10/12/2014 03:12 EDT | Updated 12/12/2014 05:59 EST

CRA "Gotcha" Audits Need to Stop

In a recent piece I pointed out that when the Minister of National Revenue issues a Notice of Intention to Revoke, a charity must appeal to the same Minister who issued the Notice. There is no guarantee of an independent appeal process. The Appeals Branch of CRA's Tax and Charities Appeals Directorate does not even go through the motions of opening a new file. The file number assigned by the Charities Directorate auditor remains the designation of the file throughout the so-called appeal process.

This ineffective appeal process becomes even more frustrating when one recognizes that revocation frequently proceeds on insignificant administrative issues rather than on substantive issues such as political activities. When government or industry officials want a charity closed down, they have little interest in the way they achieve revocation. All they care about is whether, at the end of the audit, they can raise their martini glasses and say GOTCHA.

CRA has a number of Go Directly to Jail, Do Not Pass Go, Do Not Collect $200 cards it can play when seeking revocation. One of these is when a registered charity "fails to file an information return as and when required under this Act."

I am currently working on responding to an audit of a charity not allegedly involved in political activities. In the audit period (2010 and 2011) the charity had paid for a number of public speaking engagements by such luminaries as a retired judge of the High Court of Australia and one of the senior lawyers at the Charity Commission. The auditor could not easily establish that speakers of this standing talking about charity issues failed to qualify as a charitable activity, so, instead, opted to invoke the "failure to file a return" card.

The auditor went back and reviewed every annual return the charity had filed since it was registered in 1996, finding that in 12 of the 17 years the charity had filed its return an average of 68 days late. Filing late was treated as a failure to file.

Witness your tax dollars at work in a charity audit: how many hours did the auditor spend reviewing these 17 years? This would explain why CRA was given an extra $8 million for these audits and why the government does not want hearings.

Apprehend the bias in CRA counting only the delinquent years and not the five years the charity had presumably filed its return by the due date. (No allegation was made that the returns were late in the two years under audit.)

Individual and corporate taxpayers have their tax returns statute barred after three years. Consequently, they can sleep at night without worrying that the taxman will go back 17 years looking for a fault. However, no year in a charity's existence ever becomes statute barred. CRA has unlimited resources to concoct a bogus reason for revocation with no time constraints.

Charities are allowed to destroy records after six years and frequently do so to save storage and administrative costs. The charity I'm working with in this case has no chance of dealing with this allegation unless CRA sends them CRA's files for the past 17 years.

Even though this charity has, by CRA's admission, not actually failed to file a return, it doesn't really matter. If focusing on this type of insignificant delay in compliance did not lead to revocation, the Director General would not authorize and fund auditors to spend taxpayers' money on exercises such as this.

The Director General authorizes and funds auditors to spend taxpayers' money digging into past years' filings because it achieves the GOTCHA result with much more certainty than fighting about what is a political or charitable activity in the audit period.

When the Minister wearing her Charities Directorate hat revokes on this basis, she is not going to reverse the revocation simply because she subsequently put on her Charity Appeals Directorate hat. The Federal Court of Appeal has not granted an appeal in a revocation case in more than three decades.

When a charity is targeted by CRA for a GOTCHA audit, whether for its political leanings or another cause, in the Monopoly game of life, it truly has drawn the Go Directly to Jail, Do Not Pass Go, Do Not Collect $200 card.