On August 27, the Canada Revenue Agency (CRA) released CG-024, a Guidance outlining CRA’s interpretation and intended enforcement approach to the rules in the Income Tax Act (Canada) surrounding ineligible individuals.

The ineligible individual rules were introduced in the 2011 Federal Budget and became effective as of January 1, 2012.  The rules are complicated, but provide, in essence, that the presence of an “ineligible individual” on the board or senior management of a charity, or in a position to control or manage the organization, is grounds on which CRA may revoke the registration of an registered charity or Registered Canadian Amateur Athletic Association (RCAAA) or refuse to register an applicant for charitable or RCAAA registration.  The rules also authorize CRA to suspend the receipting privileges of a charity or RCAAA.  Since the rules were introduced, there has been considerable speculation in the sector about how CRA will apply the rules.  This Guidance provides useful insight on this issue.

The Guidance begins by summarizing the various categories of “ineligible individual”.  In summary, an ineligible individual is someone who meets at least one of the following definitions:

  • an individual who has been convicted of a relevant criminal offence or a relevant offence – this refers to criminal or regulatory offences related to financial dishonesty or that are relevant to the operation of the charity (e.g. an offence committed against victims with similar attributes as the beneficiaries of the charity);
  • an individual who was connected to an organization that had its registered status revoked for a serious breach within the past five years – CRA confirms that a “serious breach” means revocation arising from an audit (e.g., for issuing false receipts, misappropriating assets, or participating in abusive tax shelters); or
  • an individual who was a promoter of a tax shelter, and participating in that tax shelter caused the revocation of an organization’s registered status within the last five years.

CRA confirms that an organization with such an individual as a director, trustee or like official, or who is in a position to control or manage the organization, may be subject to CRA action.  The Guidance provides some clarification on CRA’s interpretation of these terms – which makes clear that a broad range of individuals connected to an organization may be caught by the rules.

The Guidance then sets out CRA’s intended administrative approach.  It confirms that the sanctions available to deal with ineligible individuals are discretionary, and that CRA will assess each case on its own merits.  It notes that CRA is particularly concerned with deliberate abuses of the registration system, and with a view to limiting threats to beneficiaries and assets.  It confirms that CRA will consider the impact of the conduct that caused the individual to be ineligible, as well as the individual’s role within the organization and the steps the organization may have taken to lessen the risk posed by the ineligible individual.

CRA acknowledges that in some cases it may be entirely appropriate for a charity to welcome an ineligible individual on the board or management of a registered charity.  CRA uses the example of a charity that focuses on counselling services to people with anger management issues, and notes that such a charity may benefit from having individuals on the board or senior management who themselves have been convicted of assault.  CRA confirms that the onus is on the charity to explain the role and contribution of such individuals, but makes clear that it will consider the circumstances of each case.

The Guidance confirms that organizations will be given the opportunity to respond to CRA concerns regarding any ineligible individual who is connected to the organization.  Such a response may explain the safeguards that the organization has in place to minimize risk, as well as the benefits of having the ineligible individual continue in their role.  CRA expects to see supporting documentation along with any response, including board minutes, policies, and evidence confirming who has access to the organization’s assets.

The Guidance goes on to provide a questionnaire that assists individuals in determining whether they meet the definition of “ineligible individual”.  Given the complexity of the definition, this guidance is helpful.  The Guidance then sets out steps that charities can take to protect their beneficiaries and assets, including due diligence measures, risk assessment, fraud prevention and financial controls.  Charities and RCAAAs should review these measures and consider how they might apply to their organization, particularly if there is concern that ineligible individuals are or may be connected to the organization.

Finally, the Guidance provides a set of questions and answers regarding the rules.  These questions and answers confirm, among other things, that charities will not be required to conduct criminal record or background checks for the purposes of compliance with the Income Tax Act.  The Guidance also includes a checklist on issues that might expose an organization’s assets and beneficiaries to risk.

Overall, the Guidance is helpful in confirming the approach that CRA will take in administering the rules around ineligible individuals and the issues on which it will focus.  It is also valuable in outlining the steps that organizations can take to establish safeguards that will satisfy CRA and avoid sanction under these rules.  While many questions remain – in particular with respect to how enforcement will look in practice – the Guidance is a helpful resource and should be reviewed carefully by registered charities and RCAAAs.