A. INTRODUCTION
The Auditor General of Canada recently
completed and published her Fall 2010 Report (“Report”)
to Parliament on October 26, 2010.
The report can be accessed on the Office
of the Auditor General of Canada’s website at http://www.oag-bvg.gc.ca/internet/English/parl_oag_201010_07_e_34290.html.
One chapter of the Report was dedicated entirely
to the performance of the Charities Directorate of the Canada
Revenue Agency (“CRA”) with regard to its oversight of registered
charities. The Report examined several different issues
relating to compliance with the Income Tax Act (“ITA”),
tax shelter gifting arrangements, and communications of
CRA to the public. An audit of this kind from time to time
is imperative, since Canadians donate approximately 8 billion
dollars to the 85,000 registered charities in Canada each
year. Because of the role that CRA plays in regulating these
charities, an audit by the Auditor General is an important
means of ensuring that CRA is carrying out practices and
methods which protect these donors and the tax base.
Overall, the Auditor General found that
CRA’s procedures are effective and thorough. A majority
of the areas examined received positive feedback from the
Auditor General. However, there were also a number of recommendations
proposed to bring improvements, with which CRA has indicated
it is in full agreement. The findings of the Auditor General
are discussed in more detail below.
B. FOCUS OF THE AUDIT
The main objective of the
Report of the Auditor General was to determine whether the
Charities Directorate of CRA had processes designed to increase
compliance with the charities’ provisions of the ITA.
The three lines of inquiry that the Report centred around
included:
a) Whether
the processes that CRA uses are increasing the level of
compliance of Canadian registered charities with the ITA;
b) Whether
CRA has appropriate processes designed to increase compliance
with the ITA related to tax shelter gifting arrangements;
and
c) Whether
the communications of CRA are designed to increase donors’
and charities’ level of awareness of the relevant provisions
of the ITA.
The Report touched on each
of these issues throughout the document. The audit analyzed
a compilation of records, including documents and reports
from CRA, databases relating to applications for registration,
audits planned and completed by CRA relating to charities
and tax shelters, and revocations.
C. OBSERVATIONS AND RECOMMENDATIONS
1.
Process for Registering
Charities
As CRA is responsible for the administration
of the provisions of the ITA relating to registered charities,
their main function is to review applications for charitable
registration and to ensure that existing registered charities
are meeting the requirements of the ITA. Since CRA has the
highest level of involvement with a charity during the registration
period, this is a very important process. During the audit,
random samples of applications were reviewed and the methods
of CRA employees were examined thoroughly. The Auditor General
found that CRA’s methods were adequate and functioning very
well. The Audit also determined that CRA was taking steps
to meet registration service targets.
2.
Late Filing of Annual Information
Returns
According to provisions
of the ITA, the filing of the T3010 package must occur annually
and on time for an organization to maintain its registered
charity status. As a result of the current follow-up process
for outstanding returns which involves issuing reminders
to charities and then revoking registration during the tenth
month after the charity’s year end, many charities submit
their returns late. Also, the Report noted that the public
may not be aware that a charity has failed to file its return,
since only those organizations that have had their status
revoked for failure to file are listed on CRA’s website.
The Auditor General recommended that CRA re-evaluate their
current process for dealing with annual information returns,
to ensure compliance and that returns are received on a
timely basis.
3.
Audits
CRA has an audit and
review process that selects registered charities for annual
audits when a potential high-risk issue is identified. The
Auditor General found that compliance was generally not
an issue with a majority of CRA’s audits. However, there
was a recommendation proposed to develop and execute a random
audit sampling plan, which will ensure reliable findings
that will permit CRA to measure an overall compliance rate
for registered charities.
4.
Internal Guidance for Applying
Sanctions
CRA has several sanctions
available to encourage compliance with the ITA, with some
being more severe than others. A few examples of possible
measures that may be taken by CRA to encourage compliance
include: offering educational seminars, signing a compliance
agreement, imposing financial penalties, or revocation.
According to the Auditor General, the guidelines that CRA
is currently using for applying the appropriate sanctions
to registered charities are not sufficiently detailed. The Auditor General advised
that CRA should carry out an evaluation of the effectiveness
of its use of various tools and sanctions in order to increase
compliance with the ITA.
5.
Monitoring the Assets of
a Revoked Charity
CRA is responsible
for ensuring that the assets of a revoked charity are properly
disposed of in accordance with the ITA. A charity that has
had its registration revoked must either transfer its net
assets to an eligible donee, use the assets for charitable
activities or programs, or remit the assets to the Crown
within one year of its revocation. According to the Report,
CRA does not currently have any formal process to ensure
that it monitors whether a charity has transferred the assets
as required on revocation of its charitable status. The
Auditor General suggests the implementation of a more formal
monitoring procedure for the assets of revoked charities.
6.
Communication with Charities
and Donors
CRA provides the general
public with publications and general information on registered
charities and donors. Overall, the Auditor General found
that CRA provides a wide variety of media available for
the public and that the resources are user-friendly. Also,
the approach to communications taken by CRA in terms of
evaluations of individual information sessions and the accuracy
of the information being provided was determined by the
Auditor General to be adequate.
7.
Tax Shelter Gifting Arrangements
Tax shelter gifting
arrangements are used by many taxpayers as part of making
donations to charities and can be an effective means of
reducing taxes. However, many of these tax shelters become
involved in issuing donation receipts in excess of the cash
invested or property donated, which creates problems for
CRA and ultimately donors. As a result of a draft amendment
to the ITA issued by the Department of Finance Canada in
2003, these ‘buy-low, donate-high’ tax shelters are no longer
permitted under the ITA and CRA has undertaken a number
of actions to curtail the use of such structures.
According to the Report,
the general public has an expectation that CRA will provide
it with timely and relevant information regarding any questionable
tax schemes and shelters. CRA understands the importance
of providing this information to the public, and according
to the Auditor General’s investigation, they have made reasonable
efforts to keep the public informed and warn them of potential
abusive tax shelter arrangements.
For those organizations
and individuals that continue to be involved with tax shelter
gifting arrangements, the Auditor General’s report confirms
that CRA will perform audits on all of the parties involved:
the promoters, the registered charities, and the participants.
The Auditor General’s report emphasized the importance of
CRA continuing to invest time and resources to prevent taxpayers’
participation in these kinds of arrangements.
D. CONCLUSIONS
Overall, the feedback from
the audit was encouraging for the charitable sector. CRA’s
practices in performing its role as the regulator of registered
charities in Canada appear to be operating successfully,
with several minor modifications required. The Auditor General’s
Report represents an important commentary on the performance
of CRA with regard to its oversight of registered charities
and, therefore, should be carefully studied by those interested
in the sector.
