Canada Revenue Agency (CRA) is responsible for enforcing the Income Tax Act as it applies to registered charities. There are several actions that CRA can take to encourage and promote compliance with the Act or to punish registered charities that do not comply.
Common non-compliance problems
CRA prefers to educate charities and work with them to achieve compliance when a charity demonstrates that it is willing to do so. But if a charity deliberately breaks the law or ignores an existing compliance agreement, CRA will take stronger action. (See : Guidelines for applying sanctions) Some common problems that charities have are as follows:
Not filing the T3010 annual return
- A charity must file its annual T3010 return within six months of its fiscal year-end. If the charity has not filed within this time period, CRA can revoke the charity's registration. CRA will usually give charities a chance to late-file, however, but failing to file after receiving a reminder notice will generally result in revocation.
- CRA also has the right to apply a $500 late-filing penalty at any time after the six months. Currently, however, it does not apply this penalty if the T3010 return is filed before the charity's registration is revoked (see below).
- If the T3010 return has not been received by seven months after the charity's year-end, CRA will send a Notice of Intention to Revoke a Charity's Registration (Form T2051A).
- In the tenth month after the charity's year-end, CRA will begin the legal process of revoking the charity's registration.
- Once a charity's registration has been revoked for failing to file its annual T3010 return, it may apply for re-registration (using Form T2050), at which time it must pay a $500 penalty. Note that re-registration is not guaranteed, and the organization cannot carry on as a registered charity until its re-registration is approved.
Incorrect information on tax receipts
- Tax receipts may be incomplete or incorrect due to errors such as omitting CRA's Web site address or accidentally misstating the charity's name or address. In these cases, CRA will generally use an education letter to help the charity avoid these mistakes in the future.
- CRA may also choose to apply a penalty of 5% (for the first instance) or 10% (for repeat problems) of the eligible amount on the incomplete or incorrect receipts.
False information on tax receipts
- A tax receipt that contains false information, such as an incorrect amount or donation date, is viewed as a serious matter by CRA. In these cases, CRA will generally not use a compliance agreement but will proceed to apply penalties.
- A penalty of 125% of the eligible amount on the receipt will be applied by CRA where information on the receipt has been falsified. If the total of these penalties is more than $25,000, the charity's tax receipting privileges will be suspended for a year.
- If the infraction involves a tax shelter arrangement or outside parties (that is, beyond the officers and directors of the charity), more serious sanctions, including revocation, can apply.
Inadequate books and records
- Problems with books and records can range from minor, inadvertent issues (such as poor housekeeping or occasional mistakes) to very serious matters (such as falsifying or destroying records to conceal other problems, or refusing access to records during an audit).
CRA will generally use a compliance agreement to deal with minor, inadvertent matters, in order to ensure the charity corrects its practices in future.
In more serious situations, CRA will usually impose a one-year suspension of the charity's tax receipting privileges. It can also move to revoke the charitable status permanently.
Penalties and sanctions for non-compliance
If a charity does not voluntarily comply with the Act or if a charity’s non-compliance is serious enough, CRA can choose to use one of the following measures:
- Compliance agreements. A compliance agreement is signed by both the charity and the CRA. It lists the problems that CRA sees, the steps the charity will take to solve the problems, the timeframe in which the charity must solve the problems, and the potential consequences to the charity if it does not take these steps.
- Sanctions. These include financial penalties or a temporary suspension of the charity's ability to issue official donation receipts.
- Revocation of the charity's registration. CRA can remove ("revoke") the advantages of being a registered charity, such as the ability to issue official donation receipts.
- Revocation tax. CRA can order a revoked charity to pay all its of its net assets to CRA as a revocation tax, if it does not transfer them on a timely basis to an "eligible donee".
CRA can choose which of these measures to use, depending on the circumstances. In situations where CRA considers there to be a "serious case of non-compliance", it will proceed directly to sanctions or revocation.
If CRA proposes to revoke your charity's status or apply a financial penalty or suspension and you disagree with this decision (with supporting evidence), you may file an objection and, if necessary, an appeal.