Here are the CRA letters relating to the Ne’eman Foundation Canada Notice of Intention to Revoke. I would recommend that any charity that conducts foreign activities carefully review the letters. The revocation and the letters supporting that revocation have not been tested in court, and the charity may still appeal to the Federal Court of Appeal. If they do so, I will cover it in our blog.
The conclusion CRA provided was:
The audit by the CRA found that the Organization is not complying with the requirements set out in the Act. In particular, it was found that the Organization was not constituted and operated exclusively for charitable purposes, failed to devote resources to charitable activities carried on by the Organization itself, failed to maintain proper books and records, failed to issue donation receipts in accordance with the Act and/or its Regulations, and failed to file an information return as and when required by the Act and/or its Regulations. For these reasons, it is our position that the Organization no longer meets the requirements for charitable registration.
The CRA noted the areas of non-compliance as:
1. It is not constituted and operated exclusively for charitable purposes:
a) Unstated collateral non-charitable purpose
b) Delivery of non-incidental private benefits/conferring an undue benefit to a person
2. Failed to devote resources to charitable activities carried on by the Organization itself:
a) Lack of direction and control over the use of resources
b) Conduct of non-charitable activities / activities do not further a charitable purpose
3. Failed to maintain adequate books and records
4. Failed to issue donation receipts in accordance with the Act and/or its Regulations
5. Failed to file an information return as and when required by the Act and/or its Regulations
It is interesting to note some specific paragraphs relating to Amendments to the Act (in 2022 relating to qualifying disbursements) and also a discussion of procedural fairness in the letters.
Amendments to the Act
The Act was amended on June 23, 2022, to include new rules on “qualifying disbursements”. Registered charities continue to be permitted to make disbursements to qualified donees. They can now also make gifts or transfer their resources to non-qualified donees in one of two ways:
• by having the non-qualified donee carry out the charity’s own activity and by exercising direction and control over the non-qualified donees use of the charity’s resources; or
• by making a qualifying disbursement to the non-qualified donee.It is important to note that the legislative change is not retroactive. Prior to June 2022, registered charities that wanted to work through a non-qualified donee could only do this in one way. Charities had to demonstrate that the activities were their own, demonstrated by maintaining ongoing direction and control over the use of their resources. Nevertheless, at section 2 below we considered whether the non-compliance outlined in our AFL would now qualify under the new granting legislation.
So in essence, the June 2022 legislation does not apply to the activities of this charity prior to June 2022, but in case the new rules were helpful to the charity if they had applied, CRA also considered this. In practicality, the new grant to grantee rules, which are a different system, involves many requirements, especially relating to due diligence/books and records/risk mitigation, and the likelihood is that they will not be helpful in this circumstance. However, from a theoretical point of view, it is arguable that it is unfair if a charity does not comply with the rules to use a new rule retroactively to assist the charity. This could give a registered charity not complying with the rules with some undeserved benefits. How about the opposite – if a new stricter rule comes in, are people fine with that being applied as well? Is that fair? There are issues not only of fairness to registered charities, but also fairness to others (depending on the circumstances) including the public, donors, taxpayers, other charities, etc.
Procedural fairness
The Organization’s representations
The Organization represented that it is entitled to the benefits of procedural fairness and that legal conclusions should be drawn on the basis of evidence. The Organization further stated that the responsibility of the auditor is to engage in appropriate audit procedures.
CRA’s response
As noted in subsection 149 .1 ( 1 ), in order to maintain charitable registration, the Act requires an organization to demonstrate that it is constituted and operated exclusively for charitable purposes (or objects) and that it devotes its resources to charitable activities carried on by the organization itself or to making qualifying disbursements in furtherance thereof. [FN1 1 See subsection 149.1(1) of the Act, which requires that a charitable organization devote all of its resources to “charitable activities carried on by the organization itself” and Vancouver Society of Immigrant and Visible Minority Women v MNR, [ I 999) I SCR ·10, 1999 CanLII 704 (SCC) at paras 156-159. A registered charity may also devote resources to activities that, while not charitable in and of themselves, are necessary to accomplish their charitable purposes (such as expenditures on fundraising and administration). However, any resources so devoted must be within acceptable legal parameters and the associated activities must not become ends in and of themselves.]
The process to review an organization’s continued eligibility for charitable registration does not require the CRA to provide undisputable evidence of wrongdoing as a basis for revocation. Rather, the revocation of a charitable organization’s registered status under the Act is an administrative decision.
In making an administrative decision as to whether a charity continues to qualify for registered status, we take into account, and draw reasonable inferences from, all relevant information that is generally available to the public. We also review and weigh all of the information collected during the audit to determine whether the charity has demonstrated that it continues to meet the common law and statutory requirements for registration.
When the CRA has finished its audit, it will send the registered charity a letter outlining the results. When the CRA finds a serious case of non-compliance, it will propose revoking the
charity’s registered status. In this case, it will issue an administrative fairness letter (AFL).The purpose of the AFL is two-fold:
1. to describe, and fully disclose, our findings related to the identified areas of non-compliance; and,
2. to provide the charity with an opportunity to respond to our concerns, to make available to the CRA any additional information, and to submit written representations and any
relevant documentation as to why its charitable status should not be revoked.
The Courts have confirmed that the onus is on the charity to demonstrate that the CRA has erred or that the audit should not result in revocation. [FN2 Public Television Association of Quebec v. Canada (National Revenue), 2015 FCA 170 and Canadian Committee for the Tel Aviv Foundation v Canada 2002 FCA 72.]
Procedural fairness was respected and documented throughout this audit process. Specifically, during our audit review, we made numerous requests to the Organization for documentation required by the CRA to confirm its compliance with the requirements of charitable registration. The CRA granted all three of the Organization’s requests for extensions, and made multiple field visits to the accountant’s office to pick up and review books and ‘records. In addition, the auditor offered to visit the Organization’s Canadian address to pick up documents. The CRA also sent query letters on numerous occasions and provided the Organization with ample time to respond. These steps were followed to enable the CRA to develop a complete understanding of the Organization’s operations, expenditures and decision making during the audit period, while providing the Organization with ample time and opportunities to provide the information required to verify its compliance with the rules of registration.
Recently, there has been a lot of discussion about allegations that the CRA is biased against different groups. We have covered that issue extensively on our blog.