CRA Compliance

Penalties and Consequences for Non-Compliance

The responsibility of ensuring compliance with the Income Tax Act for registered charities falls under the purview of the Canada Revenue Agency (CRA). CRA may employ various measures to foster and uphold compliance with the Act, or to penalize registered charities that fail to comply.

Typical non-compliance issues

While the CRA prefers to educate charities and collaborate with them to attain compliance when a charity shows a willingness to comply, it will resort to more severe measures if a charity intentionally violates the law or disregards an existing compliance agreement. Here are some typical issues that charities encounter:

Failure to file the T3010 annual return

• Charities must file their T3010 annual return within six months following the conclusion of their fiscal year. If the charity fails to file within this time frame, the CRA may revoke its registration. Typically, CRA grants charities an opportunity to file late. However, if the charity fails to file even after receiving a reminder notice, its registration is likely to be revoked.
• The CRA can impose a late-filing penalty of $500 at any time after the six-month filing period. Nonetheless, at present, CRA refrains from applying this penalty if the charity submits its T3010 return before its registration is revoked.
• If the CRA fails to receive the T3010 return within seven months of the charity's fiscal year-end, the charity will receive a Notice of Intention to Revoke its Registration (Form T2051A).
• If the CRA has still not received the T3010 return by the tenth month following the charity's year-end, it will initiate the legal procedure of revoking the charity's registration.
• If a charity's registration has been revoked due to its failure to file the annual T3010 return, it can seek re-registration by submitting Form T2050 and paying a $500 penalty. It is crucial to keep in mind that there is no assurance of re-registration, and the organization cannot function as a registered charity until its re-registration has been authorized.

Inaccurate details on tax receipts

• Tax receipts may contain errors such as leaving out the CRA's website address or mistakenly stating the charity's name or address, resulting in incomplete or inaccurate information. When this occurs, CRA usually issues an education letter to assist the charity in preventing these errors in the future.
• In addition, CRA has the authority to impose a penalty of 5% (for initial offenses) or 10% (for recurring issues) of the eligible amount on tax receipts that are incomplete or incorrect.

Misleading information on tax receipts

• When a tax receipt includes misleading information, such as an inaccurate donation date or amount, CRA considers it a significant issue. In such situations, CRA typically does not offer a compliance agreement but instead imposes penalties.
• CRA considers false information on a tax receipt a severe issue, such as an erroneous donation amount or date. Compliance agreements are usually not used in these cases, and penalties are enforced instead. In case of false information on a receipt, a penalty of 125% of the eligible amount mentioned on the receipt will be enforced. If the total amount of these penalties is greater than $25,000, the charity's ability to issue tax receipts will be suspended for one year.
• If the violation involves a tax shelter scheme or external parties (beyond the charity's officers and directors), stricter penalties, such as revocation, may be imposed by CRA.

Insufficient books and records

• The issues related to books and records can vary in their severity, ranging from minor, unintentional problems like disorganized records or occasional errors, to more critical concerns such as the intentional fabrication or destruction of records to hide other issues, or denying access to records during an audit.

To ensure that a charity rectifies its practices in the future, the CRA typically employs a compliance agreement for minor, unintentional issues.

For more severe cases, the CRA may enforce a one-year suspension of the tax receipting privileges for the charity and even initiate permanent revocation of its charitable status.

The consequences and disciplinary actions for failing to comply

In the event that a charity does not adhere to the Act willingly, or its non-compliance is significant, the CRA has the option to implement one of the measures below:

• Compliance agreements entail a signed agreement between the charity and the CRA, outlining the issues observed by the CRA, the actions that the charity will undertake to address these issues, the timeframe allotted for the resolution, and the possible repercussions if the charity fails to implement the agreed-upon steps.
• Sanctions may comprise monetary fines or a provisional revocation of the charity's authorization to distribute official donation receipts.
• The CRA has the authority to withdraw the benefits associated with a registered charity status, which encompasses the capability to distribute official donation receipts, through revocation of its registration.
• The CRA can instruct a revoked charity to remit all its net assets to the CRA as a revocation tax, if it fails to transfer them to an "eligible donee" within a specified timeframe.

The CRA has the discretion to select any of these measures based on the specific circumstances. If the CRA deems the non-compliance issue to be "serious," it may directly proceed with sanctions or revocation.

In the event that the CRA suggests imposing a financial penalty, suspension, or revocation of your charity's status, and you have contradictory evidence, you have the option to file an objection and, if required, an appeal.

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