COMPLICATED, CONFUSING AND COSTLY CONSEQUENCES

by Adam Aptowitzer


Next to a charity's actual charity work, filing the annual T3010 information return may be the most important work a charity does in a year. Of course, like most things in life, we usually do not realize its importance until it gets missed. When this happens, the Canada Revenue Agency (the "CRA") revokes the charity's registered status as a matter of course. It then falls to the charity to reapply for its former status. 

In these circumstances, charities often simply assume that they will be successful in their application. Of course, there is some logic to the idea that an organization which was not revoked for anything substantive but rather for simply missing a filing should be able to remedy the defect and move on. However, the CRA is under no obligation to approve the application for re-registration.  In fact, we have been involved in several circumstances where the CRA rejected the re-application by the (now former) charity. Generally, this has come as a result of an investigation by the CRA into the activities and the purposes of the applicant organization which the CRA would otherwise not have done. (One recent case though did strike us as unusual in that the applicant organization was refused registration for having chronic problems filing the T3010). Unlike a new organization, on which there is no record to judge its compliance, an active organization may have decades of operations (or purposes) with which the CRA takes issue.

Adding additional colour to the situation is the application of the Revocation Tax. This tax is payable by any organization which has lost its registered charity status and is calculated as 100% of the organization's assets at the time of receiving the Notice of Intent to Revoke (less liabilities and certain expenses). Assuming the organization does not file the information return (the T2046) due on revocation, the CRA will calculate the tax owing based on the information filed in the last T3010 (or perhaps gleaned on audit) and may be an amount far in excess of what the organization has on hand to pay its taxes.

In lieu of paying the Revocation Tax, a revoked charity can transfer its assets to an eligible donee (often an arm's length registered charity). Generally, this should be done within one year of receiving the Notice of Intent to Revoke. However, it seems, more often than not, revoked charities take their time in transferring their assets and so are often left with assets well after the one year period has expired. While the government has been rather accommodating in accepting transfers to eligible donees after the one year period as payment in lieu of the tax it is under no compulsion to do so and may in fact demand a transfer of all of a charity's assets.  A wise charity will keep this in mind if planning out a strategy for either re-registration or unwinding.

While the cost of compliance with the charity regulatory regime may be high, the implications of non-compliance are far worse. All organizations must remain vigilant to file their charitable information returns on time every year so as to avoid these complicated, confusing and costly consequences.