Charities spend a great deal of time and energy focusing on audits from the Charities Directorate. While this attention on the Directorate is justifiable it is important to recognize that charity regulation is only one function of the Canada Revenue Agency (the “CRA”) and that charities are answerable to the CRA for many of its activities.
One particularly troublesome area seems to be the T4 habits of charities. Even where there is no issue with a specific expenditure on a particular individual for a charitable activity, if the charity does not properly issue the T4 the CRA may well hold that the charity is offside the requirement to keep proper books and records. And in this thorny area, the issuance of T4s to non-residents seems to be particularly difficult.
The ‘use’ of non-residents in pursuit of charitable activities is actually quite common. Churches use non-resident Pastors, charities often have non-resident consultants and many organizations use key-note addresses for their annual meetings. Where these individuals are not residents of Canada, questions arise as to the responsibility of the charity for withholding and remitting a portion of the payment amount to the CRA.
If the individual never sets foot in Canada then there are no withholding requirements. However, where the recipient is a non – resident that provided a service in Canada and is paid a fee, commission or other amount (although not salary or wages) then the Canadian payor must withhold 15% (24% in Quebec) from the payment exclusive of reimbursement for expenses. It should go without saying that the amount withheld must be remitted to the CRA (or Revenue Quebec).
It can, at times, be difficult to determine whether an individual is a non – resident. And even if it is obvious that the person does not live in Canada there may be some difficulty in determining in which country they are resident. To make matters worse, where the individual may be resident in more than one country, the charity employer may need to resort to the tie-breaking rules that are a feature in many tax treaties. (Although in this case the Canadian charity may need to know the application of the tie breaking rules between two foreign countries to determine where a non – resident contractor is resident). This might be necessary to determine whether Canada has a treaty with the country in which the individual is actually resident for reasons which are explained below.
The amount withheld can be reduced by application – of the recipient – to the CRA. There are two mechanisms to do so. The first relates to a relevant treaty between Canada and the country of residence of the contractor to reduce with amount withheld. Another waiver exists where the individual would not be paying any Canadian tax as a result of deductions available to him or her in the course of their work or if the amount of income is less than $5000 CDN. The waiver must be applied for by the recipient and will not be backdated. So non-residents working in Canada should be proactive in applying for the waiver.
Once the amounts are deducted the non-resident may file a Canadian income tax return and claim any overage amount back as a refund if applicable. Knowledge of these rules is critical. An organization which fails to withhold and remit the amount itself becomes obligated to make the payment out of its own pocket. The further corollary is that Directors may become responsible personally as they would for any other individual for whom they do not withhold and remit the source deductions.
Charities and not-for-profits as economic actors are subject to many of the same income tax rules as every other economic actor. All organizations should seek professional counsel with expertise in these specific areas so as to avoid the pitfalls of operation.