CRA uses a risk based approach to deciding which charities are to be audited. CRA a few months ago announced they are adjusting their audit strategy to focus more on larger Canadian registered charities. I guess someone in the past might had thought that smaller organizations, many without any staff, might be less legally compliant and they should be focused on. I guess someone now at the Charities Directorate has worked out that larger organizations have a large amount of resources, generally a lot more complexity and are more likely to be non-compliant with the requirements of the Income Tax Act and such non-compliance could affect much larger amounts of resources.
I often hear people say 'charity x', 'charity y', and 'charity z' will never be audited because they are so large and important. All I can say is that is not true. In many cases I will know that one or more of those charities are undergoing audits although I cannot disclose which and in some cases those charities may be having significant issues with CRA.
For a small charity many will deal with an audit without any legal assistance and in some cases this works out well and the organization may receive an education letter or perhaps a compliance agreement at the worst. With large charities the notion of waiting for CRA to audit the charity before taking income tax act compliance issues seriously can be a big problem and very costly.
We all know that CRA is increasingly using compliance agreements. The problem with entering into a compliance agreements is that when CRA returns they will expect a very high standard of compliance with any of the requirements in the compliance agreement. Put another way - for many charities a compliance agreement may be a precursor to revocation a few years down the line.
For large charities it is often not difficult to find non-compliance. Sometimes it just takes a few minutes of looking at the T3010s, or reviewing one sample donation receipt or briefly perusing their website or social media account.
When CRA first audits a charity they certainly don't expect perfection. But they do expect that reasonable efforts have been made to try to be compliant. For example, when a large organization that does a lot of foreign activities is not complying with the requirements for "direction and control" the CRA will not be very sympathetic. And because your CFO thinks the organization is complying with "direction and control" does not actually mean that it is.
The most cost-efficient ways to improve compliance are two-fold:
1) Conduct a risk review. There may be thousands of legal requirements affecting your charity but from a CRA perspective there are about 20 issues that they are most concerned with. It is best to identify whether any are relevant to your organization and to come up with a plan to deal with any of those issues. In some cases there are some simple changes that can be helpful in solving the compliance problem. In other cases it may be a difficult and costly to deal with. I am a big believer in at least understanding the potential challenges and in starting with the low hanging fruit and fixing important compliance issues which require little effort.
2) Educational workshops. In my experience if you want compliance you need to have an educated board, staff and volunteers. Having educational programs for these people can bring them quickly up to speed as to the legal requirements. It can also provide them with knowledge as to red flags and issues to be concerned with. It can also result in them identifying problems that would probably never come up in a limited risk review as these people know more about how the charity actually operates than anyone else. Education can also mean that staff will be less reluctant to implement change and more able to assist with the changes that are required. We have about 40 different "standard" workshops dealing with compliance issues if your charity is interested.
Unfortunately when it comes to compliance it is not always possible to fix the past. Or it can be fixed but the cost may be prohibitively expensive. Therefore, the next best thing is to focus on the future, start operating appropriately and hope that your charity does not get audited by CRA for a number of years. Typically, CRA is looking at 2 fiscal years within the last 3 or 4 years. Also if CRA finds non-compliance that is historic but you have changed your systems to be in compliance before the audit commences you are more likely to have a smoother audit.
If you would like a risk review or an educational workshop just contact us.
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Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.