Complicated, confusing and costly consquences

publication date: Jun 25, 2011
 | 
author/source: Adam Aptowitzer
Next to a charity's actual mission, filing the annual T3010 information return may be the most important thing a charity does in a year. Of course, like most things in life, we usually do not realize its importance until it gets missed.

When this happens, the Canada Revenue Agency revokes the charity's registered status as a matter of course. It then falls to the charity to reapply for its former status.Author photo

Re-registration not guaranteed

In these circumstances, charities often simply assume that their application will succeed. And there is some logic to the idea that an organization which was not revoked for anything substantive but rather for simply missing a filing should be able to remedy the defect and move on.

However, the CRA is under no obligation to approve the application for re-registration. In fact, we have been involved in several circumstances where the CRA rejected the re-application by the (now former) charity. Generally, this has come as a result of an investigation by the CRA into the activities and the purposes of the applicant organization - an investigation the CRA would otherwise not have conducted.

(One recent case, though, did strike us as unusual in that the applicant organization was refused registration for having chronic problems filing the T3010). Unlike a new organization with no track record, an active organization may have decades of operations (or purposes) with which the CRA takes issue.

Pay taxman or give assets away

Adding additional colour to the situation is the application of the Revocation Tax. This tax is payable by any organization which has lost its registered charity status, and is calculated as 100% of the organization's assets (less liabilities and certain expenses) at the time of receiving the Notice of Intent to Revoke.

Assuming the organization does not file the information return (the T2046) due on revocation, the CRA will calculate the tax owing based on the information filed in the last T3010 (or perhaps gleaned on audit). That may be an amount far in excess of what the organization has on hand to pay its taxes.

In lieu of paying the Revocation Tax, a revoked charity can transfer its assets to an eligible donee (often an arm's-length registered charity). Generally, this should be done within one year of receiving the Notice of Intent to Revoke.

However, it seems more often than not that revoked charities take their time in transferring their assets and so are often left with assets well after the one-year period has expired. While the government has been rather accommodating in accepting transfers to eligible donees after the one-year period as payment in lieu of the tax, it is under no compulsion to do so, and may in fact demand a transfer of all of a charity's assets.  A wise charity will keep this in mind if planning a strategy for either re-registration or unwinding.

While the cost of compliance with the charity regulatory regime may be high, the implications of non-compliance are far worse. All organizations must file their charitable information returns on time every year so as to avoid these complicated, confusing and costly consequences.

Adam Aptowitzer of Drache Aptowitzer LLP is a charity law lawyer with a national practice based in Ottawa. He has been published in Canadian Taxpayer and the Not-for-Profit News. He has also published a widely distributed study on the regulation of Canadian charities with the C.D. Howe Institute.

As a speaker, he has presented to the National Symposium of Charity Law, the C.D. Howe Institute, the Association of Fundraising Professionals, the Canadian Association of Gift Planners, the Ottawa Estate Planning Council and various large and small Canadian charities. He has also given expert advice on Parliament Hill. Adam is an executive member of the Canadian Bar Association's Charity and Not-for-Profit Law section.

For speaking engagements and consultations, contact him at 613-237-3300 or visit http://www.drache.ca.

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