Charities and not-for-profits are obviously subject to a layer of laws that are related to their special status. Often overlooked though, is that they are equally subject to the same rules and regulations as other economic actors. Indeed, sometimes there are linkages between these two worlds making the need for good legal awareness that much more critical. For example, the CRA often raises improper T4 habits as proof that the charity or not-for-profit has improper books and records. The punishment for this offence can be revocation of charitable status even though there is an explicit penalty for any employer that is offside these rules.
Making matters worse is that the withholding regime can be particularly complicated for charities and not-for-profits given that their activities are often much different than the standard business. For example, many Churches bring in pastors from foreign countries for guest sermonizing or scholar in residence programs (the same can be true for health groups but in a different context). Similarly, organizations may create different types of employment arrangements for individuals delivering or monitoring their programs abroad.
In situations where entities bring non-resident contractors into Canada to perform work the Income Tax Act requires a base amount of 15% to be withheld from their income. Obviously, this amount needs to be then remitted to the CRA and the proper tax slips generated. This situation is that the 15% base amount can be lowered if Canada has a tax treaty with the home country of the contractor and that treaty speaks to this point. The issue can become even more complex when there is a question about the applicability of the treaty or if the contractor’s home base is in doubt. Clearly, a review of each country and the contents of its tax treaty is beyond the scope of this article, but it should be sufficient to note that these issues are extraordinarily complex and require a consultation with skilled advisors in the area.
Fortunately, for organizations that may have misstepped in the past the CRA’s voluntary disclosure program may be available to them. Typically, charities and not for profits do not use the voluntary disclosure program (“VDP”) because they do not pay tax. But, because the improper issuance of T4 slips can result in penalties, the VDP is a way to resolve the issues and avoid attendant penalty consequences. In cases where an organization has failed to properly withhold and remit source deductions from anyone, including non-residents, it may disclose this fact through the VDP and – if the disclosure qualifies – the CRA would waive the penalties and possibly reduce the interest charged. Unfortunately, if the organization has failed to withhold the proper amount from the contractor and the contractor is unwilling to send this amount back to the organization, the organization must pay the withholdings out of its own pocket.