“CRA”) to suspend the charity’s tax receipting privileges and/or qualified donee status, or give notice to the charity of its intention to revoke the charity’s registration.
This particular case involved a religious organization (the “Charity”) with activities in Canada and overseas. In the case, the TCC upheld a decision of the Minister of National Revenue (the “Minister”) to temporarily suspend the Charity’s tax receipting privileges and qualified donee status for one (1) year. The Minister’s decision was based on her finding that the Charity failed to maintain proper books and records in connection with the Charity’s overseas activities. More specifically, the Charity was not able to produce receipts that matched the entries in the Charity’s financial statements and that clearly showed how the Charity’s funds had been spent overseas. The Charity had kept some receipts and invoices, and had also maintained written summaries of its mission trips, which it sent to its supporters; however, the documents did not explain the numbers in the financial statements.
Before the suspension, the Charity had entered into a compliance agreement with CRA with respect to this same issue of failing to maintain complete and accurate receipts. In the compliance agreement, the Charity had promised to take certain steps to ensure it maintained all of its receipts. As a result of this, and other correspondence that had taken place between the Charity and CRA, the TCC found that the Charity had been given many opportunities to address the concerns with its receipts.
One of the difficulties faced by the Charity, which it raised in the case, was that the Charity had encountered significant problems obtaining and tracking receipts in some of the countries in which it worked as a result of the prevalence of cash economies in poorer countries and remote communities. That being said, the TCC held that the Charity had known for some time that there were concerns over its receipts and that it was the Charity’s responsibility to find ways to address and satisfy these concerns.
The Court also rejected the Charity’s argument that there could be inaccuracies in its financial statements due to accounting errors. It is not unusual for a court to reject this type of argument. In other cases, the courts have held that oversight and understanding of financial matters is ultimately the charity’s responsibility.
There is a body of TCC decisions and other case law that deals with charities being found to have kept improper books and records. That being said, when a new case is published, it is a good reminder to charities of their obligations under the Act. Maintaining proper books and records is also a cornerstone of good governance and should be a priority for that reason as well.
As a basic rule, charities should obtain, and ensure they maintain, official receipts and invoices with respect to all of their expenses. However, in situations where this is truly not possible, there are other ways that charities can keep accurate records of their expenses, depending on the circumstances. For example, charities can request written invoices and work orders. Charities can track cash withdrawals from their accounts and prepare their own expense reports based on such withdrawals. Such expense reports can be supported by pictures of the charity’s activities and other documentation that shows how the funds are being spent and the corresponding amounts. Other options include: keeping a voucher book outlining expenses and supporting them by signatures and other details, using financial management and tracking tools provided by the charity’s bank, using straightforward financial and accounting software like QuickBooks, preparing regular budgets and requiring individuals making expenses on behalf of the charity to confirm and provide supporting documents that show that the funds are being spent in accordance with the budgets. These are just some of the options to consider.
In addition, charities should designate a particular individual or individuals to maintain all records and keep them together in an organized and orderly manner. Charities should also conduct periodic internal audits to ensure they are complying with all of their record-keeping requirements.
By Jordyn Allan and Nicole K. D’Aoust, Miller Thomson
[1] 2019 TCC 145.
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