Here are some comments from Cathy Hawara, Director General of the Charities Directorate, relating to the issue of Canadian charities and ineligible individuals rules in the 2011 Federal Budget.

“Now I’d like to move on to another significant change of Budget 2011 which affected existing registered charities and RCAAAs. I’m referring to the new registration eligibility requirements relating to past conduct of individuals involved with an organization.

Until this year, a criminal history or past misconduct of an individual with significant influence over an organization, such as a director, was not a statutory ground for refusal of registration or for revocation of a charity or RCAAA – this, in spite of the fact that we sometimes knew that the director of one organization had also been the director of a separate organization that had its registration revoked for serious and deliberate non-compliance, such as issuing fraudulent donation receipts. These new provisions will assist us in keeping out those who seek to abuse the registration system for charities.

The Income Tax Act now gives the CRA the discretion to refuse to register or revoke the registration of an organization, or to suspend an organization’s authority to issue official donation receipts, if a member of the board of directors, a trustee, officer or equivalent official, or any individual who otherwise controls or manages the operation of the organization is considered to be an “ineligible individual,” as defined in subsection 149.1(1).

There are two categories of ineligible individuals: one covers individuals convicted of an offence; the other refers to individuals involved with an organization which was revoked in the previous five years for a serious breach of the Act or for promoting a tax shelter. Both of these raise a number of interesting operational challenges.

And the key question for both you and for us is: how will we establish if an individual is “ineligible?”

With regard to criminal history, the legislation provides that an individual is ineligible if convicted of a relevant criminal offence or a relevant offence.

At the end of the day, the result is that any conviction for an offence that involves a form of financial dishonesty will always be relevant, whether or not the offence is considered criminal. This makes a lot of sense when you consider the significant public investment in the charitable sector: registered charities are tax exempt; government funding continues to be a primary source of revenue for many registered organizations; and, of course, credits and deductions from donation receipts also represent forgone revenue for the Government of Canada. So the integrity of the system is placed at risk when people with a history of financial dishonesty are able to secure registration for their organizations.
Where an offence does not involve financial dishonesty, the determination of relevance may depend on an analysis of the specific facts of the situation. More specifically, whether the offence, if repeated by the individual, could inflict harm on the organization or its beneficiaries.

This particular aspect of the definition of “ineligible individual” – the aspect relating to a conviction of an offence – represents some new ground for the Charities Directorate. We intend to strike an appropriate balance between protecting the public interest and respecting individual privacy. We are working in consultation with our legal advisers to develop processes to apply these measures. We will also be consulting with representatives of the sector as we move forward.

With regard to individuals involved with an organization that had its status revoked for a serious breach, as I mentioned before, we are primarily concerned with deliberate non-compliance. This provision gives us discretionary authority, and our intent is to administer it in a way that strengthens our risk-based approach to compliance. A careful reading of the provision and related definitions reveals that only those individuals controlling or managing an organization at the time a serious breach of the Act was committed, when that breach resulted in revocation, will be considered ineligible individuals. There are no implications for any board members who were not board members at the time of the violations.

I want to assure you that our intent is to proceed cautiously, and on a case-by-case basis when applying these new eligibility provisions. However, there may be circumstances, such as tax shelters and false receipting cases, when we will enforce the new rules even as we continue to fully develop our processes. I am sure our ongoing concern about these issues comes as no surprise to you.

I would also add that while we recognize that many registered charities working with children or other vulnerable groups may already be requiring background checks on their officials, employees, and volunteers, not all organizations have the capacity to do so. In addition, Budget 2011 made it clear that charities were not expected to undertake background checks in order to demonstrate compliance with the new provisions. That said, there may be cases where a charity or RCAAA has been made aware of certain concerns about an individual, or where an individual’s background is or has become public knowledge. In those instances, failure to take appropriate action could result in the denial of the application for registration, suspension of receipting privileges, or revocation of registered status.

To conclude on this point, we are moving forward deliberately and prudently and will be consulting with the sector. But we are prepared to act quickly where there is serious deliberate non-compliance. I would add as well, that while our role as regulator does not extend directly to issues of governance, there is, with these new provisions, some overlap. Both the common law and relevant related statutes oblige directors to put the best interests of the organization ahead of their own (particularly in exercising their fiduciary duties), to be diligent in familiarizing themselves with all aspects of their organization, and to protect the organization’s interests and property. So, to my mind, the general thrust of these provisions are not inconsistent with existing rules.”

Here is the full text of Cathy Hawara’s comments on the CRA website:

Also here is an article I wrote last year on the ineligible individual provisions: