Canada Revenue Agency’s Charities Directorate has as one of its duties, to take steps to ensure registered charities comply with their obligations under the Income Tax Act. In addition to having charities report financial and organizational information on annual returns, the Charities Directoratemay also audit a registered charity to verify that it is compliant with its obligations.

A. CHOOSING A CHARITY TO AUDIT

The Compliance Division of the Charities Directorate audits a variety of registered charities on an annual basis. Inmany cases, the Charities Directorate identifies a potential issue with a specific charity and chooses to do an audit to ensure that the charity is complying with its obligations. The Charities Directoratemay identify a potential issue with a charity in a variety of ways, including through its review of the information received in that charity’s annual return, a public news story or a specific complaintmade about that charity. The Charities Directorate develops an annual plan to randomly audit charities that operate in a specific sector or that carry out certain activities. Finally, the Charities Directorate also performs a number of audits each year on randomly selected charities of all types.

B. TYPES OF CHARITY AUDITS

The Charities Directorate may perform an on-site audit and meet with the charity’s representative locally or it may perform an “office audit” in which all of the required information is collected from the charity through mail or telephone without visiting the charity’s place of business. In an office audit, the Charities Directorate will review all of the information available on the charity’s file and then contact the charity only if further information is required. In an on site audit, the auditor will meet with the charity’s representative in person and may examine any part of the charity’s operations by reviewing hard copy information and discussing the charity’s operations with representatives of the charity. The auditor may choose to examine any of the charity’s documentation, including financial information, receipts, governing documents, minutes of meetings, bank accounts, investments, documents respecting the charity’s operations and activities and any contracts involving the charity.

C. SANCTIONS FOR NON-COMPLIANT CHARITIES

If an audit reveals that the charity is not compliant with its obligations, the Charities Directorate has several options for correcting those non-compliant actions. The Charities Directorate will choose which sanctions to apply based on the severity and frequency of the non-compliance.

If the charity’s non-compliant actions are minor, the Charities Directorate may simply educate the charity about the actions it needs to take to become compliant. The Charities Directorate may offer advice to the charity during the audit or issue an “education letter” to the charity explaining the rules it must follow. A large number of non-compliance issues can be resolved through education of the charity.

If the charity’s non-compliance is more than a minor infraction, the Charities Directorate may enter into a “compliance agreement” with the charity instead of issuing an education letter. The compliance agreement is a formal agreement between the Charities Directorate and the charity that sets out the issues the charity needs to address to become compliant, the steps the charity will take to address those issues and the resulting consequences if the charity does not address those issues. The Charities Directorate may do a follow up audit to ensure that a charity is meeting the terms of its compliance agreement.

If the charity’s non-compliance is more serious, for example if the charity’s non-compliance involves a large percentage of expenditures on non-charitable activities or if the charity has not abided by the terms of a previously issued compliance letter, the Charities Directorate may impose more serious sanctions on the charity or revoke the charity’s registered status. A serious sanction may include an interim suspension of a charity’s registered status or a financial penalty. The amount of any financial penalty issued will depend on the frequency and severity of the non compliance. The most serious cases of non-compliance, including repeat infractions or an unwillingness or inability of the charity to become compliant, will result in a permanent revocation of the charity’s registration.

D. CONCLUSION

In order to avoid any problems of noncompliance that could arise in an audit, charities must only carry out the activities that have been approved by the Charities Directorate and meet all financial, operational and reporting obligations under the Income Tax Act. If a charity is planning to change any of its activities, it should ensure that the Charities Directorate is notified and approves of such changes prior to implementation. Finally, charities should ensure that all of their documentation, financial information and various agreements are kept current and organized in case a Charities Directorate audit should occur.