Compliance within the charitable sector

• How we promote compliance
• The audit process for charities
• Compliance statistics

How we promote compliance

Trust is critical to a healthy charitable sector. Given that registered charities have significant privileges, such as issuing donation receipts and having tax-exempt status, the Charities Directorate has a responsibility to maintain the integrity of the charitable sector and confidence of Canadian donors. To accomplish this, the Charities Directorate monitors the operations of registered charities to make sure they comply with their obligations under the Income Tax Act.

As the majority of charities are compliant and only need guidance at times, we use a risk-based approach to promote and address compliance within the charitable sector. This involves various interventions based on the risk of non-compliance.

Balancing our compliance program in this manner allows us to proactively promote voluntary compliance and to interact with a greater number of charities.

Lower risk non-compliance
This represents the greatest proportion of charities. When we identify minor non-compliance issues, our interventions include education letters and telephone calls to charities.

Higher risk non-compliance
We reserve audit interventions for cases where there is potential evidence that a charity has engaged in more serious acts of non-compliance. These audits may result in measures ranging from education letters to revocation of charitable registration.

Interventions to support the compliance program

Education letters and telephone calls to charities

We issue different types of letters and conduct telephone calls to remind charities of their obligations or to educate them when we have identified possible areas of non-compliance, outside of an audit. For example, we may send a letter, or make a telephone call, to provide registered charities with guidance on how to correct inaccurate or missing information on their annual return to help them voluntarily comply with the requirements of registration.

Bringing charities back into compliance

We encourage charities to contact us in writing to correct any errors they might have made in the past. Our objective is to work with charities to resolve difficulties and help them get back on track.

For more information, go to Bringing charities back into compliance.

Audit program

Audits are a key part of the compliance program. They help us maintain public confidence in the fairness and integrity of the charities registration system. Our risk-based methodology identifies the severity of the non-compliance to be addressed in an audit.

If the findings of an audit raise concerns, we will use one or more of the following compliance measures:

• Education letters guide charities through the steps they need to follow to be fully compliant.
• Compliance agreements outline areas of non-compliance and commit charities to take corrective action.
• Sanctions include financial penalties and temporary suspensions of charities’ tax-receipting privileges as well as their status as qualified donees.
• Revocation is the loss of charitable registration and the privileges that go with it. It is used in serious cases of non-compliance with the Act.

Other tools

Website

Our web pages on operating a registered charity, guidance products, and publications help registered charities follow the rules. For the latest information, go to What's new or sign up for our electronic mailing list.

Outreach program

We produce educational videos, webinars, and other communication products. We also engage with the sector in a variety of ways (including social media and working groups) in order to help registered charities and other qualified donees voluntarily comply with the obligations of registration.

Client service

Our client service representatives are available to answer your questions over the telephone or in writing. You can contact us at 1-800-267-2384. Our representatives are here to help you Monday through Friday, 8 am to 5 pm, Eastern time.

The audit process for charities

As part of its ongoing efforts to make sure charities meet the requirements of registration, the Canada Revenue Agency (CRA) connects with as many charities as possible each year through a variety of compliance activities in its coverage of the charitable sector.

Relying on a risk-based approach, the CRA helps charities respect their obligations by providing early education and outreach to address minor types of non-compliance. The CRA focuses its audit resources on situations where we determine a charity may be engaging in more serious acts of non-compliance. 

Audits can result in different compliance measures ranging from education letters to revocation of charitable registration.

Reasons why a charity could be selected for audit

A charity can be selected for audit for various reasons including for one or more of the following:

• referral from another area of the CRA
• complaints from the public about suspected tax cheating
• information from other government departments
• articles in the media or other publicly available sources
• review of specific legal obligations under the Income Tax Act
• information from its T3010 annual information return
• follow-up on a previous compliance agreement

How the CRA audits a charity

There are two main types of field audits: the audit and the restricted audit. The size and complexity of a charity, as well as the issues involved, will often decide the type of audit required.

• An audit is done on the charity’s premises and usually lasts between three and five days. The auditors from the regional Tax Service Offices (TSO) will review the charity’s books and records such as bank accounts, contracts, governing documents, annual reports, board minutes, and other documents that relate to its activities. The auditors will interview the charity’s directors and ask questions about the charity’s activities. They may also want to tour the premises to better understand the transactions recorded in the books and to see the charity’s programs and activities in action.
• A restricted audit (previously referred to as an office audit) is generally a limited scope audit restricted to a review of specific risk issues. The field auditors from the TSOs will review the information and documents in the charity’s file with the CRA. This may include its most recent governing documents, descriptions of its programs and activities, its annual information returns and financial statements, and compliance agreements. With a restricted audit, it is often necessary to contact the charity to get more information about its activities and it may require an onsite visit to the charity. 

After the audit is finished

When the CRA has completed its review of the charity’s operations, it will send the charity a letter outlining the audit findings.

If the charity’s operations and all its activities are in line with the Act, the CRA will confirm in writing that there will be no change to the charity’s registered status.

When the audit uncovers that the charity is not operating in accordance with the Act, the CRA will send the charity an Administrative fairness letter (AFL) that:

• outlines in detail each of the CRA’s concerns
• gives its preliminary view of whether the charity needs to take corrective actions or whether the non-compliance warrants imposing sanctions or revoking or annulling the charity’s registration
• gives the charity the chance to make representations before the CRA comes to a final decision

Generally, the CRA gives a charity 30 days to reply to all the concerns listed in the AFL, although the charity can request an extension.

Types of letters a charity may receive after it has been audited

Where possible, the CRA will give the charity the chance to correct its non‑compliance through education or a compliance agreement before it resorts to other measures such as sanctions or revocation. Only a very small proportion of the CRA’s audits result in serious consequences like sanctions or revocation.

Based on the charity’s response to the AFL, the findings of the charity’s audit will determine the compliance approaches the CRA will take: 

• Education letters: When the non-compliance is minor, the CRA will send an education letter. The letter will identify where the charity has not followed the law and will offer guidance to the charity so that it can make the required changes. An education letter does not adversely affect the charity’s registration, and the charity does not have to reply to the letter. The CRA may follow up to ensure the charity has applied the required changes.
• Compliance agreements: In cases of moderate non-compliance, the Charities Directorate may suggest entering into a compliance agreement with the charity. A compliance agreement outlines the non-compliance issues and the remedial actions that the charity has agreed to take. It also sets out the timelines for the charity to implement the necessary changes, and outlines the consequences if the charity does not follow the agreement. The CRA will follow up to make sure the charity is acting according to the agreement.
• Sanctions: In cases of serious or repeat non-compliance, the CRA may propose a sanction (financial penalties or the temporary suspension of the charity’s tax receipting privileges or both). The CRA may also propose a sanction when the charity has been found to be disregarding the terms of its compliance agreement.
• Revocation of registration: When the CRA finds a serious case of non-compliance, it will propose revoking the charity’s registered status. Although the CRA usually uses revocation as a last resort, under the Act the CRA can revoke a charity’s registration at any time, when it is appropriate. This includes situations where:
  • the non-compliance is serious and intentional
  • the non-compliance has had a substantial, adverse effect on others (beneficiaries, donors, or funders)
  • the charity had a previous record of serious non-compliance or cannot or will not follow the rules

A charity whose registration is revoked must dispose of its assets within one year to other registered charities in good standing or pay a 100% revocation tax on any assets remaining. This tax helps make sure the funds donated for charitable purposes stay in the charitable sector.

• Annulment of registration: In rare cases, an audit may find that a charity was not established and operated exclusively for charitable purposes when it was registered, or a change of law has caused it to no longer qualify as a charity. Although the CRA is obligated to remove the charity’s registration because it should never have been registered or no longer qualifies as a charity, it may be unfair to penalize it by applying the revocation tax to any assets it has accumulated. In such cases, the Act allows the CRA to propose to annul the charity’s registration. A charity whose registration is annulled can no longer issue tax receipts, but it can keep its assets.

For information on how the CRA makes its decision on which approach to take, see Procedures in Guidelines for applying sanctions.

Recourse for a charity during and after an audit

As mentioned above, the charity is given the chance to make representations to the CRA by responding to the AFL. In its response, the charity may explain why it disagrees with the CRA’s position, provide more information, or propose changes to satisfy all of the concerns raised in the AFL.

The CRA will fully consider the charity’s representations and make a determination on the appropriate compliance outcome. If, after considering the charity’s representations, the CRA finds it is reasonable to impose a sanction, annul, or revoke the charity’s registration, it will send the charity a letter by registered mail outlining its decision.

When a charity receives one of these letters and believes the CRA has not interpreted the facts or applied the law correctly, it can file an objection by writing to:

Assistant Commissioner
Appeals Intake Centre
Post Office Box 2006, Station Main
Newmarket ON  L3Y 0E9

The charity must set out the reasons for the objection and all the relevant facts.

The charity has to file its objection no later than 90 days after the date of the final letter it received from the CRA. The Appeals Branch is responsible for the objection process, and its mandate is to review the decision fairly, transparently, and independently from the Charities Directorate. If the charity disagrees with the CRA’s decision about its objection, it has the right to appeal to the Federal Court of Appeal or the Tax Court of Canada, depending on the type of appeal.

Comments on the audit process

If we have recently audited your charity, we would like to hear from you.

• Do you feel we properly informed you about the audit process? 
• Did you find the process helpful in understanding your obligations as a registered charity under the Act?
• Is there anything that may have made the process easier to understand?

Send your comments to:

Director, Compliance Division
Charities Directorate
Canada Revenue Agency
Ottawa ON  K1A 0L5

Compliance statistics

Audit information available to the public

All information related to CRA audits are confidential to the public. However, there are some exceptions in the Income Tax Act to the general rules around taxpayer confidentiality, such as publishing details about non-compliance related to sanctions, and revocations as a result of an audit.

When the CRA revokes or annuls a charity’s registration or when it imposes a sanction, it posts this information in the List of charities and certain other qualified donees. Under the Act, the CRA can release a copy of the letter(s) it sent to the charity outlining the reasons for its decision. This is to make sure the CRA’s decision about the charity is transparent.

Interventions

Each year, we conduct a variety of audit and non-audit interventions. The tables below reflect the number of contacts we have made as a part of our compliance program.

Outcome of all Charities Directorate audits

The outcomes of audits depend on the severity of a charity’s non-compliance. Below, you can see the actions the CRA has taken after an audit was completed.

Please note that these numbers are subject to change as statistical data is updated by our program areas.