Hidden Implications of Compliance Agreements Revisited
By: Adam Aptowitzer

Most charities will be unfamiliar with compliance agreements - but some that are familiar with them are finding that they wish they were not. Compliance agreements are offered by the Directorate to charities which, in the Directorate's opinion, are guilty of transgressing some provision of the Income Tax Act. The agreement usually stipulates that the charity will no longer engage in the activity or behaviour which led to the transgression in the first place. According to the guidelines which attempt to make sure the punishment fits the crime, compliance agreements fall somewhere between a 'slap on the wrist' and jail time. Often, the alternative to signing a compliance agreement is revocation of the charity's status and so signing the agreement, if offered, is generally a foregone conclusion.

Unfortunately, reducing compliance agreements to writing can have unintended consequences. In the past we have seen compliance agreements used by the Canada Revenue Agency to justify reassessing donors and refusing to review the facts of the reassessment as required. We have also had concerns that the admission of guilt required by such agreements would be used by donors or the media to attack the charity - much to the detriment of the charity. Often these unintended consequences do not arise within the Directorate itself but from other parties that may gain access to the compliance agreement.

Of course, the compliance agreement is an agreement between the Directorate and the charity, and so if Directorate believes the charity has breached the compliance agreement it will revisit the agreement and likely pursue revocation. Assuming the Directorate is right about the application of law to the matter the Directorate has obvious grounds for pursuing revocation. The charity has transgressed the law and revocation is available to the Directorate.

However, we recently ran across a novel use of a compliance agreement by the Directorate.  In this case, the charity had been a frequent late filer of its T3010 information return. The charity was contacted by the CRA and signed a compliance agreement which required it to file its T3010 in a timely fashion from that time on.  Notably, the compliance agreement did not deal with any other issues relating to the organization's charitable status.  In due course, however the charity once again filed its T3010 late and was then revoked for failure to file - but not for breaching the compliance agreement.

As is customary for operating charities that are revoked for failure to file, the now revoked charity filed an application for re-registration as a charity. In this case however, the Directorate refused to re-register the charity on the basis that the organization was in breach of the compliance agreement. And of course the underlying transgression in this case was failure to file the T3010 in a timely fashion. 

While one might expect the Directorate to refuse to re-register a charity which was in breach of a compliance agreement for some substantive transgression (for example providing undue benefits or running an unrelated business) there is no grounds for refusing to re-register an organization for breach of a compliance agreement.  Compliance agreements are simply a matter of administrative practice not statutory provisions, so breach of a compliance agreement is not 'breaking the law' and arguably cannot be used as a justification for the Directorate to refuse its duty of registering qualifying organizations as charities.

The continuing lesson here is that compliance agreements should not simply be signed with complacency. They are instruments which can be used to justify a wide range of actions against the charity and its donors and so charities must consider very carefully not just the consequences of not signing them, but the consequences of doing so.