Canada

Registered charities - Are your books and records in order?

TAX ALERT  | 

Registered charities should take note of a recent Tax Court of Canada decision in Promised Land Ministries v. The Queen that upheld the Canada Revenue Agency’s (“CRA”) decision to suspend a charity’s charitable receipting privileges and qualified donee status due to inadequate documentation.

Documentation obligations of registered charities

A qualified donee, that is a registered charity within the meaning of subsection 149.1(1) of the Income Tax Act (“ITA”) in Canada, enjoys a special status and advantages over unregistered organizations. Advantages include exemption from tax on certain activities and the ability to issue official receipts to donors who make gifts to a registered charity.

To retain such status, a registered charity is required to observe certain requirements to enable the Minister to determine whether there are any grounds for revocation of its registration under the ITA. If there is a contravention, the Minister can suspend tax receipting privileges or revoke the charity’s registration.

Generally, as stipulated in subsections 230(2) and 230(4) of the ITA, records and books of account of a registered charity must be kept by it in such form to enable the Minister to determine if a charity’s registration should be revoked. 

The facts

Promised Land Ministries, (“PLM”), a registered charity for the purposes of the ITA, undertakes charitable work within Canada. Following an audit of its 2007 year, the CRA noted certain documentation irregularities and thus executed in 2009 a compliance agreement with PLM establishing corrective measures relating to the maintenance of adequate books and records to support activities outside Canada (“Agreement”).

In 2013, PLM was again audited and the Minister requested documentation to support PLM’s 2011 and 2012 tax returns, including its reported expenses and activities outside Canada. However, PLM failed to provide any information as to its expenses for activities outside Canada. The auditor therefore determined that PLM failed to maintain adequate books and records and had failed to observe its commitment under the Agreement to implement all corrective measures. As such, a Notice of Suspension (“Suspension”) was issued by the Minister suspending PLM’s charitable receipting privileges and qualified donee status for one year in accordance with paragraph 188.2(2)(a) of the ITA.

PLM objected to the Minister’s decision on the basis that it had subsequently addressed the Minister’s concerns and that it acted in good faith in providing what it believed the Minister was requesting. However, the documentation PLM eventually produced at the objection stage in support of expenditures for activities outside Canada approximated only half the amounts reported by it. Ultimately, CRA issued a Notice of Confirmation confirming the Suspension, and PLM appealed the Suspension to the Tax Court.

The Tax Court of Canada’s analysis

The issues before the Court were:

a. Whether the Minister reasonably found that PLM failed to maintain proper books and records as required by the ITA?

b. If so, whether the Suspension pursuant to paragraph 188.2(2)(a) was justified?

On the first issue, the court observed that in Prescient Foundation v Canada (Minister of National Revenue), the Federal Court of Appeal held that for revocation of a charity’s registration to be reasonable under the ground of inadequate books and records, the Minister must “clearly identify the information which the registered charity has failed to keep” and “explain why this breach justifies the revocation. It is not sufficient to simply state that the charity has failed to keep proper records.”

In this regard, PLM was adequately informed of the particulars of the alleged breach and was given the opportunity to respond on several occasions. The evidence revealed that PLM was given a number of opportunities over a lengthy period and 18 months later still only provided part of the information despite its clear commitment under the Agreement to keep all receipts.

PLM’s attempt to attribute blame to its former accountants was insufficient plus their actions were irrelevant to PLM’s failure to keep adequate books and records; it was ultimately responsible for keeping records, including invoices, vouchers and expense receipts. Thus, PLM failed to provide the information requested regarding the records. It was non-compliant and therefore in breach of the requirement to maintain adequate books and records with respect to certain aspects of its operations in the relevant years. The judge concluded that the Minister reasonably found that PLM failed to maintain proper books and records pursuant to the ITA.

On the second issue of whether the Suspension was justified, the judge noted that this was not PLM’s first audit experience and that it had committed under the 2009 Agreement to keeping all receipts moving forward. 

Having regard to the special status a charity holds, the court was satisfied that the breach justified the Suspension especially since there had been repeated non‑compliance involving receipts for expense amounts for activities outside Canada. Indeed, by the time of the Tax Court trial, PLM had still not produced all such receipts, as contemplated under the Agreement, for activities outside Canada during the relevant years.

Consequently, the Minister’s decision to suspend PLM’s authority to issue official charitable receipts and its qualified donee status was a reasonable response and warranted in the circumstances.

Registered charities are themselves responsible for maintaining adequate documentation

This case suggests that it is the charity’s own responsibility for ensuring that its books and records are in order. Merely appointing a bookkeeper to keep track of expenses and related invoices, without any further diligence or oversight by the charity, would not pass muster.

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