Human Concern International penalty, suspension and compliance agreement with CRA and related documents

CRA has the ability to provide penalties to Canadian registered charities and suspend the receipting privileges and qualified donee status of a registered charity.  This is in addition to other tools such as revoking the charitable status of a charity.   The CRA imposed a penalty on Human Concern International and also suspended their receipting privileges/qualified donee status which limits the ability of Human Concern International to not only issue receipts but also receive gifts from other registered charities for a period of a year.  Below we have received and provided the Notice of Penalty and Suspension of Receipting Privileges which is 140 pages long.  We understand that Human Concern International is appealing this penalty and suspension.

On the CRA Charities Listing, it says the charity is “registered” and also says “Penalized and Suspended”

In the CRA’s glossary it notes:

Penalized

A financial penalty has been imposed on a charity because it was not complying with specific legislative obligations under the Income Tax Act.

Suspended

Certain privileges of a registered charity, registered Canadian amateur athletic association, or other qualified donee have been temporarily taken away because it failed to comply with specific provisions of the Income Tax Act. Although a suspended organization may continue to operate while its privileges are suspended, it is not considered a qualified donee during that time, it cannot issue official donation receipts, and it must inform a donor of its suspension before accepting a gift.

Here is a note dated July 14, 2021 from Human Concern International about the suspension

As well here is some media coverage.

Muslim charity Human Concern International heading to court over ‘unfair’ suspension levied by revenue agency (July 16, 2021)(Canadian Press)

Muslim charity wants court to freeze suspension, citing ‘irreparable harm’  (August 20, 2021) (CTV)

Here is the information we received from CRA recently:

Human Concern International – Notice of Penalty and Suspension of Receipting Privileges -Redacted

Human Concern International -Charity Application – Redacted

Human Concern International -Governing Documents – Redacted

Human Concern International – Financial Statements 2020-12-31 – Redacted

Human Concern International – Notification of Registration

The Notice of Penalty and Suspension of Receipting Privileges is 140 pages long and quite interesting, especially for larger organizations and those that do foreign activities to understand the types of issues that CRA could be concerned with.   Because CRA alleges something in a lengthy document does not mean that it is necessarily correct.  It certainly has not been tested in court yet and while some of the allegations may be correct, others may not be correct.    That being said the letter is still interesting because it provides a window into CRA’s concern, albeit with a particular charity.  The 2 notices of assessment are the last 2 pages of the document.

The CRA has said that they wish to make more use of intermediate sanctions (penalties and suspensions) so perhaps we will see more of those.  In addition, the Notice says that the organization has been provided with a compliance agreement.

The CRA letters cover many different topics.   They are arranged in reverse chronological order so if you want to understand the letters better you may wish to read the documents as follows:

CRA Letter May 24, 2018                                       – page 54

Organization’s lawyer’s letter October 1, 2018)    – page 97

CRA Letter July 7, 2021                                          – page 1

Here are some paragraphs or sentences that express CRA’s concern.

For example, under the heading “The Organization is highly experienced and well resourced.”  The CRA notes “Consequently, it’s reasonable to expect that the Organization would have the resources, ability, and experience to be knowledgeable about the requirements of the Act, including proper tax-receipting practices.”  This should be a wake-up call for large charities, especially those involved with more potentially risky activities, that there will be greater expectations of your organization.  CRA is increasingly taking a “risk-based approach” in deciding who it will audit and how it conducts audits.

Under the heading “The Organization appears to have disregarded non-compliance indicators.” CRA notes:

Directors / trustees and like officials are persons who govern a registered charity and are responsible for overseeing the operations to ensure it continues to meet its obligations for charitable registration under the Act.
The courts have placed extensive responsibility, known as fiduciary duties, on the directors of charities. Additionally, the fiduciary responsibilities of the directors of charities are clearly laid out on Industry Canada’s website, and the Ontario Public Guardian and Trustee’s document “Duties, Responsibilities and Powers of Directors and Trustees of Charities.” Included amongst the identified responsibilities is the duty of due diligence and the exercise of power. Directors must further the purposes of the organization and not be inactive or inattentive. The duty of due diligence requires active and concerted effort on the part of directors to be familiar with all aspects of the corporation, including its management and operation, thus enabling them to make informed decisions affecting the charity.

Turning a “blind-eye” or not exercising due diligence where a director is aware or ought to be aware of malfeasance on the part of another director or another person is not acceptable.  All directors have a duty to investigate any suspicious circumstances that suggest a charity’s resources have not been properly used. Furthermore, action should be taken to address and correct the identified issues.

Throughout the audit, the CRA has pointed to several factors that if not conclusive in themselves, should have at least raised red flags for the Organization prompting them to seek advice from the CRA or a tax professional. One strong indicator in this regard is the unregistered organizations’ email communications to both the Organization and the public indicating that they viewed the projects as their own.   …

CRA talks about the content of partner websites and it is important that Canadian charities working with partners are aware of what their partners are saying, especially in relation to fundraising and receipting.

There is a discussion of the importance of having direction and control over the assets of the charity.

There is an interesting quote from an employee in the Middle East cited by CRA on page 8 of the PDF document:

” … I have big reservation about the way things are being done recently in relation to the programs … More than 80% of the programs … have less direct control by HCI on them, and they are restricted funds to selected projects- that are not designed, neither managed, nor implemented by HCI .. . All these programs are loosely controlled by HCI and this is not a good practice at all, especially if we take in consideration the new guidelines that you shared with us that state that
HCI should ‘not be merely a conduit to funnel money, and should have direct control, etc.’ We have not reached that stage but still it is not a good practice. I believe we should be in more direct control on these projects. We should identify and design the projects based on our priorities, we should participate in the implementation, we should supervise, monitor and manage the projects, and we should identify the partners and the beneficiaries in partnership with the partners .. .. ” [emphasis added]

On page 9:

The CRA expressed concerns about arrangements the charity had with non-charitable parties that were fundraising and the charity was issuing receipts for the funds raised.  In some cases this can be appropriate and in other cases, it is not.  It all depends on the facts of the situation.

 

During the period under review, the Organization reported that it issued over $9 million dollars in donation receipts. As noted in our AFL, in order to assess compliance with the ongoing registration requirements of the Act, the CRA selected a sample of 31 projects, conducted outside Canada, by 31 different partners, to analyze. Out of the 31 projects/partners reviewed, the CRA found that the Organization entered into receipting arrangements with six unregistered organizations, allowing those organizations to raise and collect funds for their own projects, as detailed in Appendix 1.

In this regard, we note that the audit did not find this tax-receipting arrangement with the other 25 unregistered organizations/projects that were included in our sample analysis.  The audit also found that the Organization advised three out of the six unregistered organizations that it was deducting a 5% fee from the funds raised and receipted in order to allow the Organization “to cover administrative costs of channeling funds.” We note the following examples :
• In an email,24 dated January 25, 2012, the Organization advises the of the following: “We will be sending the full amount of $74,800 but would like to advise you that for all following
transfers, HCI will be taking off 5% to cover the administration costs of channelling the funds.”
• –In an email, dated November 19, 2012, the Organization writes the following to-: “It was wonderful talking to you. As agreed, we will channel 39K to-(35K which you said we have with us for this project and 4K as adva~us). This shortfall will be covered later from the funds which you will send us. We will also deduct 5% for administration from the total funds received by us and channeled [sic] to Bangladesh.

…

The CRA’s Policy Commentary CPC-026 Third Party Fundraisers – states that a registered charity can enroll a third party organization or retain a fundraiser or other contractor as an agent to organize a fundraising event for the benefit of the charity.   However, the charity should maintain control over all monies that are earned as part of the event, and over the receipts that are issued for part of these monies. 25 In this regard, the first paragraph of the guidance states: “Under the Income Tax Act, registered charities can issue official donation receipts to donors for gifts. This tax-receipting privilege is not to be casually farmed out to third parties, even if some of the resulting funds will be flowing back to the charity”.

We do not dispute that some individuals and/or others were appointed by the Organization to collect funds, which the Organization has called third party fundraisers. However, it is our view that the Organization knowingly entered into arrangements to issue official donation receipts for gifts that were intended for the projects/activities of six unregistered organizations. Consequently, we are unable to accept your representation
that these six unregistered organizations, were third party fundraisers acting on behalf of and for the benefit of the Organization. The audit found that the funds were collected by the six unregistered organizations with the pre-determined intention to funnel the monies to these unregistered organizations for their programs.

CRA expressed concerns with the documents provided during the audit relating to funds provided to non-charities:

With respect to the examples provided in Appendix 1 of this letter, the Organization claims that it raised funds for projects that it decided to conduct through intermediaries, over which it sought to maintain direction and control. In this regard, the Organization provided limited documentation in support of the activities conducted by the six unregistered organizations. However, the documentation provided does not demonstrate that the Organization directed and controlled the activities. We note the following
:
• The Organization provided the CRA with copies of unexecuted written agreements, in that none of the agreements provided were signed by a
representative of the unregistered organizations;
• The Organization provided the CRA with copies of written agreements that did not cover the period under audit;
• The Organization provided the CRA with copies of images that promoted projects that do not appear to correlate with the basic program areas outlined in the written
agreements provided; and
• The Organization provided the CRA with copies of trip reports however, our review of these reports found that they appear to describe the activities of the
unregistered organizations and not that of the Organization.

Based upon our audit findings, it is our view that the Organization did not maintain direction and control over the use of its resources relating to the activities undertaken by the six unregistered organizations.

On page 23 CRA notes about not having an adequate description of the activities that the Canadian charity was hiring a foreign intermediary to conduct:

The agreements contain almost no detail as to the specific activities undertaken. For example, the Organization only appears to be responsible for making funds available for the projects described as Zabiha Program and Education Project. With respect to [REDACTED]’s involvement, its responsibility appears to be limited to acknowledging receipt of funds, providing a report on how it used the funds, and agreeing to be in compliance with all applicable laws including anti-terrorism financing regulations.

The CRA noted:

Audit Observations
The audit revealed that [REDACTED] projects were funded with the help of the Organization.    [REDACTED] own documentation stated that it ” … raise[s] funds using Human Concern
International’s (HCI) charitable number and we deposit all funds to HCI.”  [REDACTED] is not a qualified donee.

CRA again expressed concerns about the lack of detail in the agreements and other matters:

Our review of these agreements revealed the following:

• None of the agreements were signed by [REDACTED]’s representative, even though that representative is listed as [REDACTED] works in dual roles-president of [REDACTED] and purportedly as a fundraising volunteer of the Organization.
• The agreements contained almost no detail as to the specific activities undertaken. For example, the Organization only appears to be responsible for making funds available to [REDACTED], for emergency relief, education projects, university scholarships and transportation. With respect to [REDACTED]’s involvement, its responsibility appears to be limited to acknowledging receipt of funds, providing a report on how it used the funds, and agreeing to be in compliance with all applicable laws including anti-terrorism financing regulations.
• The agreements stated that [REDACTED] ” … will ensure that funds are not used for any purposes.” This statement is puzzling as it is unclear what [REDACTED] could use the funds for since the agreements restrict it from using funds for any purposes.

…

We have considered the documentation provided by the Organization, and we must advise that the Organization has not demonstrated that the activities of [REDACTED] are actually activities of the Organization. While the Organization claimed [REDACTED] acted as its intermediary, none of the documentation provided supports this statement. Furthermore, the Organization has not provided any documentation to refute our findings that in FY2013, it issued $12,420 in donation receipts for gifts intended for [REDACTED]

The CRA has concerns about when agreements were executed and their content.

CRA’s Position
The two signed written agreements provided by the Organization in it submission were executed after, and did not cover, the period under audit. Additionally, the agreements contain almost no detail as to the specific activities undertaken. For example, the wording in the agreements suggests that the Organization’s role is “…to provide support to the [REDACTED]” and defines the Organization’s responsibility as being limited to making specific dollar amounts available to [REDACTED] ($37,150 in the April 24, 2013 agreement and $32,500 in the September 12, 2013 agreement). With respect to [REDACTED] involvement, its responsibilities appears to be limited to acknowledging receipt of funds, providing unspecified services to the community, providing a report on the activities of the centre, and agreeing to be in compliance with all applicable laws including anti-terrorism financing regulations.

The CRA reviewed websites of the Organization’s partners and had concerns about some of the statements on those websites.

7. Other

Audit Observations

According to our open source research, we note that some of the Organization’s partner websites, social media websites, and public reports advised that donations to their programs are eligible to obtain tax receipts, which is facilitated through the Organization. We noted the following examples in our AFL:

• [REDACTED]([REDACTED] ) “Contact Us” page refers potential donors to the Organization for “donations in Canada.” It also states that the donations are “tax exempt.”78
• On both its website79 and Facebook page,80 [REDACTED] refers its potential donors to the Organization for donations towards their projects.
• [REDACTED] ([REDACTED] ) 2011-2012 Annual Report directs potential Canadian donors to send their donations through the Organization and to state that the funds are “designated for Pakistan.”81

 

Organization’s Representations

The Organization advised that it undertakes projects with the above mentioned intermediaries. The Organization stated:
“The [Organization] had made appeals on its own website and social media. Its intermediaries such as [REDACTED] and [REDACTED] also made appeals on their website and social media without the [Organization]’s consent. Upon learning about this, the [Organization] communicated with its intermediaries to remove this from their website and social media.

“The [Organization] was not aware that has made similar statements. The [Organization] intends to contact as well to direct them to discontinue this misleading practice.”

CRA’s Position
The CRA acknowledges that the Organization has taken steps to ensure its partners’ websites, social media websites, and public reports do not advertise that official donation receipts can be obtained, which is facilitated by the Organization.

Conclusion
Based on our review of the information and documentation provided in the Organization’s representations of October 1, 2018, the CRA maintains its position that the Organization engaged in third party receipting schemes when it entered into funding arrangements with non-registered organizations. The Organization issued donation receipts for gifts not intended for the Organization as follows:  …

Here is a CRA comment on objects/purposes on page 56 that should be a wake up call for some ONCA registered charities who want to keep their 60 year old purposes when they make corporate changes to bring themselves into alignment with ONCA:

1.1 Failure to demonstrate that it is constituted for exclusively charitable purposes
Among the various aspects that an audit may examine is whether a charity advances purposes which are charitable at law. Maintaining charitable registration demands that a charity continue to meet the existing statutory and common law requirements associated with registered status. It is important to understand that although a charity’s formal purposes may have been accepted at the time of its registration, it is possible they may subsequently be determined to no longer qualify as charitable at law.  In addition, the activities and focus of an organization may have changed since its initial registration. Such changes may adversely affect the organization’s present day eligibility for continued registration.

On pages 57-59 CRA discusses the objects of the Organization and also their concerns with those objects.

Too many redactions

We note that the CRA provides redactions to the document and often the CRA appears to over redact.  For example, corporate documents are available on the Corporations Canada website (unredacted) and CRA only provides redacted versions.    Unfortunately, redactions can make it more difficult for the reader to understand the true nature of the transactions that are being discussed and the participants that are involved.    This might be beneficial for some but it could also be detrimental to the organization and some people may infer that there is a worse story than what would be seen in an unredacted document.   I have encouraged charities to provide unredacted versions of CRA’s letters, or at least less redacted versions if they would like others to understand what CRA is arguing, whether it is right or wrong.  Even CRA is redacting all of the names of partners of the Organization you can still see some of the names of partners on the CRA website in Schedule 2 for earlier years and for more recent years there are all the names.