The Government of Canada is actively supporting the charitable sector
There are more than 86,000 registered charities in Canada.
Charities play an important role in our society and provide valuable services to Canadians – including to the most vulnerable. That is why the Government of Canada supports charities through unique tax privileges – an exemption from income tax as well as the ability to issue official donation receipts, and receive gifts from other registered charities.
Canada’s tax incentives for charities are among the most generous in the world. In 2013, registered charities issued donation tax receipts for more than $14.8 billion. This constitutes foregone revenue of approximately $2.9 billion federally and provincial/territorial foregone revenue of $1.1 billion.
Privileges come with obligations
Given the many privileges it provides, registration as a charity also results in an obligation to follow the longstanding rules for charities under the law. The Canada Revenue Agency (CRA) has a responsibility to protect the integrity of the tax system and the charitable sector by ensuring that all registered charities follow the rules. These rules apply to all charities equally, regardless of the charity’s purpose or size. They are in place to help ensure that Canadians can give with confidence, knowing that their donations to charities will be used for charitable purposes.
The CRA fulfills this responsibility through a balanced program of education, client service, and responsible enforcement.
Charities are regulated based on two key principles: self-assessment against the rules and voluntary compliance with the rules. That means the CRA places first priority on education. The Agency provides charities with an extensive range of information tools to help them voluntarily comply with the requirements of the Income Tax Act. We do this through our client services program, public outreach, and educational resources such as policies and guidance on our website.
Through its website, the CRA provides charities with policy and guidance documents and educational tools such as webinars and videos. In addition, the Charities Directorate’s client services program responds to roughly 90,000 telephone enquiries and 15,000 written enquiries in any given year.
Building on this successful client service approach, the CRA has undertaken a multi-year project to modernize its IT systems to allow charities to apply for registration and submit annual information returns online. These new electronic services will further ease the administrative burden on the sector and help charities to stay compliant with the requirements of the Income Tax Act.
As part of its ongoing efforts to make sure charities meet the requirements of registration, the CRA uses a variety of compliance activities. Historically, the CRA has audited approximately 800 to 900 charities per year, representing about 1% of registered charities.
More recently, the CRA has rebalanced its compliance activities to better focus and increase its coverage of the charitable sector. The CRA currently plans to conduct audits of 500 to 600 charities per year. In addition, we plan to contact an additional 700 to 800 charities outside of the audit process. These contacts include new initiatives, such as the Charities Education Program (CEP) that provides an opportunity to meet with charities to help them better understand and comply with their filing obligations. Overall, the CRA will now be able to reach about 1.5% of registered charities each year.
Audits help the CRA ensure that registered charities are using their resources, in particular donations from Canadians, according to the rules. A charity can be selected for audit as a result of random selection, referrals from other areas of the CRA, complaints from the public, articles in the media or other publically available sources, or to review whether it is meeting specific legal obligations.
Fairness is the cornerstone of the CRA’s audit process. The selection of charities audit files is handled by the CRA alone, based on a fair and transparent process. Once a charity has been selected for an audit, it is given an opportunity to make representations throughout the entire process and to provide explanations and/or further information before the CRA comes to a final decision on what compliance action to take. In the majority of cases, charities can exercise all options available to them before the CRA formally takes action as a result of an audit.
Once a final decision has been made, the charity is informed in writing and it has additional recourse options available if it believes that the CRA has not interpreted the facts or applied the law correctly, including filing an objection to the CRA’s Appeals Branch or appealing to the Federal Court of Appeal or the Tax Court of Canada, depending on the type of appeal.
The CRA’s approach is working
Because the CRA places such importance on education, awareness, and client service, the overwhelming majority of charities are able to meet their legal requirements. Only a very small portion of the CRA’s audits result in serious consequences like sanctions or revocation of the charity’s registration. The majority of charities that are audited are given the opportunity to correct any issues identified by the audit and continue their charitable programs.
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