All of the federal budget measures for charities previously announced on March 22, 2011, returned today in Budget 2011. The provisions are retroactive to March 22, 2011. This news release will recap those announcements and make recommendations for charities. The only new information for charities is that Parliament will ask the House Standing Committee on Finance to undertake a study of charitable donation incentives.
A [:link href=”https://www.cccc.org/members_sample_documents_view/html/43″ txt=”sample declaration”:] has been prepared by CCCC for use by member charities to avoid the involvement of ineligible individuals. An “ineligible individual” is a new concept requiring all charities to undertake additional due diligence to confirm the relevant background of their leaders. This concept and the declaration will be further explained below.
Significant provisions within the budget are focused on enforcement to prevent fraud and abuse within the charitable sector. This is an attempt to assist Canada Revenue Agency (CRA) with compliance. This is also a measure to ensure charitable donations are used for charitable purposes. These provisions should strengthen the work of legitimate charities.
In addition, the reporting requirements which have been in place for many years for charitable organizations and public and private foundations, will be extended to other organizations able to issue official receipts, including registered Canadian amateur athletic associations, municipalities, corporations providing low-cost housing for the aged, foreign universities with Canadian students, and foreign charities to which the federal government has recently made gifts.
CRA to Monitor Backgrounds of Leadership and Senior Staff
Effective the later of January 1, 2012, or the date the Income Tax Act amendments receive Royal Assent, CRA will have the right to suspend receipting privileges or revoke the registration of a charity where an ineligible individual controls or manages a charity directly or indirectly in any manner whatsoever, or is a director, trustee, officer, or like official of a charity. CRA can also refuse to register a charity where the application is made by an ineligible individual or an ineligible individual will be involved either directly or indirectly in the management of the charity.
An ineligible individual is a person:
- with an unpardoned criminal record for financial dishonesty, including tax evasion, theft, fraud, or other offences involving breaches of the public trust; or
- who has been found guilty of a relevant offence within the past five years. A relevant offence is a noncriminal offence either specifically relevant to the operation of a particular charity or is an offence of financial dishonesty contravening any law in Canada except the Criminal Code, including breaches of charitable fundraising, consumer protection, and securities legislation; or
- who was a promoter of a tax shelter for which a charity was revoked within the previous five years.
Criminal or relevant offences are not required to have been committed in Canada. They will be captured by this provision if, committed anywhere in the world, they would be criminal or relevant offences if committed in Canada.
Charities will now be required to invest more time and care into recruiting suitable individuals to participate as directors, trustees, and senior staff. CCCC provides the following suggestions for charities:
1. Implementation of a thorough screening process for all prospective leaders, such as directors, trustees, and senior staff. Budget 2011 specifically provides that charities will not be required to perform background checks. There are some searches charities can undertake on their own. For example:
- Internet Search – Conducting an Internet search of the name of a candidate may result in a match. Care should be taken to ensure that any information on the Internet is addressing the relevant candidate and not another individual with the same name, particularly where the name is fairly common.
- Reference Checks – Each charity should require references for each candidate. Time will be required to contact those individuals for interviews. Notes of the conversation should be kept including the time, date and duration of the conversation, and the name of the of the individual who conducted the interview. Specifically addressing the four criteria on the accompanying declaration, will provide additional evidence of due diligence by the charity.
- CanLII Search – The Canadian Legal Information Institute is a nonprofit organization managed by the Federation of Law Societies of Canada. CanLII makes available, free to the public, copies of all reported Canadian court cases. The [:link href=”http://canlii.org/en/index.php” txt=”CanLII website”:] will search for matches for any candidate’s name typed onto the “full text” line, if that name is listed in a reported case. Here again, caution must be exercised in determining whether any responses are actual matches for the candidate. Also, not all court cases in Canada are reported, so the CanLII database does not contain every Canadian case.
- Professional Qualifications Search – If the candidate is a member of a self-governing body, such as accountants, lawyers, or registered fundraisers, permission may be obtained to consult with the licensing body to determine if there is a history of complaints. If the candidate holds degrees or accreditation from an educational institution, confirmation may also be obtained from the university or college. The candidate will be required to consent to these inquiries.
Charities may still wish to require background checks as part of the recruiting process, as there is no other way to confirm the absence of criminal history. However, some charities may find this onerous. For additional information on screening employees, CCCC members can review the article, [:link href=”https://www.cccc.org/bulletin_article/226″ txt=”Checking it Twice: Employee Background Checking for Christian Charities”:].
CCCC is providing a declaration as an alternative due diligence measure. This declaration should be implemented immediately by having those currently in the relevant positions, sign the declaration. Budget 2011 does not have exceptions for individuals who have already assumed their roles. All future personnel changes in these positions should also be required to sign. The documents should be signed and witnessed simultaneously to prevent fraud. These declarations should be kept permanently with the employee records of the charity.
Consideration will need to be given to which staff positions need to sign the declaration. The budget provides that ineligible individuals include those who, in any manner whatever, directly or indirectly control or manage the operation of the charity. This will include the chief executive officer. Beyond the most senior position, each charity has a unique organizational structure. Consequently, each charity will be required to determine which staff positions either directly or indirectly control or manage the operation of the charity. As CRA refines the parameters associated with this new provision, CCCC members will be updated.
2. All current and subsequent directors, trustees, and senior staff should be required to sign this declaration annually to ensure ongoing due diligence by the charity.
3. A policy should be developed allowing the automatic removal of a director or trustee found to have violated the annual declaration.
Although gifts given to and accepted by charities are generally considered to be irrevocable, there may be unusual circumstances where a charity determines a gift should be returned. Most charities will never face this circumstance.
Commencing March 22, 2011, if a charity returns a gift to a donor and the value of the returned gift is greater than $50, the charity is required to immediately issue a revised official receipt and file a copy with CRA. CRA will also have the right to reassess taxpayers where the reassessments relate to returned gifts.
For additional information on returning a gift, CCCC members may view the article, [:link href=”https://www.cccc.org/bulletin_article/315″ txt=”Considerations Involved in the Return of a Charitable Gift”:].
Donations of Publicly Listed Flow-Through Shares
In this budget, donations of flow-through shares have been made less attractive to donors because of the implementation of an exemption threshold. Effective March 22, 2011, the exemption allowed for capital gains on donations of flow-through shares will be limited to increases in excess of the original cost of the shares.
Two additional provisions affecting charities are also included in Budget 2011. These provisions are unlikely to impact CCCC members to a significant extent. Charities wishing to engage in these sophisticated gifting arrangements, should first ensure they obtain competent financial and legal advice on how to structure the arrangements. Both provisions are retroactive to March 22, 2011:
Gifts of Non-Qualifying Securities
The tax recognition of transfers of non-qualifying securities to charities must be delayed until disposition by the charity. Non-qualifying securities are most commonly shares in privately held corporations. This provision requires charities to issue official receipts for donations of non-qualifying securities only after the charity has sold or otherwise transferred the securities. The sale must occur within five years of the initial transfer of the securities to the charity. Charities will now be unable to provide a receipt for a transaction where the consideration for the transfer of the securities is another non-qualifying security.
Granting Options to Charities
If charities obtain an option to acquire property in future, the tax implications for the taxpayer are delayed until after the charity exercises the option. The charity must issue a split receipt at the time the option is exercised, reflecting the amount paid by the charity for the option, if anything. There will be no intention to give, and consequently no receipt can be issued, where the cost of the option exceeds 80 per cent of the fair market value of the property. This is consistent with the previously announced split-receipting rules.