In a recent piece I pointed out that CRA's charity audits frequently turn on administrative issues rather than on substantive issues such as political activities. I discussed a current audit in which the charity had filed its T3010 13 days late in one of two years in the audit period. In order to build its case for revocation CRA went back 17 years to count the number days the charity was late in filing its annual T3010 Return.
Another "Go Directly to Jail, Do Not Pass Go, Do Not Collect $200" card CRA plays when seeking revocation is failure to maintain books and records. Every registered charity must keep records and books of account containing information as will enable the Minister to determine whether there are any grounds for revoking its registration.
In 2009, CRA began to publish on its website summaries of the reasons it had revoked registrations "for cause". There is nothing in the Income Tax Act which defines revocation "for cause". (In deed, it is alarming to think that charities could be revoked "without cause".) These are simply charities CRA wants to "name and shame".
Prescient Foundation was revoked "for cause" with failure to maintain books and records being one of two causes. As part of its appeal process Prescient Foundation in 2013 filed an affidavit with the Supreme Court of Canada. Having searched CRA's website, the affidavit said that there had been 124 summaries published since 2009 and 91 had listed inadequate books and records as a grounds for revocation.
The only book and record Prescient Foundation could not produce was minutes of a board meeting authorizing a specific transaction. However, since it provided a document book about an inch thick and every financial transaction was recorded accurately to the penny, the Federal Court of Appeal said the CRA auditor was supplied with a considerable amount of information concerning these transactions which allowed her to understand both their scope and their nature. Consequently, "it would not have been reasonable for the Minister to revoke Prescient's registration on that basis alone".
In the same year Prescient had made a gift to an American charity and CRA revoked on the basis that such a gift was inappropriate. As a matter of law, the Federal Court of Appeal overturned CRA's decision to revoke on that basis. Consequently, the gift itself was approved and Prescient won the substantive legal argument. Prescient won two and lost two of the four substantive legal issues upon which CRA revoked.
The bank transactions funding the gift established that the money was paid to an American charity. However, Prescient did not proactively disclose to the auditor that the recipient was an American charity but simply provided the financial records to the CRA auditor with no comment. The Court found that this silence coupled with the absence of board minutes was enough to revoke Prescient's registration on the ground that it had failed to maintain adequate books and records.
The Supreme Court of Canada did not grant leave to appeal this revocation decision. In fact, the Supreme Court of Canada has never once in its history granted leave to appeal a decision of the Federal Court of Appeal on revocation. This is of concern to the charitable sector because the Federal Court of Appeal has not granted an appeal in a revocation case in more than three decades.
When three quarters of revocation for cause summaries include revocation for books and records issues, one realizes that it is easier for CRA to ignore the substantive legal issues and revoke for administrative failures. It will be interesting to learn how many of the current audits of alleged political activities ultimately turn on substantive political activities or on administrative accounting shortfalls. With the Prescient decision setting the charity's threshold for error so low on the books and records ground, failure to maintain adequate books and records is a "Go Directly to Jail, Do Not Pass Go, Do Not Collect $200" grounds for revocation.
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