A. INTRODUCTION
The 2011 Federal Budget, which
passed in the House of Commons on November 21, 2011 and received second reading
in the senate on November 24, 2011, contained several controversial provisions that have received a great deal of
attention from the legal community and the general public. However, the Budget
also included several less noticeable provisions that will be of great
significance to the charitable sector. These provisions, entitled
“Strengthening the Charitable Sector”, introduced a number of changes to the
regulatory regime affecting registered charities. One of the most significant
of these changes is the introduction of provisions rendering certain
individuals ineligible to serve on the board of or in a senior capacity within
a registered charity.
The “ineligible individual” provisions came as a result of
concerns from the Canada Revenue Agency (CRA) that applications for charitable
status were being submitted by individuals who had previously been involved
with charities that had their charitable status revoked for serious
non-compliance. The department of Finance is proposing to introduce the concept
of “ineligible individuals” to the Income Tax Act (“ITA”), which will
enable CRA to withhold or revoke charitable status of organizations that have
ineligible individuals on the board or serving as a senior manager, in order to
better safeguard charitable assets. The full budget plan can be accessed here: http://www.budget.gc.ca/2011/plan/Budget2011-eng.pdf.
B. THE “INELIGIBLE INDIVIDUAL” PROVISIONS
As a result of amendments to sections 149.1(4.1),
149.1(22) and 188.2(2) of the ITA, if an “ineligible individual” is a member of
the board of directors, a trustee, officer or equivalent official, or any
individual who otherwise controls or manages the operation of the charity, then
the charity may have its charitable status refused or revoked or may have its
authority to issue charitable receipts suspended. Ineligible individuals
include persons who:
· have been found guilty of a “relevant criminal offence” for which
a pardon has not been granted – such offences include both offences under
Canadian criminal law and similar offences outside Canada relating to financial
dishonesty, including tax evasion, theft, fraud or any other criminal offence
that is relevant to the operation of the charity;
· have been found guilty of a
non-criminal “relevant offence” in Canada or outside Canada within the past
five years – such offences relate to financial dishonesty, such as offences
under fundraising legislation, consumer protection legislation or securities
legislation, as well as any other offence that is relevant to the operation of the
charity;
· have been a member of the board of directors, a trustee, officer,
or an individual who otherwise controlled or managed the operation of a charity
during a period in which the organization engaged in conduct that constituted a
serious breach of the requirements for registration for which the charity had
its registration revoked within the past five years – such conduct includes
improper receipting arrangements, abusive tax shelters, or providing undue
private benefit to directors; or
· have been at any time a promoter of a gifting arrangement or
other tax shelter in which a charity participated and the registration the
charity has been revoked within the past five years for reasons that were
related to participation in the tax shelter.
The CRA has clarified, however, that a charity will not
necessarily have its charitable status refused or revoked simply because CRA
has determined that an “ineligible individual” is on the board or manages the
operation of the organization. CRA indicates that a charity will be given an
opportunity to address any concerns CRA may have with an ineligible individual.
The charity might put in place necessary safeguards over financial management,
remove the individual in question or explain why it is appropriate for the
individual to hold the position in question. CRA has also indicated that it
will be developing detailed administrative guidance on how it will use these
new provisions, but this guidance has not yet been made public.
C. IMPLICATIONS OF THE “INELIGIBLE INDIVIDUAL”
PROVISIONS
The “ineligible individual” provisions will potentially
have extremely far reaching and unintended consequences. Consider the following
example:
· Charity X has a 25 member board of directors
· Carter is a director on the board of Charity X
· Carter was also employed as the manager of another charity,
Charity Y, in 2001-2002
· Charity Y is audited in 2004 in respect of the 2001 and 2002 taxation
years
· In February 2006, Charity Y loses its status for substantial
non-compliance, as a result of the imprudent actions of Charity Y’s board of
directors, actions to which Carter strongly objected and that ultimately caused
Carter to resign in 2002
· Because Carter managed a charity that lost its status for
substantial non-compliance, Carter is now an “ineligible individual”
· He is an ineligible individual for the period of 5 years from the
date of revocation in February 2006
· The charitable status of Charity X could now potentially be
revoked because an ineligible individual was/is on its board of directors
It is not clear what sort of due diligence will be
required by a charity to ensure that an “ineligible individual” does not become
involved or continue to be involved in its management.
Though a charity will not be required to conduct
background checks, if the charity wanted to, from a risk management perspective
and out of an abundance of caution, the information required to independently
assess whether an individual is “ineligible” may not be publicly or easily
available. For instance, there are challenges in discovering whether an
individual has been found guilty of a criminal offence outside Canada; whether
an individual has been found guilty of a relevant offence that is not tracked
in publicly available databases in Canada and abroad; the names of Board
members and like officials of revoked charities are not maintained on a single
publicly-available list; and the names of individuals “who otherwise controlled
or managed the operation” of a revoked charity rarely appear in a T3010. In
fact, it is likely that the availability of much of this information is solely under
CRA’s control.
Since most of the information is likely only available to
CRA, it would be logical for the onus to be on CRA to maintain a list of
“ineligible individuals”. Such a list may already exist internally for the
purpose of enforcing these provisions. However, due to privacy and other legal
concerns, it is unlikely that such a list would be made publicly available. Therefore,
the onus is shifted to charities to comply in a situation where it is
impossible to ensure 100% compliance because the necessary information is not
available. Further, whatever due diligence a charity undertakes may be
insufficient, because if CRA decides to revoke charitable status on the basis
of the involvement of an “ineligible individual,” there is no due diligence
defence available in the legislation.
At a minimum, charities will be required to implement some sort of screening mechanism in determining who will be asked to serve and/or can continue to serve on boards of directors or as senior staff. In that regard, the following list of questions, although not entirely comprehensive, could be asked of potential board members, trustees, officers and equivalent officials, and senior staff:
1. Have
you ever been found guilty of a criminal offence in Canada relating to
financial dishonesty, including tax evasion, theft, fraud or any other criminal
offence that may be relevant to the operation of this charity, for which you
have not been granted a pardon?
2. Have
you ever been found guilty of a criminal offence outside of Canada relating to
financial dishonesty, including tax evasion, theft, fraud or any other criminal
offence that may be relevant to the operation of this charity, that if
committed in Canada would be a criminal offence, and for which you have not
been granted a pardon?
3. Within the past 5 years, have you been found guilty of a
non-criminal offence within Canada relating to financial dishonesty, such as offences
under fundraising legislation, consumer protection legislation or securities
legislation, or any other offence that may be relevant to the operation of this
charity?
4. Within the past 5 years, have you been found guilty of a
non-criminal offence outside of Canada relating to financial dishonesty, such
as offences under fundraising legislation, consumer protection legislation or
securities legislation, or any other offence that may be relevant to the
operation of this charity?
5. Have you been a member of a board of directors, a
trustee, officer, or an individual who otherwise controlled or managed the
operation of a charity in the past five years?
o If so, has this charity had its charitable registration revoked in
the past five years?
o If so, was the charitable status revoked as a result of conduct that
constituted a serious breach of the requirements for registration,
including improper receipting arrangements, abusive tax shelters, or providing
undue private benefit to directors?
6. Have you, at any time, been a promoter of (sold or promoted the
sale on your own or someone else’s behalf) or otherwise been involved with a
gifting arrangement or other tax shelter in which a charity participated and
the registration the charity has been revoked within the past five years for
reasons that were related to participation in the tax shelter?
Charities will also have to consider how to deal with
issues involving current directors, including whether, how and how often they
should be screened. For instance, charities may want to develop a parallel
questionnaire for current board members and require that the questionnaire be
completed on an annual basis or as a condition of re-election to the Board. Charities
will also want to consider how current board members are to be removed if they
do become “ineligible individuals.” Typically, only the members of the charity
are able to remove directors from the board.
D. CONCLUSION
The new “ineligible individual” provisions create another
burden on charities that is not imposed upon any other private entity and is
far beyond the federal government’s jurisdiction over taxation. While the
department of Finance specifies that charities will not be required to conduct
criminal record checks, it is clear that charities will be required to implement
some sort of screening process for current and future members of their boards
of directors, which may become a disincentive for individuals to serve on the
boards of charities. Of possibly even greater concern are the “ineligible
individual” provisions as they relate to individuals that may have controlled
or managed a charity, as these provisions are clearly intended to also apply to
senior paid staff. In addressing this risk with employees, employers will also
be well advised to consider compliance with employment standards and human
rights legislation, when implementing the screening process and in removing
“ineligible” individuals.
