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Common issues with Charity Returns

Charities have many obligations to the government with respect to reporting and operating with due care. One of these reporting requirements is the annual Charity Return, or T3010, that is required to be filed by all Charities. This return is required to be filed annually within six months of the Charity’s year end.  Charities who fail to file the T3010 on time may lose their charitable status.

The information that is filed on the Charity Return is publicly available on the Canada Revenue Agency website which further stresses the importance of ensuring the return is accurate and complete.  We will now highlight some common errors and omissions that we commonly see in relation to the creation and submission of the Charity Return.

Receipted donations

Charities often receive income from various sources.  However, the T3010 requires that the amounts by revenue stream be separately reported.  A few specific items that are often not tracked separately are as follows:

  1. Donations or grants received from other registered charities within Canada.
  2. Grants received from the federal or provincial government.
  3. Donations that are receipted versus donations that are not receipted.
  4. Donation receipts that are issued for gift in kind donations.

Ineligible Individuals

The board of a Charity has the responsibility of ensuring that the organization accomplishes its mission.  In addition, these board members are the individuals that are publicly accountable for the Charity’s activities.  As a result, care should be taken in selecting board members to ensure that they will be an asset to the organization.  A little known fact about selecting board members is the duty of the Charity to ensure that the individuals are eligible individuals.  The Canada Revenue Agency (CRA) has defined an “ineligible individual” as a person who:

  1. Has been convicted of a “relevant criminal offence”; or
  2. A “relevant offence”; or
  3. Was a director, trustee, or like official of a registered Charity; or an individual who “controlled or managed,” directly or indirectly, a registered Charity that had its registered status revoked for a serious breach in the past five years; or
  4. Was a promoter of a tax shelter which led to the revocation of a Charity’s registered status.

If the CRA determines that such an individual is on your board you will receive a notification with a request for the Charity to remedy the situation.  The CRA has the power to suspend the Charity’s receipting privileges or revoke the Charity’s registration.  To be proactive as a charitable organization, background checks on all directors, trustees, officers or like officials should be completed by requiring an annual mandatory declaration from those serving in such offices.  A template of a declaration form is available on the CRA website.

Direction and Control

A Charity is required to maintain direction and control on all funds spent to ensure that it aligns with their charitable purposes.  The CRA requires that the Charity’s resources be used in carrying out its own charitable activities or making gifts to qualified donees.  The basic definition of a qualified donee is a Canadian Charity.  Some areas that Charities are commonly offside with this requirement is giving gifts to not-for-profit organizations, individuals or a Charity that is not in Canada.

If a gift is made to a non-qualified donee then there must be other measures put in place to ensure that the funds are spent according to the Charity’s purposes.   Since the funds were given to a non-qualified donee, there is no longer direction or control over these funds by a Canadian Charity.  As a result, the CRA requires at a minimum, a legal document called an agency agreement be in place. This agreement ensures that the funds are spent align with the Charity’s purposes. The Charity must also monitor the agency agreement to ensure it is being adhered to by the recipient of the funds.

Foreign Activities

Many charities or not-for profit organizations will execute projects outside of Canada either by the organization themselves or through a partner organization that resides locally in the foreign country. There are several special rules around these foreign activities.  The most important one is that charities must maintain direction and control of the funds spent to ensure that it still aligns with their charitable purposes.

An example where the funds are clearly controlled by the Charity would be a short-term mission trips where the organization pays for all the travel expenses and the expenses to implement the project in the foreign country.  In this situation, since the Charity is funding employees or volunteers for these expenses it typically means that they are maintaining direction or control of the funds.

An example of a situation where direction or control may not be maintained is where funds are given to another organization for a project and that local organization manages and executes the project.  Since the funds were given to the other organization, there may no longer be direction or control over these funds by the Charity.  As a result, to ensure direction and control is in place, the CRA requires that an agency agreement be in place which allows for the following items:

  1. An expenditure budget
  2. Making progress or periodic payments
  3. Being able to cease funding if necessary
  4. Consistently reporting through receipts, invoices and progress
  5. Having a separate bank account

In addition, all foreign activities will need to be disclosed on the Charity Return, and any funds given under an agency agreement will also need to be disclosed.

Political activities

A number of years ago, additional reporting requirements were introduced relating to reporting donations made to political organizations. This is something that needs to be considered carefully before donations are made to political organizations, as the CRA watches this area closely and in the past has audited organizations that report information in this section.

Conclusion

Charity information returns are extremely important for charities as they are the reporting tool to the governing body, the Canada Revenue Agency.  In addition, they are publicly available to all interested donors, grantors or other stakeholders. These returns can quickly become complex with any of the issues that we have identified above. If you would like to discuss any of these areas and how to implement processes to ensure that they are appropriately handled throughout the year, please contact us.

Sources:

https://www.canada.ca/en/revenue-agency/services/charities-giving/charities-listings.html

https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/policies-guidance/ineligible-individuals.html#appendix-a

https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/policies-guidance/guidance-002-canadian-registered-charities-carrying-activities-outside-canada.html

 

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