Top Ten Canadian charity law issues
Published under Charity Law In Canada
October 03, 2007
So much is written about legal issues relating to charities in Canada. Often the information is highly specialized. Reading all that material can become a full time job but most distressingly with all the information overload many charities and their employees and volunteers miss what I think are the most important issues. I thought I would try and note the ten most important things you need to know about charity law in Canada.
1) FILE THE T3010 REGISTERED CHARITY INFORMATION RETURN ON TIME
The T3010 is due 6 months after the charities year-end. Failure to file the T3010 within 1-2 months of that date will result in your charity being deregistered, losing its charitable status and consequently receipting privileges. One of the first items that a new executive director or board member should work out is fiscal year end and then the date that is 6 months after that. This date should be diarized. Always make sure that the address that CRA has on file is up to date – otherwise the reminder that CRA may send to your charity may never arrive. Unfortunately many charities are deregistered and they are not even aware of it.
2) DO NOT SUPPORT TERRORISM
That means the charity cannot support terrorism either directly or indirectly or let your charity be a dupe for terrorist organizations.
3) DO NOT RUN A SCAM
If you run a charity and your relative runs a fundraising company charging a fee equal to 80% of the funds raised that is a scam. If you tell people that they should provide you with a cheque for $100 and somehow they will end up with a tax receipt for $1000 that is a scam. It does not matter if the scam comes with a thirty page opinion letter from a prominent law firm - it is still a scam or as some lawyers refer to it ‘a potentially abusive tax scheme’. Scams should be avoided at all costs because in addition to being illegal, they are unethical and also undermine the whole charitable sector.
4) DISBURSMENT QUOTA (also called the DQ)
The disbursement quota is the Income Tax Act’s increasingly complicated way of saying you must limit your fundraising costs, administration costs and the amount that you keep in reserve in relation to your receipted donations. In its simplest form for a registered Canadian charitable organization if you receipt a donation then the following year you need to spend 80% of the donation on charitable programs, and only up to 20% on fundraising and administration. If you receive money from government or business and do not issue a tax receipt then these funds are not included in the disbursement quota and you are not limited to only spending 20% on admin and fundraising. I have never heard of a charity losing it charitable status because it only spent 78% on charitable activities. The charities who lose their charitable status are typically spending 20% on charity work and 80% on fundraising/admin or they continuously over a number of years have major shortfalls in their charitable spending. Most of my clients don’t worry much about disbursement quota either because they receive a lot of funds that do not need to be receipted (from corporations or government) or they keep a tight reign on their costs. Other charities prefer to fudge their numbers and get expensive legal and accounting advice on how far to push the envelope - sometimes there is a day of reckoning – whether by CRA audit or a newspaper report causing public embarrassment.
5) FOREIGN ACTIVITIES
If you are one of the almost 12,000 Canadian registered charities that conduct activities outside of Canada or spends money outside of Canada you need to read the CRA booklet RC4106 Registered Charities: Operating Outside Canada. Canadian charities cannot grant funds to foreign charities, except in a very small number of cases. You must comply with these rules. It is a major area of emphasis for CRA audits. For further information you can see my article on Canadian charities operating outside of Canada. (http://www.blumbergs.ca/articles_more.php?id=103_0_2_0)
6) DIRECTOR COMPENSATION
In Ontario, Directors are not entitled to compensation for serving on the board of a charity. In fact by being a director of a charity that operates in Ontario you are very much constrained in terms of any dealings you have with the charity. Accountants serving on a board and their firms cannot do an audit of the charity and cannot charge the charity for accounting services. Law firms cannot charge for legal services provided to a charity if one of their partners etc is on the board of the charity. Directors are only entitled to reimbursement of reasonable expenses incurred to further the activities of the charity. Directors cannot receive salaries, stipends, grants, honorariums, consulting fees from a charity. There is a very simple solution - if you wish to receive compensation from a charity, do not serve on the board of directors.
7) BOOKS AND RECORDS AND RECEIPTS
A Canadian registered charity must keep adequate books and records in either English or French at a Canadian office. This is so that CRA can verify official donation receipts issued, as well as its revenue and expenditures. A charity must also keep source documents that support the information in the books and records. A charity needs to ensure that every receipt it issues is accurate and according to the requirements of CRA. Even minor mistakes in the tax receipts as to either form or content are taken very seriously by CRA.
In terms of records retention charities are required to keep duplicates of receipts for at least two years from the end of the calendar year in which the donations were made. Most other documents need to be kept for 6 years from the end of a fiscal year. Some other records must be retained in perpetuity or until two years after the charity is no longer a charity such as “ten year gifts”, minutes of meetings and all governing documents such as letters patent. If in doubt, keep it!! What’s a few more boxes! Also if you keep it you will not need it, but if you get rid of it - you will need it. I think that is a law of nature.
8) BUSINESS
Under the Canadian Income Tax Act, charitable organizations and public foundations can carry on “related business” that promote their charitable objects. An example would be a hospital cafeteria - providing food to patients and visitors. They can also carry on other unrelated business activities, presumably to raise funds for the charity, if “substantially all” (CRA says at least 90%) of the people involved in these activities are volunteers. Private foundations cannot carry on any business activities whatsoever. Failure to follow these rules can result in penalties and deregistration.
9) POLITICAL ACTIVITIES
Under the Income Tax Act, a registered charity can be involved in non-partisan political activities as long as it devotes substantially all of its resources to charitable activities. Any political activities have to help accomplish the charity’s purposes and remain incidental in scope.
A registered charity cannot be involved in partisan political activities. A political activity is considered partisan if it involves direct or indirect support of, or opposition to, a political party or candidate for public office. See the CRA policy statement on Political Activities (CPS - 022) located at http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cps/cps-022-eng.html
Don’t forget that registration of lobbyists (federally, provincially or otherwise) is a separate issue to CRA constraints. You may wish to review the Federal or provincial lobbyist registration acts to check whether you and your organization are compliant.
10) QUORUM FOR MEETINGS
When you have a directors or members meeting you need to meet the quorum requirement and should record this fact in the minutes. If you do not have quorum at the meeting there is no legal validity to any of the actions or resolutions passed at the meeting. I only mention this rather obvious point because many organizations work really hard to put on their meetings, especially annual meetings, and you want the results of the meeting to be valid.
Obviously there is more to Canadian charity law than these ten points. But there is little sense focusing on obscure provincial statutes and missing the some of these important charity law issues.
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