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A New Area of Liability for Directors of Charities - Canada



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In 1999, Parliament amended the Income Tax Act (the "Act") to create what are commonly called Third Party Civil Penalties. The provisions, which are broadly worded, ostensibly target those individuals who assist others in making what the CRA would believe is a false statement or omission on their tax returns.

Tax advisors, because they are often involved in tax planning, and tax preparers because they are involved in the preparation of tax returns are the obvious targets. It appears now however that the CRA is using these provisions to target the directors of charities.

The relevant provisions of the income tax are subsections such as ss 163.2(4) and (5). They read as follows:

(4) Every person who makes, or participates in, assents to or acquiesces in the making of, a statement to, or by or on behalf of, another person (in this subsection, subsections (5) and (6), paragraph (12)(c) and subsection (15) referred to as the "other person") that the person knows, or would reasonably be expected to know but for circumstances amounting to culpable conduct, is a false statement that could be used by or on behalf of the other person for a purpose of this Act is liable to a penalty in respect of the false statement.

(5) The penalty to which a person is liable under subsection (4) in respect of a false statement is the greater of
(a) $1,000, and
(b) the lesser of

(i) the penalty to which the other person would be liable under subsection 163(2) if the other person made the statement in a return filed for the purposes of this Act and knew that the statement was false, and

(ii) the total of $100,000 and the person's gross compensation, at the time at which the notice of assessment of the penalty is sent to the person, in respect of the false statement that could be used by or on behalf of the other person.

In a case wending its way before the Tax Court, the director of a charity has been personally assessed for Third Party Civil Penalties amounting to over $500,000. In that case, a charity was involved in a plan to donate weeks of a time-share to the charity in the Turks and Caicos. As it happens, the charity was unaware that the Turks and Caicos had apparently declined to zone the property as a time-share project and so the Minister alleges the gift failed on that ground (i.e. there was nothing to gift). More importantly though, as a basis for the Minister's levying of third party civil penalties, the Minister alleges inter alia that the President of the charity simply gave blank pre-signed official tax receipts to the promoter for distribution to donors. There is no allegation that the President (who was also a director) was the authorized signing officer for the charity as required by Regulation 3501.

Given the technical defects with the gift, the ostensible donors who used these receipts were reassessed. And the Minister has personally reassessed the President / director who signed the receipts under ss.163.2 (4) as having assisted these individuals in making a false statement on their returns. The amount of the penalty is over $500,000 having been calculated as the sum of the allegedly false statements of each of the erstwhile donors.

The application of these provisions to directors comes as somewhat of a shock, given that the Third Party Civil Penalties were not considered to apply to such situations. Moreover, despite the statutory good faith defense, one wonders how far the CRA will go to hold directors liable for the use of charitable receipts. These provisions have a wide and as yet undefined scope - there is no time limit to their assessment, there is no limit to the amount of the penalty, nor is there a realizable limit as to who can be responsible for the penalty. In fact, one wonders whether all the directors of a charity may be responsible if they authorize a single individual to sign the receipts. If the CRA is successful in applying this penalty in this case we wonder how far the CRA will go in making directors of charities responsible for the false statements of donors. More to the point, it will likely cause yet another chill amongst directors from engaging in anything but the most mundane of fundraising, if people are even willing to serve as directors at all.

ABOUT THE AUTHOR: Adam Aptowitzer
Adam Aptowitzer, LL.B., has been speaking and writing on the topic of charity law for several years. He has been published in several publications including the Canadian Taxpayer, the Canadian Fundraiser and the Not-for-Profit News and has been cited as an expert in several publications including the national media. He has recently published a widely circulated paper on the regulation of charities in Canada with the C.D. Howe Institute.

As a speaker he has presented to the C.D. Howe Institute, the Association of Fundraising Professionals, the Canadian Association of Gift Planners, the Canadian Bar Association and has given expert opinion testimony at a Parliamentary Roundtable. He has also appeared at the Tax Court of Canada and the Federal Court of Appeal. Adam co-hosts the popular A to Z of charity law in Canada with CharityVillage.com and is an executive member of the Canadian Bar Association's Charity and Not-for-Profit Law section.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.



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