A Matter of Balance: CRA’s Implementation of the Ineligible Individual Rules of the Income Tax Act

THIS POST HAS BEEN WRITTEN BY GUEST AUTHOR BARRY W. BUSSEY, VP-LEGAL AFFAIRS, CCCC

Canada Revenue Agency (CRA) confirmed that it will exercise its discretion “in a balanced way” when regulating the ineligible individual provisions of the Income Tax Act (ITA) that came into force on January 1, 2012. This article will review CRA’s recently released Ineligible Individuals Guidance CG-024 as it relates to Christian charities. You are encouraged to read the whole guidance and its appendices.
CRA’s Ineligible Individuals Guidance may appear intimidating at first glance—it’s about 37 printed pages. However, it is well laid out and provides sufficient examples to make the content understandable for the average reader. It also has six appendices that are very helpful in assisting charities to navigate through the issues. The first four in particular will be great resources for your charity to have on hand. Appendix A is a self-assessment questionnaire, entitled, “Am I an ineligible individual?”; Appendix B gives helpful suggestions to assist a charity in protecting its organization, people, and resources; Appendix C provides the 10 most frequent questions and answers; and Appendix D provides a checklist for registered charities regarding ineligible individuals.

The Mischief Meant To Be Addressed

Government public policy makers decided some time ago that it was unjust for individuals to  engage in abusive practices, cause their charity to deregister, and then turn around and open up another charity under a new name with a new registration number.  A systemic approach was necessary to remove the ease with which these unscrupulous individuals could fraudulently issue charitable receipts, misappropriate charitable assets, or engage in outlandish tax shelters. The method chosen to control this abuse was to enforce certain standards that needed to be met to serve on a charity’s board or to manage the charity. Hence, the ineligible individual rules were created.
Under these rules, if CRA determines a person to be an “ineligible individual,” then CRA has the discretion to refuse or revoke that charity’s registration or suspend its receipting privileges. This, of course, could be disastrous as donations are the lifeblood for any charitable organization. However, as explained below, just because there may be an ineligible individual actively involved in a charity does not mean that the charity faces immediate deregistration. Under such circumstances, the charity has the onus to explain to CRA’s satisfaction why such individuals are involved and what is in place to protect the charity.

The Enforcement Approach

Given the sheer magnitude of possible variations in the charitable sector, CRA will review every case separately.  While the ITA has given CRA a “big stick” to enforce compliance, it does not seek to be heavy handed. When there are concerns about an ineligible individual, CRA will allow the charity to reply to CRA’s concerns before action is taken.[1] There may be legitimate reasons why a charity would need an ineligible individual to serve with their organization—for example, ministries working with prison inmates may require the assistance of ex-convicts.
Of course, we won’t fully understand how the new regime works until we witness how CRA audits on the issue. It is nevertheless comforting to know that CRA’s approach is a balanced one and that it recognizes that most charities desire compliance.

The Definition of “Ineligible Individual”

The ITA defines an “ineligible individual” as a person who

• has been convicted of a “relevant criminal offence” (a person who meets this criteria will be ineligible until a pardon is granted or record suspended) or a “relevant offence” (a person who meets this criteria will be ineligible for 5 years from the date of revocation); or
• was connected to a charity that had its registered status revoked for a serious breach (a person who meets this criteria will be ineligible for 5 years from the date of revocation); or
• was a promoter of a tax shelter which led to the revocation of a charity’s registered status (a person who meets this criteria will be ineligible for 5 years from the date of revocation).

Relevant Offences

• Criminal. A “relevant criminal offence” is a criminal offence under the laws of Canada or an act that would be a criminal offence if committed in Canada. If there is a pardon or a record suspension, then it is not a “relevant criminal offence.” It is relevant in that the crime relates to financial dishonesty (misappropriation of funds, intentional misstatements in financial records, forgery or alteration of financial documents, and fraud) or relevant to the operation of the charity (determined on a case-by-case basis).

• Non-Criminal – Relevant Offence. A “relevant offence” could also be committed under other legislation (federal or provincial), such as charitable fundraising legislation, consumer protection legislation, and securities legislation. It is relevant in that the offence relates to financial dishonesty or relevant to the operation of the charity.

Revoked Organization for Serious Breach

It was a concern of CCCC that a person not be considered an ineligible individual simply because he or she was connected to a charity whose registration was revoked because of a missed deadline, such as the failure to file the T3010. CRA has reiterated in this Guidance its “graduated approach to compliance enforcement.” In other words, revocation of registration will happen only when a registered organization cannot or will not comply with the requirements.
Therefore, if a person is to be declared an ineligible individual under this category, the breach must be serious. It is serious, for example, if the revocation is the result of an audit that reveals fraudulent receipting, misappropriation of assets, or abusive tax shelters. Revocation for the failure to file a T3010 will not normally be considered serious. However, if there are repeated failures to file, then one can expect to arrive at a serious level. The guidance does not tell us how many times it would take, but I would suggest that a failure to file two years in a row would be a reason to be concerned.

Connected to the Charity

The Guidance suggests that an ineligible individual could be connected to a charity in a number of ways:

• as a director, trustee, officer (as listed in the governing documents), or like official (a person who has influence over the organization such as a member of the clergy);
• as a person who, directly or indirectly, controlled or managed the revoked organization (this will include those who serve voluntarily, for example, as a board member or an employee who manages other employees or prepares budgets etc.);
• as a promoter of a tax shelter that caused the organization’s registration to be revoked.

A Promoter of a Tax Shelter

Tax shelters are notorious for trouble. CCCC has been consistent in its message that Christian charities avoid them like the plague. In essence, the claim of a tax shelter is that a gift arrangement or the acquisition of property by the charity allows the donor to obtain tax benefits and deductions that will equal or exceed the net costs of entering into the arrangement. The promoter of these schemes are not highly esteemed by the CRA Charities Directorate. Promoters include the person (or persons) who:

• sells or issues participating shares in the tax shelter;
• promotes the sale, issuance, acquisition, or participating shares in the tax shelter;
• acts as an agent or adviser for the sale or issuance of participating shares in the tax shelter;
• acts as an agent or adviser to promote, sell, or acquire a participating interest in the tax shelter; or
• accepts consideration for his or her role in the tax shelter.

Once CRA Discovers an Ineligible Individual

If your organization has been flagged by CRA for having an ineligible individual, CRA has the power to

• refuse to register the organization;
• suspend the organization’s receipting privileges;
• revoke the organization’s registration.

However, the Guidance is clear that before the CRA makes up its mind, it will set out its concerns in writing and allow the charity an opportunity to respond.  If the contact person is the ineligible individual, CRA may also communicate with another official of the charity. The onus is on the charity to convince CRA why such a person ought to remain. What is very important to remember is that CRA must be assured that the charity’s assets and the interests of the beneficiaries are protected. Of course, CRA’s decision can be objected to if the charity believes CRA has misinterpreted the facts or misapplied the law.
Upon reviewing the evidence, CRA may determine that beneficiaries and assets have been adequately and appropriately protected.  This would allow the ineligible individual to remain on the charity board or in a position to control or manage its work. There would then be no worry about its registration and receipting privileges.

What CRA Considers

CRA has outlined a series of deep and probing questions to determine its course of action. The following questions are outlined in the Guidance:

• What made the person an ineligible individual?
• What impact did the conduct have (for example, victim impact, dollar value)?
• Did the ineligible individual engage in the conduct more than once?
• What roles and responsibilities does the ineligible individual have in the organization?
• Is there an opportunity for the ineligible individual to repeat the conduct?
• If repeated, what impact would that conduct have (on beneficiaries and assets)?
• How has the organization lessened whatever risk the ineligible individual may pose?
• Is the organization aware of the person’s past conduct and that the person is an ineligible individual?
• Has the ineligible individual’s roles and responsibilities been appropriately restricted?
• Are there appropriate financial controls in place to safeguard assets?
• How is the safety of beneficiaries ensured?

Just because CRA does not act does not mean it is of the view that the ineligible individual poses no risk. It just means that CRA has decided to do nothing for the time being. The Guidance suggests that “You may want to consult a legal advisor, your insurer, a charitable sector advisory group, or provincial or territorial officials on any related governance or administrative concerns.”

How to Respond to the CRA’s Concerns

Receiving a letter from CRA on this matter can be a time of stress. Obtaining experienced legal counsel at this point is advised. Once a letter is received, the charity will have an opportunity to respond, and CRA will make its own decision on what action it will take based on the charity’s response. No response from the charity will in all likelihood lead to the severe sanctions canvassed in the CRA letter.
If you do not agree with CRA’s assessment of the situation, you will need to provide evidence to the contrary of CRA’s concern. Here are some possible reasons:

• The person in question did not make the application or no longer is a director, trustee, officer, or like official or no longer controls or manages the charity.
• The person in question is necessary for the work the charity does (as in the case of former convicts in prison ministry), and assets and beneficiaries are protected from such persons.
• The person in question is not involved in financial decisions and does not have access to its assets.
• There are appropriate and adequate control measures in place.

Mere declarations of fact will not suffice. Charities responding to CRA will need to provide information that clearly shows that the CRA based its conclusions on incorrect information or a misinterpretation of the facts. Provide relevant documentation, such as the following:

• minutes of board meetings in which signing authorities for the organization’s bank accounts were decided
• policies indicating the organization’s financial controls and how the organization enforces them
• copies of ledgers, cheques, or financial reports indicating who has access to the organization’s assets (and that it is not the ineligible individual)

Appendices

Appendix A is a self-assessment questionnaire “Am I an ineligible individual?” This is a very helpful document to assist charities in their hiring and appointment practises.
Appendix B provides a number of suggestions that charities can use to protect their beneficiaries and assets. Topics include “Due diligence,” “Risk assessment,” “Fraud prevention,” “Financial controls,” “Protecting beneficiaries,” and “Resources.”
Appendix C is a series of 10 questions and answers:

• How do I know if I’m an ineligible individual?
• Will the CRA clear me to serve on a board or work at a registered organization?
• Can an ineligible individual serve on a board, work, or volunteer for a registered organization?
• What should I do to protect my organization’s receipting privileges and registration?
• What if I think I am being treated unfairly?
• Can an ineligible individual be an employee or board member of a registered organization?
• Should a registered organization refuse to accept an ineligible individual as an employee or director?
• Must a registered organization notify the CRA if it knows of an ineligible individual?
• Is it necessary to do screening and background checks?
• Are there other restrictions on directors, trustees, officers and like officials?

Appendix D is a checklist for registered organizations regarding ineligible individuals
Appendix E – Definitions – Income Tax Act – 149.1(1)
Appendix F – Authorities – Income Tax Act
[1] See para. 3 of the Guidance.