Although Canadian FundRaiser has covered most of the developments reviewed here by Terrance Carter of Carters Professional Corporation and M. Elena Hoffstein of Fasken Martineau DuMoulin, they have encapsulated them conveniently to make a ready reference for readers' files. We present them as a series of three articles, as was done with the comparable review of 2006 legislative changes. This is the second article.

New policies and publications from Canada Revenue Agency

New CRA policy statement on associated charities

CRA released a Policy Statement (CPC-028) on February 26, 2007, to clarify that two unrelated charities that carry on a joint project can apply to CRA to be designated as associated charities pursuant to subsection 149.1(7) of the ITA. The effect of the designation would allow one charity to transfer more than 50% of its annual income to the other charity so designated. An application would need to be submitted to CRA disclosing details regarding the joint project. The designation would be in effect for the duration of the joint project. If the joint project is not completed within the time frame specified, the charities can request to have the designation extended. On the other hand, if the joint project is completed earlier than the expected time frame, the charities should request the revocation of the designation. This policy statement is consistent with CRA's circular IC77-6 "Registered Charities: Designation as Associated Charities", April 18, 1977.

CRA guidelines for applying the new intermediate sanctions

On April 10, 2007, CRA released a new policy document, "Guidelines for Applying the New Sanctions". This document sets out CRA's approach to the application of the new intermediate sanctions resulting from amendments to the ITA enacted by Bill C-33, A second Act to implement certain provisions of the budget tabled in Parliament on March 23, 2004, which received Royal Assent on May 13, 2005.

The ITA now includes two new kinds of penalties: (1) financial penalties; and (2) a one-year suspension of the charity's ability to issue official donation receipts. Usually a financial penalty is invoked first. Repeated violations may lead to higher financial penalties and sometimes the suspension of the right to issue official donation receipts. Initially, this right is normally suspended for the duration of one year only. In order to avoid the imposition of more rigorous sanctions, there are a number of obligations that a charity must fulfill while its charitable status is under suspension, including informing any individuals and organizations planning to make a donation to the charity of its suspended status.

The charity is permitted to receive donations but it cannot issue official donation receipts. If it does so, CRA intends to revoke the organization's charitable status. Where one charity is making a gift to another suspended charity and the donating charity is aware of the charity's suspended status and accepts an official donation receipt, CRA intends to suspend the donating charity's charitable status.

There are various types of non-compliance which can be subject to sanction. They include unrelated business activities, control of a corporation (foundations only), gifts to non-qualified donees, conferring an undue benefit, issuing an official donation receipt containing false or incorrect information, maintaining inadequate books and records, exchanging gifts in order to delay expenditures required to meet a charity's disbursement quota, failure to file an annual return on time and failure to divest excess business holdings (private foundations only).

Until recently, the end product of an audit was either revocation of the charity's registered status or the issuance of an undertaking letter requiring the charity to carry out certain corrective actions to become compliant. Under the new regime, CRA will have four tools to ensure that registered charities comply with their obligations:

* Education (either general publications or a letter specifically addressed to a charity explaining its obligations under the ITA);
* Compliance agreement (similar to the former undertaking letter);
* Imposition of an interim sanction or penalty (a financial penalty or the suspension of the charity's status as a qualified donee and the capacity to issue official donation receipts); and
* Revocation of registered charitable status.

As a general rule, the Charities Directorate intends to start with educational methods to obtain compliance, and then move progressively through compliance agreements, sanctions, and the ultimate sanction of revocation, if necessary. However, in cases of serious non-compliance, CRA intends to move directly to the imposition of a sanction or revocation.

CRA issues warning to charities on tax shelter gifting arrangements

CRA issued a warning to registered charities on June 4, 2007 and a Tax Alert on August 13, 2007 with respect to the consequences of participating in a tax shelter gifting arrangement. CRA has warned charities that participating in such arrangements can jeopardize their charitable status or expose them to monetary penalties. Examples of tax shelter gifting arrangements identified by CRA include gifting trust arrangements, leveraged cash donations, and buy-low/donate-high schemes.

CRA warns that it intends to challenge and proceed with compliance action against any arrangement that does not comply with the ITA and that charities which knowingly exploit their tax receipting privileges by participating in schemes that are abusive or fraudulent, or that fail to devote their resources to legitimate charitable activities, will be subject to revocation and/or significant penalties. In addition, CRA may also apply penalties against those persons who promote such arrangements or who participate in making false statements to CRA. In the Tax Alert, CRA urges taxpayers to avoid tax shelter gifting arrangements and warns that it intends to audit all such arrangements.

To date, CRA has reassessed more than 26,000 taxpayers who participated in these schemes, and denied about $1.4 billion in donations claimed. Audits of another 20,000 taxpayers involving $550 million in donation claims are just about complete and audits on other arrangements involving more than 50,000 taxpayers are about to begin. Both charities and donors alike are advised to exercise caution when considering any involvement in such schemes and should consider obtaining independent professional advice before participating in a tax shelter gifting arrangement. Terry De March, Director General of the Charities Directorate, has been quoted as stating that "[the CRA] will use whatever tools [it] has to stop abusive charities from harming the public and the system".

In this regard, on November 29, 2007, CRA announced that it had issued a Notice of Suspension to International Charity Association Network (ICAN), a registered charity under the ITA. The one-year suspension of charitable status was imposed upon ICAN for "contravention of … the [ITA] … by failing to maintain and/or provide, and failing to provide access to, books and records relating to its involvement with tax shelter arrangements." CRA explained that "ICAN failed to maintain sufficient documentation to support payments and expenditures including $26,372,685 in fundraising payments and $244,323,422 in charitable program expenditures and failed to provide required documentation to the CRA." This suspension is the first sanction of this sort imposed by CRA since the introduction of the intermediate sanctions. The Tax Court of Canada, in a judgment released on January 3, 2007, denied ICAN's application for a postponement of the suspension. The court was not satisfied with the affidavits in support of the application and stated that "to postpone the suspension in the circumstances would handcuff the CRA's capacity to administer the charities' provisions of the [ITA], to ensure compliance and protect public interest". ICAN plans to appeal the judgment.

Meaning of gift in Quebec

CRA recently expressed its views on the meaning of gift for the purposes of issuing a donation tax receipt in Quebec in the context of the acquisition of property during a fundraising auction. CRA indicated that for the purposes of determining whether a gift had been made in Quebec, the relevant law is the Civil Code of Quebec and that the proposed split-receipting rules do not all apply to gifts made in Quebec. Specifically, it is CRA's view that proposed subsection 248(30) is intended to alter the common law presumption that if consideration is received when making a gift there is no donative intent by providing that the receipt of consideration will not, in itself, invalidate a gift and that where the value of the consideration received represents 80% or less of the value of the gift, an intention to give will be presumed.

Since, according to the civil law in Quebec, it is possible to make a gift where consideration is received in return, CRA is of the view that the presumption in subsection 248(30) would not apply. Therefore, determining whether a receipt can be issued in the circumstances will involve more than the simple mathematical calculation of whether the value of the property received is 80% or less than the price paid at the auction. For split-receipted gifts in Quebec, organizations will have to examine all of the circumstances surrounding the gift to determine whether a gift has been made according to the civil law in Quebec.

Other federal legislation affecting charities

Major changes to anti-terrorism laws recommended by House of Commons subcommittee report

The final report of the House of Commons Subcommittee on the Review of the Anti-terrorism Act was published March 27, 2007. Unlike the report from the Special Senate Committee, this report appeared to show the first echoes of acknowledgement from Parliament of the distressing reality that charities face under this legislation.

* Among the recommendations of the House Subcommittee's report are substantial changes to the Charities Registration Act, which was created by the Anti-Terrorism Act and outlines the process of issuing of a "certificate" by which a charity can be deregistered. In order to remedy some of the deficiencies in the law surrounding the deregistration process and bring clarity with respect to the due diligence burden that charities face, the House Subcommittee has recommended changes including: "due diligence" defence for charities facing deregistration; creation of "best practice" guidelines for Canadian charities; institution of a knowledge (mens rea) requirement; right to appeal a finding of reasonableness.
* There are several other recommended legislative changes that would impact charities in the House Subcommittee's report. One of these recommendations is the establishment of a Panel of Special Counsel to test the need for confidentiality and closed hearings, as well as to test the evidence not disclosed to a party in proceedings. The Panel of Special Counsel would participate in proceedings surrounding the establishment of "listed entities", the deregistration process under the Charities Registration Act, and the security certificate process under the Immigration and Refugee Protection Act.

The House Subcommittee also recommends that section 145 of the ATA be amended to require another comprehensive review of its provisions and operation, to be commenced no later than December 31, 2010.

Recent CRTC changes: telemarketing and the National Do Not Call list

The Canadian Radio-Television and Telecommunications Commission laid the foundation for Canada's first national do-not-call list and provided further clarification and modification of the telemarketing rules established by Telecom Decision 2004-35 in Telecom Decision CRTC 2007-48. Although registered charities obtained a legislated exemption from the National Do-Not-Call List, the new telemarketing regime includes a requirement for individual do-not-call lists that are separate and distinct from the NDNC list and from which there is no exemption.

The telemarketing rules established by Decision 2004-35 brought about a number of restrictions, including restrictions on unsolicited live voice and fax calls made for the purpose of solicitation, requiring self-identification, prohibitions against sequential dialling and restrictions on calls to emergency lines and healthcare facilities, among others. There was no exemption from these rules. Decision 2004-35 also discussed the potential for a National DNC list in general and Bill C-37 (S.C. 2005, c. 50) granted the CRTC powers to establish and enforce a National DNC list, as well as providing an exemption from the National DNC list for charitable organizations registered under s. 248(1) of the ITA (Canada).

For telemarketers in general, the most relevant portion of Decision 2007-48 was the establishment of rules and guidelines for a NDNC list, which have the potential to restrict severely the current abilities of telemarketers throughout Canada, but will not be implemented until an independent operator has been selected. The exemption for registered charities under Bill C-37 does not extend to non-registered charities or the non-registered affiliates of registered charities or to not-for-profit organizations.

Although the CRTC relaxed a number of the telemarketing rules that had been introduced in Decision 2004-35, the rules remain a significant burden on the organizational and funding capacity for charitable and not-for-profit organizations. What will likely be a source of confusion for many registered charities is the requirement under the telemarketing rules for each organization to maintain its own do-not-call list even though they may be exempted from the NDNC list.

Guidelines for handling consumer complaints about the violation of the telemarketing rules were also outlined in Decision 2007-48. Although Bell Canada, the National DNC list operator chosen by the CRTC on December 21, 2007, will manage the actual filing of complaints, the CRTC will maintain the roles of investigator and issuer of notices of violation and monetary penalties.

This bulletin was written by Terrance Carter of Carters Professional Corporation, tcarter@carters.ca, and M. Elena Hoffstein of Fasken Martineau DuMoulin, ehoffstein@fasken.com, and can be found at www.carters.ca/pub/bulletin/charity/2008/chylb131.pdf.