Table of contents

• Message from the Minister of National Revenue
• Message from the Commissioner of the Canada Revenue Agency
• Message from the Director General of the Charities Directorate
• The CRA's Charities Directorate
  • Mission
  • Vision
• The charitable sector
  • Defining "charitable"
  • Qualified donees
  • Business intelligence
• The regulatory process
  • Applying for charitable registration
  • Monitoring charities: An education-first approach to compliance
  • Audit findings 2015-16
  • Revocations in 2015-16
  • Recourse
  • Summary of objections outcomes
• Outreach and engagement
  • Public and charitable sector outreach initiatives
  • Participating and consulting
  • Guidance products
  • Anti-terrorist financing initiatives
• What's next
  • Political activities
  • Outreach activities
  • Guidance product review
  • Compliance initiatives
  • The Charities Modernization Project (CHAMP)
• Stay connected
• Appendix

Message from the Minister of National Revenue

Message from the Commissioner of the Canada Revenue Agency

Message from the Director General of the Charities Directorate

The CRA's Charities Directorate

Charities are a vital part of Canadian society, offering a remarkably diverse range of services to people in our country and around the world. Their activities include providing food and shelter to people living in poverty, operating schools, offering religious services, and running hospitals. The Income Tax Act (Act) provisions that apply to registered charities help promote charitable giving while protecting charities and the public from abuse.

The CRA is responsible for implementing the Act, and has long viewed charities as a specialized group of taxpayers with distinct characteristics and needs. Many of the regulatory functions relating to charities are housed in the Charities Directorate, which acts as a small scale version of the CRA within the CRA.

Headquartered in Ottawa, the Directorate is a national program with an annual operating budget of approximately $29 million. It has 250 full-time employees organized into six divisions to meet its mandate and commitments. The Directorate's program includes:

• providing client service

• engaging in communications and outreach

• examining applications as a charity

• processing annual returns

• performing audits and enforcement activities

• contributing to the Government of Canada's efforts to ensure charities' resources do not support terrorism

• developing policy and technical guidance products

See the Appendix for more information about the structure and roles of the Charities program.

Mission

The Directorate's mission is to promote compliance with the income tax legislation and regulations relating to charities through education, quality service, and responsible enforcement, thereby contributing to the integrity of the charitable sector and the social well-being of Canadians.

Vision

The Directorate's vision is to be recognized and respected by charities, stakeholders, and the Canadian public for its integrity, fairness, knowledge, and innovative service delivery resulting in client-oriented service and compliance.

The charitable sector

Defining "charitable"

The CRA's Charities Directorate uses the common law definition of charity developed by the courts to determine whether purposes and activities are charitable. Purposes describe an organization's main aim or intent. Activities describe how the organization will accomplish its purposes.

To qualify for registration as a charity, an organization must be resident in Canada, its purposes must be exclusively charitable, and its activities must support its purposes. An organization must also be able to show that its purposes and activities will benefit the public and comply with public policy. This means that it could not, for example, operate to provide a benefit to private individuals, such as its members, or operate for the purpose of making a profit.

According to the common law, charitable purposes and activities must also fall under four "heads" or categories of charity:

Qualified donees

Qualified donees are organizations that are able to issue official donation receipts. Registered charities and the following eight types of organizations are qualified donees:

Before 2011, registered charities (including Registered National Arts Service Organizations (RNASO)) and Registered Canadian Amateur Athletic Associations (RCAAA) were the only qualified donees that had to register with the CRA before being able to issue official donation receipts. The Act was then changed to require all remaining qualified donees to be registered with the CRA except Her Majesty in right of Canada, a province, or a territory, and the United Nations and its agencies. The Directorate now publishes a list of all registered qualified donees on its webpages.

Business intelligence

The Directorate recognizes the value of business intelligence (BI) for strategic and operational planning. Analysing information from the annual return and internal data sources is a key component of the Directorate's work. This analysis enables the Directorate to make informed decisions on how to improve its policies and procedures for the benefit of charities and the public.

Here is a snapshot of Canada's charitable sector by the numbers:

The regulatory process

Registration as a charity has many privileges, but it also comes with an obligation to follow the rules under the law. The CRA has a responsibility to protect the integrity of the tax system and the charitable sector by making sure all registered charities follow these rules.

The following contains information on the privileges and obligations of registration:

Applying for charitable registration

The CRA's Charities Directorate received the following number of applications for registration during the 2015-16 fiscal year:

The Directorate made the following decisions on applications during the 2015-16 fiscal year:

Reasons for turning down applications

In 2015-16, 84 applications were found to be ineligible for charitable registration. The most common reasons applicants were not granted charitable status were:

Lack of information

The Directorate cannot determine whether an applicant is eligible for registration if the application does not include enough information on its structure, purposes, activities, and finances.

Promotion of sport

Sports programming is only charitable if it furthers a charitable purpose, such as sports offered as part of a school curriculum that advances education.

Activities do not support a charitable purpose

An applicant must have exclusively charitable purposes and activities and activities to be registered as a charity.

Resources provided to non-qualified donees

A registered charity may only use its resources (funds, volunteers, employees, and/or property) in two ways; carrying out its own charitable activities or making gifts to qualified donees. An applicant that plans to provide resources to a non-qualified donee must maintain direction and control over how the non-qualified donee uses these resources; it cannot simply make a gift.

Monitoring charities: An education-first approach to compliance

The Directorate is responsible for monitoring Canada's registered charities and ensuring they comply with the requirements of the Act. It provides charities with many resources to help them follow the rules on their own. For example, the Directorate provides guidance products, publications, and webinars on its webpages that explain how to operate a charity. Applicants and charities can call or write to client service agents at any time for assistance.

The Directorate audits registered charities as part of its monitoring efforts. Where appropriate, the Directorate uses an education-first approach when it finds non-compliance. The Directorate often sends letters to educate charities about compliance issues and how to resolve them.

The following image gives a general overview of the Directorate's audit process:

Outcomes of the 726 audits completed in 2015-16

*This figure includes situations where the audit is finished and the CRA intends to revoke the charity's registration, but has not yet done so.

**Includes other audit activities such as pre-registration and revocation tax audits.

Audit findings 2015-16

In 2015-16, the most commonly identified concerns following audits were:

1. Incorrectly issued donation receipts

Registered charities and other qualified donees may issue official donation receipts for the gifts they receive. These receipts must contain specific information.

Errors in issuing donation receipts are consistently the Directorate's top audit finding. This includes:

• mandatory information is missing
• the name and address of the charity on the receipt does not match the information filed with the CRA
• receipting practices are not properly controlled
• valuations for non-cash gifts are not supported

2. Annual return errors

Registered charities must file a complete and accurate annual return no later than six months after their fiscal period end. Return fields often contain errors or are left blank, such as:

• amount of gifts for which the charity issued tax receipts
• amount spent on charitable programs
• date of birth of each director/trustee

3. Inadequate books and records

Audits often find that registered charities do not maintain complete books and records. Common issues include:

• missing copies of donation receipts
• missing expense receipts
• banking and accounting details that do not match the information on annual returns

4. Non-charitable purposes and/or activities

Occasionally, audits find that registered charities have changed their programs or activities and that some of these changes are not authorized by their governing documents or are not charitable. Charities should contact the Directorate before making major changes to their purposes or programs. Also, charities must file any changes to their governing documents with the Directorate.

5. Non filing of T4/T4A slips

Registered charities with paid employees are required to file T4 and T4A slips. Audits often reveal that charities do not issue T4 or T4A slips or they do not maintain records of these documents.

Revocations in 2015-16

In 2015-16, the Directorate revoked the registration of 1,429 charities. Most of these revocations were at the request of the charity, or because the charity did not file an annual return. Only 1.4% of revocations were as a result of an audit.

Recourse

Registered charities and applicants for charitable registration may object to, and subsequently appeal, decisions of the Directorate. Providing an objection and appeal process ensures that the rules and principles governing charities are fairly applied. The objection process is a transparent and independent review of the Directorate's decisions by the CRA's Appeals Branch. If an organization disagrees with a decision on an objection, it has 30 days to appeal to the courts.

The Directorate's decision can be confirmed (upheld), vacated (reversed or overturned), or varied (modified). An objection can also be found invalid, such as when an organization files the objection late.

*Other notices relate to designation, annulment, excess corporate holdings, loss of corporate status, penalties, and suspension of receipting privileges.
**138 objections were found to be invalid.
Figures from June 12, 2005 to March 31, 2016.

Most of the Directorate's decisions cannot be "varied". However, the revocation tax decisions can vary because a charity's financial information can change in the time between the initial decision and when the objection is reviewed. For example, by transferring its assets to an eligible donee, the charity will reduce the revocation tax owing.

Appeals are made to either the Federal Court of Appeal or the Tax Court of Canada depending on the type of notice (decision) sent by the Directorate:

• Federal Court of Appeal
  • Notice of refusal to register
  • Notice of intention to revoke
  • Notice of a designation
  • Notice of annulment
    
• Tax Court of Canada
  • Notice of assessment
  • Notice of suspension of receipting privileges

Outreach and engagement

The CRA's Charities Directorate is committed to being transparent and accountable to the public about its own activities as well as the activities of charities. It does this by regularly engaging with the sector and public through outreach activities. Through these efforts, the Directorate provides tools to charities that help them voluntarily comply with the requirements of the Act. It also provides certain information about charities to the public on request.

Public and charitable sector outreach initiatives

In 2015-16, the Directorate reviewed its outreach program to assess its effectiveness.This review considered product quality, impact, and ease of understanding. As a result, the Directorate will be:

• improving the Charities and giving webpages and its online products
• exploring ways to expand the use and promotion of social media and other electronic communications
• working with partners in the sector, including academics, professional associations and umbrella organizations, to increase the reach of its message

The Directorate has already started work on these initiatives. For example, it:

• is updating its webpages to ensure all information is easier to understand and reflects the online behaviour of users
• developed a self-assessment tool to help applicants make an informed decision about whether registration is right for them
• developed electronic tools to make it easier for the public to request information about charities from the Directorate, such as
  • a charities listings request form
  • a request form for registered charity information

Participating and consulting

The Directorate values its connection with charitable sector stakeholders. Over the last year, the Directorate participated in events, consultations, and projects to communicate with stakeholders and to better understand the challenges they face.

Guidance products

The Directorate develops and publishes guidance products on charity law topics to help explain the requirements of the Act and the common law that apply to registered charities. It determines the topics that require clarification and guidance by:

• analysing legislative developments
• monitoring case law
• considering feedback from the charitable sector
• examining findings from its internal business intelligence

The Directorate reviews each new guidance product approximately one year after it is published. This "post-implementation" review considers feedback from internal and external sources to improve the product and ensure it achieves its purpose. Recently, the Directorate completed a post-implementation review of its arts and health guidance products.

Anti-terrorist financing initiatives

The Directorate is a member of Canada's anti-money laundering and anti-terrorist financing regime. In this role, it helps fulfil Canada's international commitment to fight terrorist financing by sharing its expertise on Canada's compliance with the international counter-terrorist financing standards set by the Financial Action Task Force (FATF).

The Directorate also participates in FATF projects. It recently analyzed case studies from a number of countries to identify risks within the non-profit and charitable sector. It drafted the report Risk of Terrorist Abuse in Non-Profit Organisations, which was published by FATF in June 2014. Based on the results of the June 2014 report, the Directorate helped revise the FATF best practices paper, Combating the Abuse of Non-Profit Organisations, in June 2015. This paper aims to help countries effectively respond to terrorist financing risks in the charitable sector, and will be used by the Directorate to promote awareness of these risks for charities.

The Directorate's work is also guiding revisions to the FATF standard concerning charities. These revisions will make sure this standard reflects current threats, as well as recent governmental and sector efforts to protect charities from terrorist abuse. The Directorate posted a notice on its webpages encouraging Canadian charities to participate in the revision process.

What's next

Political activities

Charities make a valuable contribution to public policy. For this reason, the Act gives charities the right to engage in a limited amount of non-partisan political activities. The role of the CRA's Charities Directorate is to make sure charities have the information they need to contribute to public policy while respecting the law.

Consultations

The March 2016 Federal Budget announced that the Directorate, working with the Department of Finance, will consult with charities to clarify the rules governing political activities. The CRA is hosting online consultations with the public and in-person consultations with stakeholder groups from across Canada in the fall of 2016. A consultation panel, made up of individuals with expertise in the regulatory issues facing charities, will use the feedback from the online and in-person consultations to make recommendations to the CRA in early 2017.

Conclusion of the political activities audit program

Under the political activities audit program, the Directorate selected 60 charities for audit over four years, in addition to the roughly 800 audits it conducts annually. In January 2016, the Minister of National Revenue issued a news release announcing the Directorate would be winding down the program; at the time, 30 audits were completed and 24 were underway. The release also noted that the remaining six audits would not be started as part of the political activities audit program, as the results of the program had shown substantial compliance with the rules regarding charities' involvement in political activities. As of September 30, 2016, the Directorate has concluded 42 audits. There are 12 audits for which the audit work has been completed and the Directorate is currently communicating the results to the charities, allowing appropriate time for them to respond.

Political activities audit outcomes

Outreach activities

The Directorate regularly reviews and updates its outreach strategy to ensure it meets the needs of the sector and the public. Outreach activities being developed by the Directorate include:

• high-impact animated video series to educate charities on gifting and receipting, books and records, fundraising, and other charity topics
• electronic tools to help organizations submit complete and accurate information when applying for registration, such as a personalized document checklist with important messages for applicants

Guidance product review

The Directorate is currently working on several new guidance products to help charities understand the requirements of registration. Its current projects include developing or updating guidance pieces on:

• the advancement of education
• the relief of poverty
• the protection of the environment
• private benefit
• related business

Compliance initiatives

This year, the Directorate plans to increase its outreach to charities beyond the core audit program. It will focus on educating charities on how to detect and deal with minor non-compliance issues.

A new approach to compliance

The Directorate is actively looking at ways to encourage voluntary compliance by charities to address minor non-compliance issues before they become serious concerns. The Directorate plans to strengthen its risk management framework by:

• increasing educational outreach to a larger segment of the sector, including educational visits to newly registered charities
• focusing audit resources on high-risk cases, including serious cases of repeated intentional and/or aggravated non-compliance

Strategies to reduce late filing

The most recent review of the Charities program by the Office of the Auditor General (OAG) identified the late filing of annual returns as an area of specific concern. An internal review found that one in four registered charities did not file their annual return on time, that is, within the six months after the charity's fiscal period end.

Late filing delays public access to information about charities. When a charity does not file its annual return by its due date, the Directorate sends a notice by registered mail and makes a telephone call to remind it to file. If the charity still does not file its return, the Directorate will revoke the charity and send a notice of revocation by registered mail. Late filing leads the Directorate to revoke hundreds of charities. Many of these revoked charities later go on to apply for re-registration. Approximately ten percent of incoming applications for registration are received from charities that were revoked for failing to file their return. Dealing with late filing in this way is costly and time consuming for the Directorate.

The Directorate launched a special project to address these issues. First, it examined late filing and found that:

• approximately 1/4 of charities file late on an annual basis
• most late returns are received within 30 days of the deadline
• the majority of late filers were "repeat offenders," filing late for two or more consecutive years
• most late-filing charities have:
  • no, or few, paid staff
  • revenues under $100,000
  • expenditures under $100,000

The project also considered whether the Directorate unintentionally encourages charities to file just before their registration would be revoked, rather than filing on time.

The project recommended that late-filing reminders:

• use plain language
• be sent earlier
• explain the importance of timely filing
• include the consequences of failing to file

The Directorate plans to implement these recommendations and monitor their effect on filing patterns. Starting this fall, the Directorate will email charities before their fiscal period end to remind them to file on time. Only those charities that have provided us with their email addresses will receive these reminders. Also, the Directorate will begin making automated reminder telephone calls to selected charities one month before their filing deadline, as opposed to two or three months after the deadline. All other filing reminders currently employed by the Directorate, such as the email reminder four months after a charity's fiscal period end, will remain in effect. The Directorate believes these proactive and educational efforts will encourage more charities to file on time. If filing does not improve, however, the Directorate will consider more serious measures.

Ineligible individuals

The Directorate also plans to begin a project concerning the ineligible individual provisions of the Act. Generally speaking, an ineligible individual is someone who:

• has been convicted of an offence related to financial dishonesty or relevant to the operation of the charity
• was connected to a registered charity that the Directorate revoked for a serious breach of regulatory requirements

Ineligible individuals pose a potential risk to the charity's assets and beneficiaries. The Directorate can refuse to register or revoke a charity's registration if an ineligible individual is on the board or controls the charity.

The Directorate intends to do an in-depth review of the ineligible individual issue to:

• determine the extent and impact of ineligible individuals
• provide outreach and education to charities about ineligible individuals
• detect and address serious non-compliance of registered charities with ineligible individuals

The Charities Modernization Project (CHAMP)

The 2014 Federal Budget provided the Directorate with $23 million to modernize its IT systems over a five year period. Improving these systems will allow charities to apply for registration and file their annual returns electronically, reducing their administrative burden.

As part of CHAMP, by the end of 2018:

The CRA's My Business Account is a secure and convenient way to access CRA account information online. Registered charities can sign up now to access My Business Account and be ready for online filing when it becomes available in late 2018.

Stay connected

Appendix

Organizational structure and roles

The CRA's Charities Directorate is part of the Legislative Policy and Regulatory Affairs Branch (LPRAB). The Directorate is made up of six divisions, each with its own role and responsibilities.

Assessment, Determinations, and Monitoring Division (ADM)

ADM reviews applications for registration as a charity or other qualified donee. It also provides technical and legislative advice about registration to, for example, applicants, registered organizations, and other government departments.

Client Interface and Service Division (CISD)

CISD helps the Directorate provide service excellence. Interactions with the CRA should be easy, helpful, fair, and consistent, making Canadians feel respected and valued. CISD informs and educates the charitable sector and the public by responding to enquiries and maintaining the Charities and giving webpages, as well as developing outreach and communications products.

Compliance Division (Compliance)

Compliance monitors charities and other qualified donees to ensure they continue to meet the requirements of registration. It conducts audits and desk reviews, and examines selected T3010s, Registered Charity Information Returns (annual returns) to ensure they are accurate and complete.

Policy, Planning, and Legislation Division (PPLD)

PPLD develops policy and guidance products for the Directorate and charities. It also proposes and explains changes to the Act, liaises with the Appeals Branch about objections to Directorate decisions filed by charities, and manages Directorate training. PPLD gathers and analyses business intelligence for the Directorate and is leading the Charities Modernization Project (CHAMP).

Review and Analysis Division (RAD)

RAD supports the Government of Canada's strategy to combat terrorism and suppress terrorist financing. It does this by reviewing all applications for charitable registration, monitoring and auditing registered charities, and educating charities and the public on issues relating to terrorism and terrorist financing. It also provides information to domestic partner agencies to support investigations, and contributes to the work of international organizations by participating in working groups and debates.

Corporate and Information Programs Division (CIPD)

CIPD provides IT, financial, and human resource support services to the Directorate. It is also the Directorate's resource for information management and record keeping, corporate reporting, and responding to external data requests.

The organizational structure of the Charities program is set out below: