Canada Revenue Agency audits: what charities need to know

publication date: Jul 22, 2014
author/source: Bill Kennedy

Bill Kennedy photoThe Canada Revenue Agency (CRA) has received a lot of attention recently. There are accusations of political interference; the Federal Government has been accused of using CRA audits to stifle opposition in such areas as the environment and human rights.

But whatever your position on these issues, when the CRA calls, you have to put them aside.  A CRA audit is no place for a policy debate and the auditor who calls is just there to do a job. You need to have your ducks in a row.

What can the CRA do?

If the CRA believes that your charity is not complying with the Income Tax Act, it can revoke your charitable registration and/or impose financial penalties. But the CRA has said publicly that it is not in the business of shutting down charities. If it believes that an honest mistake has been made, it will issue a warning in the form of an education letter or a compliance agreement. If the charity takes steps to comply with the letter or agreement, it can continue to accept donations and issue charitable receipts.

What is the CRA looking for?

The CRA explains the audit process in a booklet called Auditing Charities. In it they list a charity’s responsibilities:

  • File the annual T3010A information return.
  • Meet annual spending requirements (disbursement quota).
  • Keep adequate books and records.
  • Issue complete and accurate donation receipts.
  • Engage only in allowable activities (charitable purpose), i.e. relief of poverty, advancement of education, advancement of religion, and charitable programs beneficial to the community.
  • Limiting political activities (see below) to 10 per cent of the budget.
  • Inform the Charities Directorate of any changes to the charity’s mode of operation or its legal structure.
  • Maintain the charity’s status as a legal entity. 

In the summer of 2012, the CRA received funding and increased its political activities compliance efforts.  In its public disclosure of the general results of those audits in January 2014, the CRA pointed to inaccurate reporting and tracking of political activities.

What is a political activity?

The CRA presumes an activity to be political if a charity:

  • Explicitly communicates a call to political action (that is, encourages the public to contact an elected representative or public official and urges them to retain, oppose, or change the law, policy, or decision of any level of government in Canada or a foreign country).
  • Explicitly communicates to the public that the law, policy, or decision of any level of government in Canada or a foreign country should be retained (if the retention of the law, policy or decision is being reconsidered by a government), opposed, or changed.
  • Explicitly indicates in its materials (whether internal or external) that the intention of the activity is to incite, or organize to put pressure on, an elected representative or public official to retain, oppose, or change the law, policy, or decision of any level of government in Canada or a foreign country.

As a result of the measures introduced in the 2012 federal budget, a political activity also includes the making of gifts to other organizations intended for political activities.

What should a charity do when the CRA calls?

The first step in a CRA audit is a file review. Give the auditor exactly what they ask for, and do it in a way that gives them the context. Connect the dots:

  1. Clearly state your charitable purpose(s).
  2. Line up your programs and activities so that they link to the charitable purpose(s).
  3. Show how your staffing, expenditures and fundraising line up with the programs and charitable purpose(s).
  4. Make sure your documentation, controls, policies and procedures are consistent with the previous steps.

What can a charity do right now?

Many charities only track the financial side of their political activities. That is only part of the picture.  Many advocacy activities have no direct costs attached to them at all.

  1. Ensure staff are aware of the CRA’s definition of political activity in the context of the charity’s activities.
  2. A charity’s staff are part of its public voice, so it needs to be clear whether a staff member is speaking on behalf of the charity or voicing a personal opinion. Ensure that there are clear lines drawn between the staff’s personal and corporate activities.
  3. Report regularly on all advocacy activities to management and the Board.
  4. Ensure that one issue is not dominating the charity’s activities to the point where the charity’s charitable purpose appears to have shifted.

A Canada Revenue audit is not something to be feared, however, it is also not something to be taken lightly. Your internal controls and procedures need to be set up so that you are always ready for an audit, because when the CRA calls, there won’t be a lot of time to prepare.

Bill Kennedy is a Toronto based Chartered Accountant with Energized Accounting, focusing on financial and reporting systems in the charitable sector. He blogs at Find out more at www.EnergizedAccounting.cafollow Bill @Energized

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