CRA Compliance

Is Assuming Control of an Inactive Canadian Charity Both Legally and Ethically Permissible?

In this post, we explore the following questions: "Is it permissible and morally acceptable to assume control of an inactive Canadian charity as a means to bypass the lengthy bureaucratic application process? And if so, what would be the most effective approach to do this?"

There are multiple angles from which these questions can be approached.

One of the key points to note is the significant enhancement in the registration process for charities with the Charities Directorate of the Canada Revenue Agency (CRA). Previously, it would typically take six to nine months to complete this process, but now it can be concluded in a much shorter timeframe, provided the CRA does not have follow-up questions. This improvement in the speed of response to charitable applications means that obtaining charitable status and commencing operations as a registered charity is now a much faster process.

Furthermore, similar to purchasing a used car, assuming control of an existing organization often comes with uncertainties. The nonprofit that appears inactive or dormant may conceal hidden liabilities, possible legal disputes, and regulatory challenges that might only surface after investing significant resources in revitalizing the charity. The individuals associated with the inactive organization may be unaware of these underlying issues. Moreover, if financial statements and filings were inadequately prepared or completed, rectifying or revising them may prove more costly than starting afresh from scratch.

Additionally, charities differ significantly from businesses. They have specific objectives that must be adhered to or modified. Changing the objectives of a charity requires careful consideration, and you may need approval from the CRA for such modifications. Moreover, a registered charity possesses a Notification of Registration from the CRA, which may include additional restrictions. In the event that a name change is necessary, records of the previous name will always remain, and when applying for grants or similar opportunities, you will be required to provide the original letters patent reflecting the old name, along with any subsequent supplementary letters patent.

Also, it is crucial to consider whether you have an up-to-date and accurate list of members, as well as the ability to gather the required quorum for implementing desired changes, such as the removal and replacement of directors. Discovering, after a substantial investment in a charity, that the members' meeting was invalid and that you lack control over the organization while the actual members aim to remove you is a situation best avoided.

In many instances, establishing a new organization tailored to the specific needs of the charity is a simpler and more streamlined approach. However, if you do choose to assume control of an existing nonprofit or charity, it is crucial to conduct thorough due diligence. Ensure that you have the backing of a sufficient number of members to implement the necessary changes, elect new directors and officers, address other organizational requirements, and notify the relevant federal and provincial authorities of these alterations. When approached correctly, this process can be executed in a manner aligns with legal requirements and ethical principles, ensuring the appropriate handling of the transition.

It is important to differentiate between a dormant charity, as previously mentioned, which was established but remained inactive without fulfilling its intended purpose, and a shelf charity, intentionally created to remain idle until someone engages a lawyer or another party to utilize it. Shelf charities are occasionally employed to evade scrutiny or to quickly have a charity at hand. However, resorting to a shelf charity presents legal and ethical challenges and can lead to subsequent scrutiny and complications.

The charity application emphasizes the importance of authenticity and accuracy, stating that it must be endorsed by two directors/trustees or similar authorized individuals within the organization. It highlights that providing false or misleading information is a grave violation under the Income Tax Act. 

Misrepresenting lawyer Alex, friend Sophia, and secretary Max as the directors of the charity, while the individuals establishing the shelf charity are fully aware that Alex, Sophia, and Max will likely resign soon in favor of others, can be considered deceptive, to say the least. When engaging in such practices, it is reasonable to anticipate that the CRA will subject your charity and its operations to increased scrutiny.

Another concern pertains to the potential liabilities faced by former directors and officers who were associated with the dormant charity. If these individuals are not appropriately removed from their positions and disassociated from the charity, they could remain responsible for any illicit activities carried out by the revitalized organization. Certain charity scams have targeted dormant charities, aiming to take control of them for the purpose of engaging in tax shelter schemes or fraudulent receipting practices.

The CRA periodically dispatches letters to dormant charities, urging them to consider voluntary revocation. Maintaining dormant charities within the system is deemed unproductive, as they offer no public benefit and can potentially be misused by individuals with questionable intentions. In essence, directors of dormant charities are strongly advised to contemplate requesting voluntary revocation from the CRA in order to mitigate the risk of their dormant organization being exploited.

In the recent years, there has been a significant increase in the number of voluntary applications submitted by dormant charities to the CRA for the revocation of their registration. If you are currently associated with a dormant charity, you might consider pursuing the same course of action. Additionally, when undertaking significant changes within a nonprofit organization, such as reviving a dormant charity, seeking legal counsel can prove beneficial and provide valuable guidance.

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