Canadian Federal Budget Increases Transparency for Charities

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Canadian Federal Budget Increases Transparency for
By Robert B. Hayhoe [1] The 2004 Canadian budget introduces major changes to the regulatory regime for charities. One of the
most important changes in the long term is likely to be the introduction of increased transparency
requirements for both charities and the Canada Revenue A gency.
Among the very substantial changes to the Canadian charity tax regime announced as part of the
March 2004 federal budget were a number of transparency initiatives. These changes have not yet
received much attention from charities or cha rity lawyers, probably because of the more immediate
impact of some of the other changes announced, including the introduction of intermediate sanctions,
a new tax appeal process, and significant amendments to the disbursement quota spending
requirements. Though these changes are certainly important, the changes dealing with accountability
and transparency may prove to be just as important in the long term. This article will describe the
budget changes, with particular attention to the transparency ones.
Jo int Regulatory Table Report Background
The Canadian federal government has been engaged since 2000 in a consultative process called the
Voluntary Sector Initiative (“VSI”). [2] One of the “tables” or working groups established under the
VSI was the Joint Regulatory Table (“JRT”), tasked with making recommendations on procedural
elements of charity tax law. [3] The JRT conducted hearings across Canada and issued a preliminary
report [4] recommending various tax changes in the areas of intermediate sanctions, appeals,
transparency, and institutional reform. In March 2003, the preliminary report was superseded by a
final report [5] that made minor amendments. The 2004 Canadian federal b udget implements most of
the JRT’s final recommendations.
Non -Transparency Budget Changes
Before addressing the accessibility and transparency changes announced in the 2004 budget, [6] I will
first describe the other budget changes that have occupied commentators. [7] Intermediate Sanctions
The budget change that has attracted the most attention is the introduction of intermediate sanctions.
Before the budget, the only sanction available to the Canada Revenue Agency [8] in the case of a
registered charity not complying with charity tax rules was revoking its charitable registration.
Deregistration resulted in loss of the organization’s tax exemption and of tax recognition for donors.
As well, one year after d eregistration, the charity was assessed a revocation tax equal to its assets at
deregistration. [9] Since deregistration gave rise to such severe consequences, the Canada Revenue
Agency rarely imposed it. The result was that a significant number of charities felt able to act as if
many aspects of charity tax law did not apply to them, while others were unnecessarily concerned
about the possibility of revocation for minor t ax transgressions.
The 2004 budget follows the recommendations of the JRT by introducing intermediate sanctions as
part of a progressive approach to compliance. The first level of compliance action will be increased
specific and general education for chari ties about the applicable tax rules. This is a positive
development from the accessibility and transparency perspective. Indeed, even before the 2004
budget, the Canada Revenue Agency has been increasing the information it makes available to
charities on v arious topics. [10]

In somewhat more serious examples of non -compliance, the budget gives the Canada Revenue
Agency more explicit power to use compliance agreements with charities. [11] When non -compliance
is seen as repeated or more severe, the budget introduces intermediate financial sanctions. [12] While
this article will not fully set forth how these will operate, [13] they can be summarized as giving the
Canada Revenue Agency the ability to suspend the eligibility of a charity to receive donations, or to
assess tax of more than 100 percent of funds improperly spent.
Perhaps in response to constitutional concerns about the federal government’s intruding into provincial
jurisdiction by using the tax system to regulate the conduct of charities, the budget will permit a
charity assessed more than $1,000 in penalty tax in a year to pay it to an “eligible donee” instead of
the federal government. An eligible donee is another Canadian registered charity that is fully
compliant with tax rules and has a governing body that is arm’s length from the governing body of the
penalize d charity.
The budget also maintains the Canada Revenue Agency’s power to deregister in serious cases. The
revocation tax will no longer be avoidable by granting to a “qualified donee,” such as a foreign
university. [14] Instead, revocation tax can be avoided only by a grant to an “eligible donee” as
defined above. The budget also confirms that the Canada Revenue Agency may annul a registration
issued by mistake, and annu lment will not result in any revocation tax or other denial of donors’ tax
recognition. Confirmation of this power is helpful, since the Canada Revenue Agency has been quietly
processing annulments for some time. [15] Appeals
On registration issues, the pre -budget rules provided for judicial review by way of an appeal to the
Federal Court of Appeal. [16] This is a highly technical and complicated appeal route that does not
permit new evidence to be introduced. The JRT recommended that charity tax appeals proceed to the
Tax Court of Canada for trial de novo .[17] The budget includes a new internal Canada Revenue Agency objection process for reconsideration of
all charity tax decisions. The budget also provides that all inte rmediate sanction appeals will then go
to the Tax Court of Canada. However, the budget leaves registration appeals with the Federal Court of
Appeal. Given that the Tax Court is a much cheaper and more accessible litigation forum than the
Federal Court of A ppeal, and given its much greater tax expertise, the budget’s approach to appeals is
an improvement but still a disappointment.
Disbursement Quota Changes
In addition to the changes designed to implement the JRT Report, the budget announces various
technic al changes to the disbursement quota rules. The disbursement quota requires that each
Canadian registered charity that is a charitable organization expend on charitable grants or programs
80 percent of the amount of official donation receipts that it issue d in the previous year, while a
charitable foundation is required to expend 80 percent of the amount of official donation receipts that
it issued in the previous year and 4.5 percent of investment assets. [18] Note, though, that the Income
Tax Act has always contained provisions permitting exclusion of endowment gifts from the 80 percent
expenditure requirement.
A 4.5 percent net annual return has been quite difficult to o btain on endowment funds in some recent
years, particularly given the fiduciary obligations imposed on charities managing endowments. As a
result, the budget will reduce the 4.5 percent expenditure requirement to 3.5 percent for fiscal years
starting after March 22, 2004. At the same time, the 3.5 percent disbursement quota will begin to
apply to new charitable organizations immediately and to existing charitable organizations after 2008.
The budget also contains a number of more technical provisions design ed to correct various technical
faults in the disbursement quota calculation mechanism dealing with transfers between charities and
other matters. [19]

Transparency and Accessibility Changes
The budget proposes to authorize the Minister of National Revenue to make a great deal more
information available about applicants for registration, registered charities, and formerly registered
charities. The budget also signals a co ntinued commitment to increased transparency about the
internal affairs and policies of the Canada Revenue Agency Charities Directorate.
Previous Proposals
A decade ago, the Canada Revenue Agency Charities Directorate did not function in a transparent
mann er. While it did make some policy guidance available to the public, [20] this guidance was quite
general and often failed to address areas of real interest. At the same time, the information that the
Charities Directorate could make available about individual charities was quite limited. In essence,
the Income Tax Act’s general confidentiality requirements [21] operated to prevent disclosure of any
information about charities that was not permitted explicitly by that act.
Until 1998, the Charities Directorate was limited to disclosing the fact that an organization was
registered, along wi th when it became registered, its location, and a portion of its annual information
returns. [22] In 1998, the Income Tax Act was amended to provide for making additional information
available [23] : a registered charity’s application for registration, governing document(s), [24] and
annual information returns. Even these explicit exceptions to the confidentiality requirements were
interpreted narrowly by the Charities Directorate, though. For example, the availability of a charity’s
application for reg istration was undercut by the Charities Directorate’s interpretation that the law did
not require or even permit it to disclose any supporting documents that accompanied a registration
application. Similarly, although the information return was a public do cument, the financial statement
that each charity was required to attach was not made available, on the questionable theory that the
statements did not form part of the information return. [25] No information was publicly available about charities that had applied for and been denied registration.
In the case of a charity that was being audited or was exposed to some compliance action, no
information was available unless registration was revoked, and even then only the bare fact of
revocation was public until 1998, when the letter of revocation, setting forth the reasons, also became
available. These limitations hindered the ability of charities and their advisors to predi ct how the
Charities Directorate might respond in particular situations.
Future Directions Initiative
Parallel to the JRT process, which was external to the Canada Revenue Agency, the agency carried out
its own review of its effectiveness in various business lines, including charities. This review, known as
the Future Directions Initiative, involved a seri es of consultations about the effectiveness of the
Charities Directorate. Since the Canada Revenue Agency, under the Minister of Revenue, administers
but does not draft tax law, [26] Future Directions did not address areas that might have required
legislation, such as access to information about particular charities. However, the Future Directions
Initiative reports [27] do address the organizational transparency of the Charities Directorate at some
length and include a specific commitment to make all of its internal policy guidelines available to the
After the issuance of the Fu ture Directions Initiative Report, the Canada Revenue Agency Charities
Directorate moved quickly to implement the recommendations dealing with transparency. A significant
number of internal Charities Directorate policy documents have now been made availabl e on the
Canada Revenue Agency’s website. Further, the Charities Directorate has been going through its files,
pulling advice letters provided to particular charities, and, where the advice given in the letter is
correct, publishing excised versions. This new information [28] is a very helpful source of background
on the Charities Directorate’s positions on various issues.

The Charities Directorate has also introduced on its website a searchable database of registered
charities, which can be used to confirm registration. It also links to a page summarizing the public
portion of each registered charity’s last few filed information returns.
Joint Regulatory Table Proposal [29] The JRT Report addressed accessibility and transparency in detail. It acknowledged the need to
balance the privacy interest of individual charities with the public in terest in transparency and
accessibility. However, in general the JRT came down on the side of more disclosure.
For applicants for registration, the JRT recommended that the Charities Directorate be required to give
written reasons for registr ation decisions, with more detail in the case of novel applicants or refused
applicants. Not only should this information be accessible, the JRT recommended that it be actively
promulgated on the Charities Directorate’s website. Beyond this information, th ough, the JRT accepted
that an applicant’s registration form, whether registration was successful or unsuccessful, should be
available to the public only upon request. Any other documents in the application file should remain
confidential. As a result of t he JRT consultation process, it was recommended that an unsuccessful
applicant should be given the opportunity to withdraw its application in the face of an intended refusal,
thereby allowing the organization to avoid public disclosure.
The JRT recommended that the existence of audit or other compliance action should not be public until
a sanction is applied. While the report indicates considerable discussion of this issue, it was eventually
decided that the existence of an audit of a particular charity could undermine public confidence in the
Annual Return
The JRT Report complimented the Charities Directorate for beginning to make information returns
available on -line. However, it criticized the position that the attached financial state ments should not
also be made available and suggested that the Income Tax Act be amended to require this disclosure.
Operational Guidance
The JRT confirmed the importance of the Charities Directorate’s making more information about its
operational position s available. While it acknowledged that such information has always been available
pursuant to the Access to Information Act ,[30] the JRT stressed the importance of hav ing the
Charities Directorate collect and publish its internal policies as guidance for charities and their
Budget Announcement Changes
The budget was designed to implement the JRT Report recommendations. It announced that virtually
all of the accessibility and transparency recommendations would be made. Specifically, the budget
includes the following new disclosure items for all registere d charities [31] :
 financial statements filed with annual information returns; letters sent by the Canada
Revenue Agency to a charity relating to the grounds for annulme nt of registration;
 the Canada Revenue Agency’s decisions regarding a notice of objection filed by a
registered charity; information that a registered charity has filed in support of an

application for special status or exemption under the Act, such as a request for
permission to accumulate assets, as well as any responses from the Canada Revenue
Agency; and

 the identification of a registered charity on which a sanction has been imposed, the type
of sanction, and the letter sent to the charity relating to the grounds for the sanction.
For applicants ultimately denied registered charity status, the budget announces that the following
materials will be made available, though with identifying information excised:
 the governing documents of the organization , including the statement of purpose;
information disclosed by the organization in the course of making the application;

 a copy of the notice of denial; and

 a copy of any decision of the Canada Revenue Agency’s Appeals Branch regarding a
notice of ob jection filed by the organization.
In addition to the above information, the budget announced that the reasons for all registration
decisions will begin to be made available.
These announced changes bring the JRT cycle to a close, at least in terms of tran sparency and
accessibility. It will be interesting to see how these legal changes will be implemented by the Canada
Revenue Agency and accepted by charities.
[1] Robert B. Hayhoe, a charity lawyer with Miller Thomson LLP in Toronto, Canada, is also the
Canada Contributing Editor of IJNL and a member of the ICNL Advisory Council.
[2] For background on the Voluntary Sector Initiative, see www.vsi ; Arthur Drache,
“Canada: The Next Step” (2000), 2:4 IJNL
( ); Robert Hayhoe, “Recent
Legal Developments Affecting the Not -for -Profit Sector” (2002), 4:2/3 IJNL
( l/vol4iss23/cr_na.htm ); and Robert Hayhoe, “New Proposals for
Federal Charities Regulation” (2002), 5:1 IJNL
( ) (hereinafter “Hayhoe Proposals”).
[3] In Canada, the provinces are generally accepted as having exclusive legislative jurisdiction over
charities, leaving only federal tax rules subject to federal juri sdiction. For more detail, see Robert
Hayhoe, “An Introduction to the Canadian Tax Treatment of the Third Sector” (2004), 6:2 IJNL
( e.htm#_ftn12 ).
[4] Voluntary Sector Initiative, Joint Regulatory Table, Improving the Regulatory Environment for the
Charitable Sector: Interim Recommendations (Ottaw a: 2002) ( https://www.vsi – ).
[5] Voluntary Sector Initiative, Joint Regulatory Table, Strengthening Canada’s Charitable Sector:
Regulatory Reform (Ottawa: 2003) ( https://www.vsi – al_report_full.pdf ) (hereinafter “JRT Report”), as discussed in
Hayhoe Proposals, supra note 2.

[6] Canada, Department of Finance, 2004 Budget Tax Measures: Supplemen tary Information at 349
( ) (hereinafter “Budget”).
[7] Ro bert Hayhoe, “Canadian Federal Budget Introduces Intermediate Sanctions” (2004), 44 Exempt
Organizations Tax Review 185.
[8] Canada’s federal tax authority, once Reve nue Canada and more recently the Canada Customs and
Revenue Agency.
[9] With deductions for legitimate expenses and grants to other registered charities during the ye ar:
Income Tax Act, s.188, S.C. 1985, c.1 (5th Supp.) as amended (hereinafter “Income Tax Act”).
[10] The best example is the significant increase in the volume of i nternal Canada Revenue Agency
Charities Directorate policy materials now available on the
Internet: -e.html .
[11] The Canada Revenue Agency already resolves audits by threatening revocation unless a charity
provides a written undertaking to comply in future. See Canadian Ma gen David Adom for Israel v.
Minister of National Revenue, 2002 FCA 323 ( https://decisions.fct – ), as discussed in Robert Hayhoe, “Case Comment: Canadian
Magen David Adom for Israel v. M.N.R.” (2002) 5:1 IJNL
( -canda.htm ).
[12] For more detail on the specific sanctions, see Budget, supra note 6 at 352 -354.
[13] Partly because of length constraints and partly because the budget changes have only been
announced in the form of a budget paper; the release of draft legislation should help clarify the details
of intermediate sanctions.
[14] For a discussion of “qualified donees” in the context of international philanthropy, see Robert
Hayhoe, “A Critical Description of the Canadian Tax Treatment of Cross -Border Charitable Giving a nd
Activities” (2001) 49:2 Can. Tax J. 320.
[15] Canada Revenue charities Information Letter CIL – 1994 – 005
( -005 -e.html ) confirms that
annulment was practiced in 1994.
[16] Income Tax Act, su pra note 9, subsection 172(3).
[17] JRT Report, supra note 5 at 83.
[18] Income Tax Act, supra note 9, subsection 140.1(1)
[19] “Position Summary: Canadian Bar Association Charity & Not -For -Profit Law Section” (2002), 17
The Philanthropist 57.
[20] In the form of Interpretation Bulletins and Information Circulars.
[21] Income Tax Act, supra note 9, section 241.
[22] Income Tax Act, supra note 9, subsection 149.1(15)
[23] Income Tax Act, supra note 9, subsection 241(3.2).

[24] Letters patent, special legislation, constitution, bylaws, trust deed.
[25] JRT Report, supra note 5 at 63.
[26] Canadian federal tax legislation is the responsibility of the Minister of Finance.
[27] Canada Revenue Agency Guide RC 4313, Future Directions for the Canada Revenue Agency
( -e.html ).
[28] https://www.ccra .
[29] JRT Report, supra note 5.
[30] R.S.C. 1985, c.A -1.
[31] Budget, supra note 6 at 358.