The Income Tax Act confers on the CRA a broad range of powers to audit Canadian taxpayers, including registered charities and not-for-profit organizations (“NPOs”). Some examples of those audit powers that have been conferred on CRA include the power to inspect books and records, as well as to compel taxpayers to respond to requests for information or obtain third-party records at CRA’s request (potentially subject to CRA having received judicial authorization for the request). Section 231.3 of the Act even provides that a judge may, on an application brought by the Minister of National Revenue, issue a search warrant that allows any person named in that search warrant to enter into and search any building, receptacle, or other place for any document that may afford evidence of an offence under the Act.
In addition to being aware of the scope of CRA’s audit powers, charities and NPOs should be aware of the limits on those powers as well as how to deal with CRA in the event that CRA exercises its audit authority under the Act.
When a charity or NPO is selected for audit, CRA may conduct a “desk audit”, a “field audit”, or in the case of a registered charity, possibly a “headquarters field audit”. A desk audit essentially amounts to a request from CRA Head Office to provide supporting documentation in respect of a particular area of review. A field audit is an in-person visit from an auditor who works in the CRA Tax Services Office that services the area in which the particular taxpayer is located. A headquarters field audit is an in-person visit from an auditor assigned to the CRA Charities Directorate. For registered charities, this is likely the most serious type of audit since that division of CRA is responsible for ensuring that organizations qualify as charities under the common law, that their operations fall within the limits of the Act, that their receipting practices are consistent and appropriate, among other things.
Once CRA has notified a charity in writing that it is the subject of an audit, as well as the type and scope of that audit it would be appropriate for the charity, as a matter of first course, to consult an advisor to assess the audit risks and to devise a strategy to deal effectively with the audit in a manner that is consistent with the charity’s legal obligations under the Act.
One such legal obligation is the requirement that charities provide “all reasonable assistance” to CRA in order to assist CRA in carrying out its audit of the charity. Practically speaking, this requirement means that charities should be civil and cooperative with CRA auditors. Other ways in which a charity may reasonably assist a CRA auditor is by having the relevant documents at-hand upon the CRA auditor’s arrival on the charity’s premises. Upon the arrival of the CRA auditor, the charity should appear prepared and organized. A charity should also consider providing a space for the CRA auditor to carry out his or her work, and assign an employee of the charity to be the point of contact for the charity to communicate with the CRA. The charity might also consider doing an internal review of its relevant practices and procedures so as to be in a position to be able to demonstrate to the CRA auditor how the charity intends to ensure future compliance with the Act.
Best practices that every charity can adopt include knowing the rules in the Act and training staff and employees accordingly. Charities should also be aware of CRA audit project (such as the current CRA political activity audit project) as well as potential audit triggers (such as the failure to complete annual compliance requirements, for example). Charities should always keep accurate and detailed books and records, and complete all of their annual filings. Finally, as previously mentioned, if the charity has any concerns in respect of how to comply with the Act, it should seek professional advice, sooner rather than later.