Non-Profit Organizations and Loss of Status
CRA released a technical interpretation on the consequences to an organization that no longer qualifies as a non-profit. First, there is no formal notification process required. The Income Tax Act deems the organization to have disposed and reacquired all of its assets for fair market value and the organization is deemed to have an immediate year end. As the deemed disposition occurs just before the loss of its tax exempt status, there is no tax payable on the capital gains arising from the deemed disposition, unless the non-profit is a dining, recreational or sporting facility. Upon change of status the organization will not be able to claim loss carry forwards. The CRA states that the deemed disposition rule does not apply to an organization that never qualified as a non-profit.
The CRA takes the position that if an organization filed tax returns as a non-profit, but never met the qualifications of being a non-profit, then the CRA can reassess it for all years it made this misrepresentation. Miller Thomson LLP’s Charity and Not-for-Profit group lawyers can assist organizations faced with this issue.
Activities and Charitable Objects
At the end of April, the CRA released a Charities Connection No. 1, a new CRA newsletter that will be published more frequently and will replace the Registered Charities Newsletter.
The newsletter has a useful discussion of operating within the scope of a charity’s objects. In brief, a charity can only carry out activities in furtherance of its objects (found in the incorporating document or trust deed).
Where the charity is carrying out new activities, the newsletter sensibly suggests that a charity confirm the activity is charitable and falls within the scope of it objects. CRA notes that activities that do not meet these requirements place the charity’s registered status in jeopardy. The CRA recommends that charities carrying on new activities or activities outside its mandate contact CRA. Given the potentially serious consequences, charities may alternatively consider first obtaining legal advice. Discussing activities with CRA in advance of carrying them out may make sense for some charities. However, where a charity has already carried on the activity, legal advice could help the charity protect its registered status.
T3010B for Taxation Years Ending after March 4, 2010
In response to the proposed changes to the disbursement quota, the CRA has announced amendments to the T3010B for those charities reporting taxation years ending after March 4, 2010. See the attached link for more details.
CRA Lays Charges in Fraud Scheme
On April 8, 2010, the Canada Revenue Agency investigators laid charges against Martin Danso-Dapaah, Carrie-Anne Danso-Dapaah and Michael Meszaros, all of Victoria, B.C., for offences relating to the alleged sale of more than $7.6 million in inflated charitable donation receipts. The alleged offences included donation receipts issued by CanAfrica International Foundation and Canadian Foundation for Child Development – all formerly registered charities.
The Danso-Dapaahs and Meszaros are alleged to have played various roles in the sale of charitable donation receipts to more than 450 individuals at 10 to17 per cent of their face value, creating a tax credit greater than the value of the purchase price.
Revocations of Charities Participating in Tax Shelters Continue
Over the past few months CRA has reported several revocations of charities for participation in donation tax shelters. The CRA audit of the Henvey Inlet First Nation Community Support Organization concluded this charity issued over $44 million in donation receipts and only retained 1 per cent for its charitable purpose. Similarly, the CRA concluded that Destiny Health and Wellness Foundation issued $42 million in receipts and only retained $840,000. The audits of Liberty Wellness Initiative and the Orion Foundation concluded these charities issued receipts for more than the actual value of the gifts received. The CRA revoked all of these charities, stating that the charities were operated for the non-charitable purpose of promoting a tax shelter arrangement.
The CRA releases warn charities that CRA is auditing all tax shelter related donation arrangements.
On April 13, 2010 the CRA suspended for one year the International Relief Fund for the Afflicted and Needy-Canada’s ability to issue donation receipts and receive gifts from other registered charities because the charity failed to keep proper books and records.