Tax Executives Have Same Questions as Do We
Arthur Drache, December 12, 2007

For a year or so we have raised the issue of whether the Charities Directorate is legally able to impose a $500 fee on registration which comes after a revocation for failure to file. They call it a fine, but in fact it is a back-door fee which is not authorized by law. We have also written about the lack of use of intermediate sanctions which in our view should be a major step prior to revocation.   

So it was with some considerable pleasure that we read part of a submission to the CRA by the Tax Executives Institute. The TEI is primarily made up of in-house tax advisers of large companies, though of course there are other members. Typically, the issues which they deal with are corporate and business matters. But in preparation for some meetings with the CRA in December we found amongst the score of topics for discussion, the following. 

  "10. Revocation of a Charity's Registration for Non-Filing  

  Many companies have established private foundations and also operate employee-related charities. Subsection 188.1(6) of the Income Tax Act provides for the imposition of a $500 penalty where a registered charity fails to file a required return. CRA published Guidelines for Applying the New Sanctions on charities on its website on April 10, 2007. The guidelines state:    

The legislation allows for a $500 penalty for failure to file the return on time. However, we intend, for the present, to apply this penalty only to charities that:  
  . have had their registration revoked for not filing the annual return; and  
  . apply for re-registration. 

  Organizations in this situation have to act quickly to avoid the revocation tax that the Act imposes on charities if they lose their registration. Within 12 months of the time we send the notice that we intend to revoke their registration, they will have to:  
  . rectify their filing deficiency;  
  . pay any outstanding penalties (including the $500 non-filing penalty), taxes, and interest under the Income Tax Act and the Excise Tax Act; and  
  . obtain re-registration.  

  One of the first things we will check in an application for re-registration is whether a cheque for the $500 has been enclosed.  

  Although the Minister's right to revoke a charity's registration under the provisions of subsection 168(1) is clear and necessary, such action would presumably be undertaken only where intermediate sanctions fail to produce compliance. CRA's new guidelines thus seem contrary to the purposes of the intermediate sanctions. The 2004 Federal Budget documents implementing the intermediate sanctions state that:    

Until now, the only sanction available to CRA in response to non-compliant charities was to initiate deregistration proceedings. It is proposed that for taxation years beginning after today, charities be liable to possible taxes, penalties and sanctions for non-compliance with the requirements of the Act.  

  In addition, the budget proposes to introduce new, more effective sanctions that are more appropriate than revocation for relatively minor breaches of the Income Tax Act. The proposed sanctions will generally respond directly to activities that contravene the rules, thereby making the income tax rules for charities clearer and fairer. The sanctions will also be progressive, generally increasing in severity for repeat infractions. All proposed sanctions deal with infractions that are already identified in the Act. Moreover, a mechanism will be established to allow financial penalties to be reinvested in the charitable sector.  

  In our view, the purpose of the intermediate sanctions under section 188.1(6) should be to prompt compliance before revocation proceedings are commenced. Under CRA's guidelines, the $500 penalty is, in effect, stacked on top of and applied with the revocation sanction. Before revoking a charity's registration for failure to file a return, would it not be more appropriate for CRA to first remind the charity of its filing obligation? If the charity does not cure its nonfiling, CRA might then send a notice imposing the $500 penalty under section 188.1(6). If the charity still fails to respond, CRA might then initiate revocation proceedings. We invite CRA's comments."   

We couldn't have put the issues better or more succinctly. It is also gratifying to note that other tax experts read the law and policy in the same way we do. Historically, the CRA is much better at answering the TEI than the Charity Directorate is in responding to the sector. If and when we see any responses, we will pass them along.   

The day after the TEI was to meet with the CRA, it had a meeting with Finance. Obviously, comments directed to the CRA deal with administrative issues while those directed to Finance deal with issues that would require legislation to improve.   

The TEI indicated that it was concerned about the "excess business holdings" provisions for private foundations, though for reasons which might surprise. 

  "The 2007 Federal Budget proposes to implement an "excess business holdings regime" for private foundations. Where a private foundation's holdings of one or more share classes of a corporation exceed two percent of the outstanding shares of that class, the foundation would be required to report in its annual information return the number shares held at the end of the year. The proposals loosely follow section 4943 of the U.S. Internal Revenue Code, but the U.S. rules require disclosures only of stock holdings of controlled entities. As important, Canadian securities law requires shareholders to disclose their holdings only where they hold 10 percent or more of an entity's outstanding stock. Because the excess business holdings regime would require disclosure of shareholder information that would not otherwise be made public, market distortions may arise for the affected company shares. Would the Department consider revising the disclosure requirements of the proposed excess business holdings regime to be consistent with the disclosure requirements currently imposed by Canadian securities regulators? Alternatively, would the Department consider an exemption from the disclosure requirements where it is reasonable to conclude that disclosure would affect the price of a publicly traded security?" (Our emphasis.) 

  We don't know whether Finance will pay attention but thirty years in Ottawa tells us that the TEI swings an awful lot more weight than does the charity community, however represented.