Five Good Ideas
Five Good Ideas about staying on the right side of the CRA
Published on 26/11/2019
Charities know about the tax regulations that govern their work and work hard to stay compliant. That said, as organizations are all faced with competing pressures for time and resources in their work, it is often tough to prioritize what gets done and figure out how to meet these requirements efficiently. But there are things your organization can do when operating and maintaining its books and records to ensure that the CRA gives you a good report card if an audit occurs. In this session, learn about five good ideas to help minimize the risk of a CRA audit and be in a good position if and when the CRA auditor gives your organization a call.
Five Good Ideas
- Know your charitable purpose and stay focused on furthering your mission
- Understand the CRA rules and regulations
- Organize your books and records
- Don’t be fearful if contacted by CRA
- Prepare! Prepare! Prepare! – Consult internally and with your advisors before CRA arrives
- Chartered Professional Accountants (CPA) Canada: Not-for-profit governance: Summary resource guide
- Imagine Canada: Charity tax tools – record keeping
- Robert Hayhoe, Miller Thomson LLP: Canada Customs and Revenue Agency charity audits
- Canada Revenue Agency: Public policy dialogue and development activities by charities
- Canada Revenue Agency: Compliance and audits
- Canada Revenue Agency: Issuing receipts
A cautionary note
The ideas, resources, video presentation, and transcript are provided for general information purposes only. They are neither intended as, nor should be considered, legal advice, and readers and viewers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
© Miller Thomson LLP 2019.
Full session transcript
Thank you to Maytree for inviting me to join the Five Good Ideas sessions and to come and speak to you today about staying on the right side of CRA. I’m actually impressed at the number of people in the room, and I hear there’s a number of people online. Usually, when we say we’re going to talk about CRA, it doesn’t actually bring a huge crowd out, but today we have you here, so that’s good.
I also had the opportunity to look at some of the Five Good Ideas sessions online on the podcast, just to get the idea of what we’re hoping to do today, and I came away thinking that what I’m going to try to achieve is to give you five ideas, five topics that you can think about in your day-to-day work which will help an organization to be prepared if the Canada Revenue Agency ever comes knocking.
When I talk about staying on the right side of CRA, I mean, CRA is this regulator that we all know is very relevant to charities, although it’s really a tax collector and you don’t pay taxes and you don’t do any of that, but it is still the regulator you have to worry about. And what is also true is that it doesn’t often actually come knocking, which is a good thing we’re all happy about. But if it does, there are some things that you can be doing in your day-to-day lives that will keep it easier.
So let’s get going and go through the five good ideas. My first one is, know your charitable purpose and stay focused on your mission.
Now, some of you might say, well, that seems really obvious, and why would we say that? And I can tell you, having done this work for the last 15 or so years, that not withstanding it seems really obvious, there are many organizations who are working, doing wonderful charitable work, that if you actually ask them to look at their incorporation documents and tell you what were you registered to do as a charity, what did you tell CRA you were going to do when you got your tax number 20 years ago, many organizations either don’t know or haven’t really focused on it.
They’ve developed over time doing good work with their organizations, achieving their mission, but they’ve actually lost sight of the fact that they told CRA, perhaps they were going to work with youth with mental health challenges, and now they’re working with adults, or they talked about being an organization that was going to be a food bank, but now they’re actually running programs and training new Canadians on how to get jobs, et cetera, in Canada. All charitable, but not exactly what they said they were going to do in their records with CRA.
And so, the reason this is important, and it’s a question to always ask an organization you’re working with or when you’re working, is that if CRA ever came knocking, that’s the first thing they’re going to ask. They’re going to say, our records said you were registered to be a food bank. Where’s your food bank? And if you’re not running a food bank, it’s sort of a shock to them, and then they start going down the road of “Are you really a charity? What are you doing?” Figuring out and knowing that charitable purpose is important.
The second reason I say that this is a good idea is because legally, and I don’t want to get too legal, I want to be very practical, but legally, the courts in Canada have said, if you’re running programs that further your charitable purpose, so if you’re doing a program, I’m going to use sport as an example, if you had a purpose of training people or pursuing basketball, that’s not a charitable endeavour. Pursuing sport just to be a sport is not charitable. But if you have a program that is teaching young people about basketball as part of keeping them off the streets and in a program or educating them, that could be charitable. So if you’re using the activity of basketball to further your charitable purpose, it’s okay, and that’s what the courts have said.
They’ve said, when you know what your charitable purpose is and you run a program that furthers that purpose and you can show us how, those programs will be acceptable even if the Canada Revenue Agency thinks they’re not. So sometimes Canada Revenue Agency will walk in and say, well, running an athletic organization isn’t a charitable activity because it’s just sport. But when you say, whoa whoa whoa, it’s part of a larger program, it’s helping people off the street, it’s keeping people healthy, it’s contributing to bringing new Canadians into the community, then it’s furthering the charitable mission and it’s fine.
So, when I look at an organization and when an organization says to me, what is it we have to do when we’re talking about our strategic plan, or how we’re working and what we need to do next, what do we have to think about as to whether it fits with what we do as a charity or not, I always take them back to “know your charitable mission,” and talk about how what you’re doing is furthering that charitable mission. Tie them together and show how it works, because if you can do that, it’s very likely that when the CRA comes knocking at your door that you will be able to demonstrate that everything you’re doing is charitable, and that’s one of the key issues.
If CRA is concerned about an organization, what are they concerned about? They’re concerned that the organization is using its resources in a way that isn’t charitable, and why do they care? This is a bit of an aside, but I think sometimes the policy behind all this is important.
Charities in Canada, as you know, don’t pay tax on revenue, and also give donors a tax receipt. So the government really cares that the money that gets that tax receipt, that saves each of us money on our tax returns, that that money does, in fact, go to a charitable purpose, and that’s really their main focus. They want to know that you as an organization can demonstrate that that money is going to do something that’s charitable, and so when they come and ask the questions, that’s what they’re concerned about.
They’re concerned that somehow somebody’s getting a tax receipt to put money into an organization and the money is being spent on something that isn’t charity. So, if a professional hockey team tried to argue that playing hockey was for fitness and charitable, they would disagree. They would say, in that context, that activity isn’t charitable, and they wouldn’t want charitable dollars going to that. That’s sort of the background of knowing your mission and really being able to identify how what you do is furthering that mission. If something doesn’t seem to connect, then maybe you have to rethink how you’re doing it.
That brings me to the second good idea, because I think the other part of being able to handle a regulator and work with a regulator is to understand what the regulator cares about. This is a very short commentary on understanding the key CRA rules that CRA is going to look at if they ever come knocking on your door.
I know that most organizations don’t have time to spend a lot of thought process on educating themselves about the details. That’s why you have advisors. That’s why you work with people like me and your accountants and Imagine Canada and others to get the background. But there are some key issues that you want to really sort of be able to be at least knowledgeable about.
The first one I’m going to talk about is really probably self-evident, but it’s your charitable tax receipting program. If you’re an organization that’s raising money and issuing charitable tax receipts, I can assure you if CRA somehow decides to come and talk to you about how you meet the regulations, they’re going to want to know about your receipts. They’re going to want to ask you, are you keeping the receipts for the time period you’re supposed to, which is a minimum of two years if not more. They’re going to want to know if the tax receipts are sequentially numbered, because that’s one of the regulations.
There is very clear guidance on the CRA charities director’s website about what information you should put on a tax receipt. In fact, one of the requirements that’s in the law is the middle initial of the donor. Now you may wonder, why is that so important, and I think it’s because of the John Smiths or the Anne Scotts or the very typical names that are very similar and there can be many. They want to see the middle initial. And I’ve had clients who had undergone CRA audits where that’s the thing that CRA noticed. You didn’t put the middle initial.
Now, they’re not usually going to hold anybody up significant issues on that, but it’s the type of detail that they’re actually interested in. And if you’ve got it there, it’s great, because they think you understand the rules, and part of this is letting the people know who come and talk to you from CRA that you understand and you think about these rules, that you’re not blind to them, that you’re actually paying some attention.
They want to know as well on the tax receipts whether the money, whether it’s a gift of money, whether it’s a gift of property, or it’s a gift in kind. They look for valuations. They look for very specific things. So my rule about this issue is, familiarize yourself with the rules that CRA publishes on its website, and just have your organization be organized on the tax receipting. There are penalties actually for having an incorrect receipt and a false receipt.
Now I’m not saying anybody’s going to do false receipting, but incorrect receipts can happen all the time. Usually they don’t issue a penalty, but if they feel like an organization isn’t really paying attention or isn’t respecting the rules, they might, and the penalty amount is 5% of the amount on the receipt, the eligible amount of the gift. So it can be significant.
The second key issue I think you should understand, or organizations should understand, is, what does the law say a charity can do? And then, what does the law mean when it says what a charity can do?
The first thing to tell you is a law says a charity can carry on its activities itself, so you can run your own programs with your charitable resources, and that’s all good, and we talked about how you’ll be able to tie it to your purposes.
The other thing you can do is you can grant some of those charitable resources to other organizations, provided those organizations are “qualified donees.” Now, what is a qualified donee? A qualified donee is a defined term the regulator uses, and it means basically other Canadian registered charities.
There are also a few other categories of organizations that fit. Some of them are public bodies serving a function of government, which is a category where a lot of Indigenous organizations fit. Foreign universities if they apply to be on a list. So there’s certain lists, again, on the charities directorate website.
If your organization is working, and you want to work with another organization, and part of that plan is to give some money to that other organization to let it do some work on a project you’re working together with, you have to be sure that organization is a qualified donee, is another Canadian registered charity or on this special list, or you can be offside the rules. I tell you this, because this is one of the biggest questions CRA ever asks.
If they see three community organizations, two of which are registered charities, one of which is a nonprofit that’s not a registered charity, they will want to understand how the money is being spent and whether the charities are directing and controlling the money that they are spending, or whether they’re giving it to the non-charity to spend.
If you give [money] to the non-charity without any oversight, CRA will be upset by it. This is an issue that you can, again, there’s a lot of guidance that you can find in the materials that are resources, but it’s an area where a red flag should go off for you if you’re doing strategic planning and you’re thinking, we’re going to be working with organizations maybe in another country.
They aren’t going to be a Canadian registered charity if they’re established in another country. And we’re going to be pooling our resources. So we need to make sure we’re doing it in the right way so that CRA won’t have a problem, because that’s an area where they often come and knock on your door and look.
Related to both of these issues of the qualified donee and receipting is lending your charity’s registration number. And if you go on the CRA website, I think I can click on almost any topic, the first thing that comes up on the screen is, “do not lend your charity’s registration number.” This is a really important rule to stay on the right side [of the CRA].
What this is, and notwithstanding, it’s all over the charities directorate website, I see it all the time, so it’s not, and I’m not saying it’s always done improperly, but I see the scenario where there’s an organization, really great purpose, probably charitable, but hasn’t quite got around to applying for charitable status in Canada, working with another organization that is a charity, and the other organization says, oh don’t worry, I’ll support your program. We can all raise the money and then we’ll either pay you to do the program, or we’ll do something, but when you look behind it, you are worried that CRA might just think the organization that is a registered charity is lending its number to the other one.
For this rule the takeaway is, if you’re in that scenario, you can work with a non-charity using agreements that ensure you can follow the money and account for how it’s being spent, and do that properly, and you’ll be able to satisfy CRA. But don’t just raise money for an organization and hand it over and think that CRA will be happy. So that’s another area that we have to be concerned about.
Fundraising is always a topic for CRA when they come and knock on the door. What are they interested in? They like to look at what the expenses are, what the revenues are, and whether it makes sense. There is a charities directorate guidance on this. It talks about expenses to the revenue generated. I always push back on auditors who are worried about fundraising expense ratios. Depending on the nature of the charitable mission, some charities can raise money a lot easier than others, so there are all sorts of facts and circumstances to go in it, but for purposes of CRA and preparing for an audit, it really is understanding your fundraising program, making sure you’re tracking it, trying to keep on side what the expenses and revenues are.
They tend to say if you’re below spending 35 cents for every dollar raised, they won’t look twice. If you’re above 75 cents spent for every dollar raised, they’re likely to tick you for an audit. If you’re in between, they will likely ask questions. So it’s getting the organization to focus on what it needs to focus on from fundraising perspective and then making sure that you have your books and records organized so you can respond to it.
Advocacy is another issue that they sometimes have been asking question about, and it has been very high profile in the last few years because there were audits done around what we call political activities, which were rules in the Income Tax Act which said an organization could advocate for its mission, but only do sort of calls to action and very public call advocacy up to 10% of its resources, and so that was another time where you were required to keep track of your expenditures, keep track of what you were doing.
The good news on this one is the law has changed and in fact, provided your advocacy furthers, I’m going back to number one, your charitable mission and can be tied to your charitable mission, you can advocate all you want provided it’s nonpartisan today. That is an area where we’ve sort of had some relief on the CRA side, but they still will be looking for partisan activity, and so advocacy is something you want to be at least thinking about and focused on.
The place where we see the biggest concern around partisanship is on social media, and what we have to do with social media counts to make sure that you don’t all of a sudden have your organization’s Facebook page or Twitter handle being used in some distributions that are partisan in nature. You really have some obligation to deal with that.
The final issue I think that CRA often asks about is revenue generation and whether you have any business activity, and I’m not going to go into this in a lot of detail. But the point around revenue generation is that you have to be doing it in a way that’s related to your charitable purpose. If you’re working in an organization that has, let’s say George Brown College is training chefs. I always think of the chefs’ restaurant.
They have, as part of the school, and it’s a charity. Colleges and universities are charities. They have this whole education program, but they also have a restaurant on King Street, and that’s where the students are trained and they come and people can go and have dinner or lunch or whatever. That’s a related business in the sense that, yes, it’s generating revenue for the program, but it’s related to the education in the chef space, so that’s okay, and CRA doesn’t hold that off side.
If somebody said to them, I’ve got a widget factory and I’m happy to let you run it and make money to put towards the education at George Brown to teach, but the widget factory, making widgets has nothing to do with the education, that would be an unrelated business, and that would be offside.
So, what’s my message here? Organizations wanting to generate revenue from activities seeing this as an alternative revenue source, particularly today we’re always looking for them. Social enterprise is a huge thing. You have to take the time to look at your organization, again your purpose, and figure out if it fits as a related business. You probably need to get advice. That’s probably the kind of area, but it is something CRA is working about.
So that was my second good idea. There were five things I said you have to just think about, because if you’re on top of issues as you operate day to day, if CRA comes knocking, you’re probably going to be okay.
My third good idea is about your books and records. They need to be organized. I am not the most organized person, so please trust me. I’m not trying to preach or anything about organization here but I can tell you that if a CRA auditor comes in to an organization and says, I’d like to see your payroll files. I’d like to see the programming files about the program that’s offered over in Scarborough at the Hub and the one in Etobicoke down by the Lakeshore, and you can pull out those files and they’re organized and there’s a way, whether it’s on a computer or in paper. I always visualize paper, but it’s probably less likely.
If you can demonstrate to the person who’s asking the question that the information’s accessible, it’s organized. Somebody has spent, it doesn’t have to be perfect, but has spent time thinking about what are we doing here? Are we tracking how things are dealt with? Are we making sure? Then, that auditor’s going to get a level of comfort that you’re organized, that you understand what you’re doing and they’re going to be less nervous about things than they might otherwise if they see 10 files grouped together with invoices, expenses, papers, planning, everywhere without any real control to it. So it’s really important to ensure that you get organized.
It’s also important to make sure you keep adequate books and records. You have to keep the information and what the CRA says, they have to be able to verify the revenues received, the resources spent on your charitable programming, and be able to look at invoices, expense vouchers, all sorts of things that will back it up. You’ll have your accounting numbers and then you’ll have the backup for that. That’s what they want.
They like source documents. They ask for source documents. There’s generally a rule that we keep things for at least six years if not 10, depending on what they are. For your incorporation documents, your board meetings, your annual meetings, have them somewhere organized. That is the kind of thing that CRA sees as an indicator that you understand that there’s responsibilities and that you respect the requirement for that.
It’s not the top priority when you’re trying to do things like help people, but it is something that’s really important, and the area where it can be the most difficult is if you’re working outside of Canada or if you’re working with organizations that are outside Canada, because in those cases, the Act actually says they have to be kept in Canada. So if you’ve got a branch group or you’ve got some people working in another country, fulfilling your mission, which is perfectly fine, but they’ve got all their expense books and records, their vouchers, their revenue received, and everything, records in that other country.
Technically CRA would say that’s not complying with the rules. You’re supposed to have them here. Now, we have been able to convince the Canada Revenue Agency as if you can access them online and get them and have them readily available, that that is an indicator that you do have them in Canada, although they want to be able to get the true source documents if they need to. In my mind, the rules around this are really archaic, and they’re very out of date, but the law hasn’t evolved yet on this, so that if there is an audit, this is an issue that can come up, and so it’s always important to think about it and if possible do your best to keep the best records available.
If you do have programs outside of the country, where books and records are outside of the country, make sure they understand that if they’re needed, they have to be produced quickly, because as soon as you take a long time, they think you’re making them up. It all comes back to what’s their immediate reaction to what they’re doing. If they ask you and you can produce them, that increases the confidence of the auditor that you know what’s going on, and it really is about that.
The next good idea is – don’t be afraid if they contact you. How do you like that after all I’ve said? But it’s true.
The auditor is an employee of the Canada Revenue Agency. It’s a little bit unfortunate that charity is stuck with the Canada Revenue Agency, but that’s where it is because of the tax exemption and the tax receipting. So most of the auditors, I’ve met a lot of them, they’re fine people. They have no personal axe to grind, but they’re doing a job, so they’re trying to come and do their job. Generally they are going to be decent folks and they are going to want to work with you.
They’re generally coming to see an organization either as a formal audit, and you’ll get a letter and it’ll say, we’re coming to do an audit, or there’s a new level of visit called the Charities Education Program, which is intended to be helpful. So the auditor comes in and they’re trying to help you. They’re going to ask you about your receipting, your books and records, your programming. They’re going to want to look at your records.
But the Charities Education Program is intended to be a light touch, not having to go behind with all sorts of source documents, not having to be in writing. And it’s intended to be for relatively newer organizations, and what CRA says is, we just want to come and explain the rules.
Now, the lawyer in me is very cynical about this and will tell you all that if you do get a Charities Education Program visit, or an intention to come, take it seriously, but again, don’t be afraid of it. They are really trying to come in and give some guidance. But again, it is the CRA person. If they saw something they really didn’t like, they will have to deal about it, so you do need to be careful.
I often say about these audit visits, and I used to hear people say this and I think there’s an element of truth, especially if the auditor’s coming from Ottawa or they’re coming out of their head office where they’re normally there, it’s sometimes really nice to get to the charity and get to look at your books and records. It’s a different place to go to work. You’re out of the office. So I always tell my clients, don’t make them too comfortable.
Now I’m not saying, don’t put them in a closet, but just create an environment where the auditor can go where they know they have a spot. Don’t make it the best place in the office. Don’t put them in the middle of the office where they can talk to everybody. Think about who should talk to the auditor. Who understands everything that I’ve just talked about, so if the auditor asks a question can understand how to respond in a way that will make the auditor have confidence in your organization.
Sometimes people will pick one or two people to do the discussions. I’m not saying it has to be so limited, but I do think it’s really important to at least focus on that and have an idea of who’s going to deal with the auditor and how you’re going to respond.
If you happen to get a letter that says you’re going to have not just a Charities Education Program visit, but a full audit, that generally will either come through a phone call from the auditor or a letter, and they might say, we want to come next week. You are more than open to say to them, and this comes back to don’t be afraid, you’re more than open to say, I can’t do it next week. I need to know. We need some time. Our programming is X, we have this planned for next week. Can we schedule a time a little bit later? You’re also open to say, can you tell us what you’re coming to look at? Like is there something in particular?
Because CRA says today if they’re going to come and audit an organization, they usually have a particular issue they’re looking at, whether it be revenue generation, whether it be working overseas, whether it be fundraising, but they usually have an idea of what they want to focus on. So it’s always open to just be very professional and ask them, what do we think you’re going to need.
They will sometimes send you a letter, which will have a questionnaire attached which may include everything but the kitchen sink and you’ll think, oh my gosh, why do I have to do this? But it will give you an idea of why they’re coming, but you don’t have to be fearful, and you’re perfectly open to try to manage and work with it.
How they select charities for audit used to be more random than it is now that they have this Charities Education Program. They’re starting to say that they see high-risk areas, and now they want to focus on them a little bit more. What’s a high-risk area? It’s working with non-charities. It’s working overseas. It’s receiving a lot of gifts in kind. Things that they think are a little bit more, they’re a bit more concerned about.
I still think that they’re from the perspective of if they come and talk to you, just be confident and open with them.
They aren’t your friend. That’s my last point. Don’t be fearful, but don’t forget they’re not your friend, either. Often people will talk after the audit and say, oh, we had a great discussion. I asked him this question. I asked him about working with this organization that’s not a qualified donee. They definitely have a lot of information, but what CRA says the law is is not always actually the law.
They have their view of the law, and that’s why we have courts. But also sometimes it’s better if there’s something you’re thinking about to ask somebody after they’ve left just to see what the issue is. If you’re overly friendly, you may end up saying things that might cause them to do more looking.
I’m not trying to make them into nightmare people, but that’s just something we’ve seen over time. Be conscious of who they are. So that leads to my last good idea, and that is just prepare.
Prepare, prepare, prepare. The management, the board of the charity, you’re responsible for ensuring if there is an audit or an information visit that what is being put in front of the CRA is what you need to put in front of the CRA. You want to understand. You want to be knowledgeable.
If you feel that you’re uncertain, consult with somebody. Find out and get some feedback before in fact the auditor comes in. You can’t recreate things.
If you happen to have used your charitable registration number for a non-qualified donee, so lent your charitable registration number, nobody’s suggesting that you try to hide or do anything different. When you prepare, you can actually probably create and ensure that you at least understand where the weakness might be, but also put forward the information, the files, and the work around it in a way that makes it look reasonable. The CRA doesn’t really want to cause problems for any organization in my view, but if they feel that charitable resources are being used improperly or for non-charitable purposes, they feel they have to take some kind of action.
On an audit you can get a letter, you can get a clean bill of health, or you can get a compliance agreement where they ask you to sign an agreement that says, I did this wrong and I won’t do it again. This just goes in your file.
Or they can come along and try to issue a penalty or, heaven forbid, a notice of intent to revoke your charitable status, which doesn’t happen very often. But if you’re prepared, if your books and records are in order, if your files are in order, if you are confident and knowledgeable and able to converse with them on the topics, it takes you a long way to having a good relationship, a good experience with your audit, and keeping on the right side of CRA, which is really the overall objective.
This transcript has been lightly edited for clarity.
Susan Manwaring is a recognized leading expert advising social enterprises, charities and non-profits in her practice. Susan provides both general counsel and specialized tax advice to her clients across Canada and internationally. Susan is the national lead of the Social Impact Group at Miller Thomson LLP.
In addition to her work as general counsel to charities and non-profits, Susan has particular expertise in complex issues and provides sophisticated advice on social enterprise and social finance issues. Susan worked on the first two provincial or federal government funded Social Impact Bonds with clients of the firm. She has advised numerous social enterprises about regulatory and structuring issues and works with public and private foundations in the field of mission investing and social finance. She also assists clients undergoing tax audits or other regulatory issues, including legal matters relating to Canadian anti-spam law.
Susan is regularly called upon to advise charities and non-profit organizations on compliance and taxation matters under the Income Tax Act, as well as other relevant provincial tax regulations. Susan was appointed as a member of the Canada Revenue Agency Consultation Panel on Political Activities of Charities.
Susan writes and speaks frequently on social enterprise, social finance and other non-profit and charities-related issues.