When the CRA pits the Charity against the Donor

By: Adam Aptowitzer

When the CRA audits a charity, the charity's primary goal is often the protection of its donor base. In fact, this can be broken into two separate concerns. The first is the predictable reputational concern that preoccupies all charities. The second is that information gleaned from the audit not be used to reassess donors to the charity. This second concern can in fact be quite significant, as evidenced by a recent case in which Drache Aptowitzer was involved.

In this case, the charity was audited and in the course of the audit the auditor came to believe (apparently by way of misunderstanding a comment made by a representative of the charity) that the charity was offside regarding some element of its operations. As the matter was in the past, the CRA suggested a compliance agreement as a way to ensure that no similar transgressions would happen in the future. The charity, after having obtained verbal assurances that this was the end of the matter, signed the compliance agreement and agreed to no longer engage in the practice that was part of the compliance agreement. Unfortunately, the agreement itself listed the "facts" as found by the CRA.

The CRA then reassessed the charity's donors (those who had received receipts for this allegedly inappropriate practice). When the donors objected, first to the auditor, and then formally through the Appeals mechanism, the CRA replied that the facts had already been determined as being accurate because the charity had signed a compliance agreement agreeing that the receipts should not have been issued. As a result, even at the formal objections stage, where the CRA is mandated to review the facts underlying the reassessment, the CRA refused to look at the practice engaged in by the charity.

Besides the obvious procedural breakdown resulting from the Appeals Directorate's refusal to play its role in the system (contrary to the oft ignored Taxpayer's Bill of Rights), there are two fundamental problems in relying on a compliance agreement in this manner. First, compliance agreements invariably state that the CRA found the "transgression," but do not necessarily state that the charity agrees with their findings. So, reliance on the compliance agreement for the proposition that the charity agrees with the CRA's findings is most often false. Second, a charity is often forced to sign a compliance agreement because to not do so may very well result in a potential fight over revocation, with the attendant legal fees and public relations issues, so the choice for most charities is usually easy. And agreeing not to do something in the future does not necessarily entail an admission of guilt (particularly where the decision not to sign is fraught with such consequences).

If these concerns are not enough to make charities very wary of even the most basic compliance agreement, the CRA's new policy regarding the acquisition of information from third parties will make an already difficult situation worse. While the new policy is not revolutionary, it does make clear that the CRA assumes it has the power to request information from third parties that advise taxpayers regarding their tax matters (under penalty of jail time). Thus, charities that provide such advice to their donors as part of the planning regarding sophisticated donations could be required to provide evidence of these plans to the CRA. It should go without saying that this information would then be used by the CRA to reassess the donors to deny them a receipt (and potentially levy penalties). That said, it should be noted that there are certain procedures the CRA must complete if it is looking for information to reassess unnamed donors. And there are circumstances where the information produced may be subject to solicitor client privilege.

Clearly, charities do not want to be put in the position of harming their donor(s) in order to save their own skins, but for charities facing a compliance agreement this is often the choice. And assurances from the CRA's Charities Directorate that the donors are not facing reassessment are misleading because that decision is made by another branch of the CRA altogether - and perhaps well after the charity audit.

While there can be many ways to avoid harming donors, there are really only two strategies to contemplate. The first is to have legal counsel review all of your procedures (even the most mundane) as they relate to donors. The second is, if faced with a compliance agreement, to negotiate wording that limits the charity's admissions. Overall though, given the complexity of the law in the area, it seems unlikely that that the risk can be eliminated completely. The best that can be hoped for is to mitigate the risk by maintaining constant vigilance over your practices.

If you have any questions about mitigating such risks or negotiating a compliance agreement, feel free to contact the author at adamapt@drache.ca