In July 2011 the CRA imposed a penalty of $174,228.08 on the Reimer Express Foundation Inc, which is a Canadian private foundation based in Winnipeg. The penalties related to certain payments that CRA characterizes as gifts to non-qualified donees. Paul Waldie covered the Foundation in an article in the Globe and Mail entitled “Improper giving prompts tax trouble for trucking magnate’s Christian charity”. Here are the letters from the Charities Directorate of CRA to Reimer Express Foundation Inc. re: penalties for gifts to non-qualified donees.
Summary of what we can learn from the CRA letters:
1) If you are providing funds to non-qualified donees a Canadian charity must make sure it has direction and control over its payments. See CRA’s guidance on dealing with intermediaries. http://www.canadiancharitylaw.ca/index.php/blog/comments/cras_new_guidance_on_foreign_activities_by_canadian_charities/ Charities conducting foreign activities must understand the rules.
2) If you have a compliance agreement with CRA dealing with previous acknowledged problems then expect that CRA will be less forgiving if you are doing the exact same a few years later. Also if you are doing the exact same things with many of the same parties expect increased consequences.
3) You cannot just pay large amounts to people and call these amounts “honorariums”.
A few other observations:
1) As I was quoted in the Globe and Mail article the amounts of money being put into private foundations is growing and the number of private foundations is growing quickly so it would not be unreasonable to assume that the Charities Directorate will be more closely scrutinizing private foundations. What should private foundations do? They should pay close attention to the governance of their foundation. Private foundations should learn about the compliance issues involved with running a Canadian registered charity. Private foudation can save themselves a lot of time, headaches, and money by doing this, or getting others to help them, before CRA calls. Prevention is a lot cheaper and better than a “cure”.
2) I deal with many religious charities. I think many religious charities understand the notion that when you are part of a group, your actions fairly or unfairly reflect to some extent on the group. Those who work with religious charities should be particularly aware of how their actions affect public perception of their group and also the wider charitable sector.
3) In some cases it may make more sense for certain people to forego the tax benefits of putting some of the funds into a charitable foundation and rather send the funds directly to the cause or issue they wish to support. As an example, if you have a million dollars you wish to use for philanthropy - and you know that $50,000 of that you want to gift to a person or group in a foreign country and you don’t want to follow the rules the Income Tax Act and CRA have laid out for registered charities then it may be preferable to forego the tax benefits of about $25,000 on the $50,000 that was not donated to the Canadian foundation and rather disburse the $50,000 outside of the registered charity sphere. Individuals in Canada can take money and send it to family, friends or others. This happens thousands of times a day. In fact, according to the Hudson Institute, Canadians send annually about $12 billion of remittances to developing countries. The people doing so sent funds and received no assistance from government in Canada and no tax deferral or deduction. As Aristotle noted “To give away money is an easy matter and in any man’s power. But to decide to whom to give it and how large and when, and for what purpose and how, is neither in every man power nor an easy matter.”
Here are some highlights of the CRA letters:
The Foundation made disbursements that CRA has determined were gifts to non-qualified donees. The penalty in these circumstances is 105% of the amount of the benefit (gifts), as per 188.1(4) and 188.1(5) of the Act.
The balance of this letter describes the identified areas of non-compliance in further detail.
Previous Audit Findings:
The previous audit, which related to its operations for its fiscal periods ended November 30, 2003 and November 30, 2004, found that the Foundation had made gifts to non-qualified donees. The Compliance Agreement signed at the conclusion of the previous audit outlined that the Foundation had “gifts made to individuals and to charitable organizations in the United States and in the United Kingdom totalling $82,140.08 in 2003 and $163,930.73 in 2004”. These individuals and charitable organizations in the United States and in the United Kingdom were non-qualified donees.
Identified Areas of Non-Compliance:
A registered charity may only use its resources (funds, personnel and/or property) in two ways, both inside and outside Canada - for charitable activities undertaken by the charity itself under its continued supervision, direction and control, and for gifting to “qualified donees, as defined in the Act.
The current audit revealed that the Foundation continued to make gifts to nonqualified donees.
Amount gifted as “Foreign -Donations”
The Foundation reported in its Registered Charity Information Return (T301 0) that it made “Foreign Donations” for the current period under audit. The Foundation provided information that it disbursed funds to four organizations (listed below) totalling $81,912 as “Foreign Donations”.
Christian Solidarity Worldwide United Kingdom http://www.csw.org.uk/portal.htm
Shepherd Serve United States http://www.heavensfamily.org/ss/
Elam Ministries United States http://www.elam.com/
Lamplighters International United States http://www.llim.org/index.phtml?start=1
CRA found no record that any of these organizations were registered charities in Canada, or were otherwise qualified donees. The information found by searching the organizations websites confirmed that each was established outside of Canada. CRA explained during the previous audit that almost all organizations outside of Canada such as foreign charities and international aid agencies are not qualified donees.” Furthermore, of the four organizations that received funding during the current audit period, three of the organizations, Christian Solidarity Worldwide, Shepherd Serve and Elam Ministries, were found to be recipients of gifts from the Foundation as non-qualified donees during the previous audit.
It appeared that the Foundation was merely forwarding funds to the four organizations listed above, who were non-qualified donees. However; the Foundation did complete Schedule 2 Activities Outside of Canada of its T301 0, which indicated that it had conducted its own charitable programs outside of Canada. The Foundation did not provide any information in Schedule 2- Activities Outside of Canada about how the funds were used to conduct its own charitable programs, either through intermediaries using written agreements or through its own employees or volunteers.
The CRA, in its letter of December 14, 2010, requested the list of the organizations that received the amounts reported as “Foreign Donations”. This information was required in order to verify if the Foundation was conducting its own activities outside of Canada that were under its continued supervision, direction and control or if it was gifting to non-qualified donees. The list was requested to include a description of the activities performed on the Foundation’s behalf, and an explanation as to how the Foundation maintained direction and control over its funds. In addition, the CRA, in its letter of January 21, 2011, requested a more detailed description of the activities outside Canada and any documentation that demonstrated the Foundation’s control of the activities conducted with Christian Solidarity Worldwide and with Shepherd Serve.
The Foundation in its correspondence of January 11, 2011, and February 15, 2011, did not provide evidence that it conducted its own activities outside of Canada under its continued supervision, direction and control. Specifically, the Foundation did not:
• provide an adequate or detailed description of the activities undertaken. The Foundation only provided a one-line synopsis for each of its alleged activities and a general description that it worked “to secure rights and freedoms for persecuted religious groups in northern Africa, the Middle East and southern Asia.
The one-line synopsis for each of its alleged activities and a general description provided by the Foundation was consistent with the activities described by each organization on its website. For example, Elani Ministries appeared to have been established to promote Christianity in Iran;
• provide a breakdown of the specific expenses incurred;
• enter into any written agreements with any of the four organizations outside Canada, as stipulated in the Compliance Agreement: rather the Foundation stated it had verbal agreements. As a result, there was no evidence that any of these organizations acted as intermediaries and conducted activities on the Foundation’s behalf; and
• provide any documentation that substantiated the funds it disbursed and stated it was unable to provide any documentation.
We could not conclude that the Foundation conducted its own activities outside of Canada under its continued supervision, direction and control.
It is CRA’s opinion that the Foundation continued to gift funds to foreign charities that were non-qualified donees. This was even more troubling because the majority of these gifts went to the same non-qualified donees that were outlined in the Compliance Agreement signed at the conclusion of the previous audit.
Amount of “Honoraria’ found to be gifts to individuals
The Foundation at the close of the previous audit asked if it was acceptable to pay honoraria to retired pastors. The Foundation was told that “if it is a small token amount for their volunteered time and effort in assisting the Charity then it should be considered honoraria.”
The Foundation reported in its T3010 that it made payments as “Honoraria” for the current period under audit. The payments of “Honoraria” were reported to be “expenditures on charitable programs”. There was no further detail in the Foundation’s T3010 or financial statements about any charitable programs that it conducted itself.
The Foundation in its correspondence of January 11, 2011, provided information that it disbursed funds to 24 individuals totalling $84,019 as “Honoraria Donations to Individuals”.
CRA had questions about whether these amounts were “Honoraria” paid to individuals who conducted the Foundation’s activities or if they were “Donations to Individuals”. The Foundation’s gifts to non-qualified donees during the previous audit included gifts to individuals for personal-use.”.
CRA requested in its letter of January 21, 2011 a detailed description of the activities undertaken by _______ and by _____________ and the Consultation services provided by _________ and ____________. We asked why the Foundation considered these to be its own activities. We requested any documentation that substantiated that the activities undertaken were the Foundation’s own, such as minutes to meetings, employment/service contracts, and anything else the Foundation deemed useful.
The Foundation in its letter of February 15, 2011, stated that these individuals did not actually conduct “direct charitable activities for the Foundation. The Foundation reported that these individuals provided “consultative services” and “support work for which the Foundation does not maintain operational, administrative or advisory staff.” The Foundation did not provide documentation that substantiated these payments.
It is CRA’s opinion that the Foundation had taken the amounts that had were found to be gifts to individuals for “personal use” during the previous audit and reclassified them as “Honoraria~ during the current period under audit. Our opinion was based on the reasons outlined below:
• The amounts disbursed to each individual were not token amounts. The lowest “Honoraria” paid were for $2,500.
• There was no record of the payment of “Honoraria” to any of these individuals. If the individuals had done work on behalf of the Foundation they should have been issued T 4As. The Foundation does not maintain a payroll account.
• Of the 24 recipients for the current audit period 14 were also recipients during the previous audit period. The funds disbursed to these individuals during the previous audit, as described above, were described as “for your personal use.” The gifts were made directly to the individuals and were found to be gifts to nonqualified donees.
As result, CRA is of the opinion that the disbursements of “Honoraria”, continued to be gifts to individuals, and as such continued to be gifts to non-qualified donees. This was even more troubling, because the majority of these gifts went to the same nonqualified donees that were outlined in the Compliance Agreement signed at the conclusion of the previous audit.
Due to the serious and continued nature of the non-compliance issues described above, it is our position that a penalty under 188.1 (4) and 188.1 (5) of the Act should be applied to the Foundation.”
Improper giving prompts tax trouble for trucking magnate’s Christian charity
Link to CRA database on Reimer Express Foundation Inc.
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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.