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O C T O B E R 6 , 2 0 1 6
Not-for-ProfitWelch LLP Presents:
Accounting UpdatesAudit Tax Accounting Consulting
AGENDA
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NETWORKING & BREAKFAST
CHARITY & NPO TAX UPDATE DAMIAN LAFLAMME
HST AUDIT ISSUES MONA TESSIER
SPECIAL PAYMENTS & REIMBURSMENTS GARTH STEELE
ACCOUNTING STANDARDS UPDATE PETER BERRY
GOING PAPERLESS PETER BERRY
COMMON LEGAL ISSUES FACING NPOS NEIL MCCORMICK
AUDIENCE Q&A
WRAP UP
CRA RULINGS GARY DONELL
AUDIENCE Q&A
BREAK
ANNULMENTS,REVOCATIONS & AUDITS OF REGISTERED CHARITIES CAROLE CHOUINARD
SPEAKER BIOS
PETER BERRY, CPA, CA, TEP | MANAGER
Peter Berry joined Welch in 2010 as a full me employee a er gradua ng from Queen’s University with a Bachelor of Commerce and a Masters Diploma in Accoun ng. Peter received his Chartered Accountant designa on in 2011 and became a member of the Society of Trust and Estate Praconers in 2015. His eexperience includes audit, review and compila on engagements in the not-for-profit and private sectors.
DAMIAN LAFLAMME | SENIOR TAX MANAGER
Damian joined Damian joined Welch in 2008. His area of experse is personal income tax compliance and planning, trust and estate planning, as well as corporate tax compliance and planning for private corpora ons; in which he has over 10 years of experience. Damian also has experience in tax ma ers rela ng to non-profit and charitable organiza ons. He has completed Level I, II, and III of the CICA In-Depth Tax Program, as well as the Advanced TaTax Issues for the Owner-Managed Business course.
GARTH STEELE, CPA, CA | AUDIT & INDIRECT TAX PARTNER
With With over 20 years of experience as a Partner at Welch, Garth has an exhausve list of Not-for-Profit audit experience. In addion to auding NPOs, Garth’s forte is Commodity Taxes (GST, HST, PST) and Payroll Taxes (CPP, EI, EHT, WCB). For the past 20 years, Garth has been a tutorial leader and lecturer for the CPA Canada In-Depth GST Course, as well as an instructor for CPA Ontario’s annual Professional Development program.
MONA TESSIER, CPA, CA | SENIOR MANAGER, INDIRECT TAX
Mona has been with Mona has been with Welch LLP since 1997. Mona received her CA designa on in 1990. In her current role at Welch LLP, Mona provides indirect and payroll tax advice to her clients in various industries. Mona has worked on indirect tax reviews for several na onal and O awa based not-for-profit organiza ons as well as some for profit organiza ons.
SPEAKER BIOS
Gary began with CRA in 1985 a er working in the private sector for eleven years and has stayed in various roles for nearly thirty years. He regularly consults with numerous CRA auditors on a variety of issues from domesc to interna onal. In his roles with CRA, Gary has parcipated as a guest speaker in CRA sponsored tax events for some of Canada's largest companies, provided a special tax event to the Department of Jusce and the Depart-mement of Finance policy secon, and has have been the CRA guest speaker for the last decade in the advanced tax program parcu-larly the advance corporate reorganiza on and advance partner-ships courses. Lastly I have had the ability to work with tax publishers and universies. Finally, he has acted as a consultant and advisor to 2 authors on their tax based textbooks, and cur-rently heads the Tax 2 program at Athabasca University.
GARY DONELLINDEPENDENT CONTRACTOR & TAX CONSULTANT
CAROLE CHOUINARD- PARTNER, GOWLING [email protected]
CaCarole is a partner in Gowling WLG's O awa office, pracsing in the area of taxa on law.Carole's pracce involves transaconal work, as well as tax planning for corpora ons and individuals. She advises clients on the tax aspects of transacons, includ-ing share and asset sales of corpora ons and reorganiza ons of corpora ons, the structuring and forma on of corpora ons, trusts, partnerships and tax-exempt en es and estate planning. Caplanning. Carole is also the co-leader of the firm's Charies and Not-for-Profit Organiza ons Group and advises tax-exempt organiza ons, as well as donors, on ma ers pertaining to tax and corporate law.
NEIL MCCORMICK- SENIOR ASSOCIATE, GOWLING [email protected]
Neil McCormick is a senior associNeil McCormick is a senior associate in Gowling WLG's O awa office, pracsing in the Business Law Group.Neil's pracce focuses extensively on not-for-profit corpora ons, whom he regularly assists with a variety of governance-related issues. In parcular, Neil has developed experse in (a) incorpora ng corpora ons with, and managing issues rela ng to, mul-stake-holder boards of directors; (b) the fiduciary du es of directors and officeand officers; and (c) statutes governing not-for-profit corpora-ons, including Crown corpora ons and other "special act" corpora ons.
NOT-FOR-PROFIT ACCOUNTING UPDATES
Yes No
50% 50%
Do you remunerate your directors?
A. Yes B. No
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4 Directors’ Fees CPP
EI
Income Tax
T4 Reporting
5 Honorariums Volunteers, Directors, Speakers
Taxable?
Reportable?
6 Special Payments Travel Allowances
Housing Allowance
Spouse’s Travel
RRSP Matching
Gifts
7 Self Employed vs. Employee? Court Test
Integration of Operations
Ability to Subcontract
Risk of Loss/Opportunity of Profit
Tools of the Trade
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Check Out Our Webinar
Non-Profit Hot Topics: Payroll Prep http://marketing.welchllp.com/acton/media/6357/non-profit-hot-topics-payroll-prep
Yes No
50% 50%
Have you had an HST audit in the past 5 years?
A. Yes B. No
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11 Place of Supply Memberships
Conferences
Quebec Sales Tax
12 Tax Status of Revenues Implication of Charitable Status
Competitors don’t always get it right
Voluntary Disclosures
13 Allocation of Inputs Review your allocation percentages
100% ITC’s for Commercial Activities
Charity/Municipal Rebates
14 HST Review Change in Staff
Change in Board
HST harmonization in Ontario July 2010
Registered Charities/Donors - 2016 Federal Budget Measures
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Donations Involving Private Corporate Shares or Real Estate (repealed)
Finance Expands the Use of Donations by GREs- Draft Legislation
January 2016 • Donation made by estate• Change in yr of donation, or• Earlier tax yr of estate, or• Last two tax yrs of estate• Donate public securities held on death/ no cap. gain
Spouse Sharing of Donation Tax Credit • Prior to 2016/ CRA admin• Post 2015/ tax rules amended
Non-Profit Organizations (NPOs) 17
NPO Consultation Paper- Update (or lack thereof)
Acceptable Uses of Accumulated Surplus by an NPO
• Fund/ create academic scholarships
• Reimburses members/ tuition fees/ courses & conferences
• Reimburses part of membership fee paid by employer
Yes No
50% 50%
Has CRA’s interest in NPOs caused you to change the way you operate or fundraise?
A. Yes B. No
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20 Agenda 2015 Annual Improvements
Accounting Standards Improvements for Not-For-Profit Organizations
Upcoming Audit Report Changes
21 2015 Annual Improvements (ASPE)
Issued in October 2015, effective for fiscal years beginning or after January 1, 2016
Clarification of Standards in effect - Relating to disclosures of business combinations, investments,
and property, plant and equipment - Relating to when the Funding Valuation model can be used for the
valuation of employee future benefits
22 Accounting Standards Improvements for Not-for-Profit Organizations
Statement of Principles introduced in 2013
Three phase project
Exposure draft for Phase 1 expected in Q4 2016
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Highlight points from Phase 1 - Accounting for Tangible Capital Assets
- Guidance on write-downs and partial write downs of tangible and
intangible capital assets
- Accounting for collections
Accounting Standards Improvements for Not-for-Profit Organizations
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Highlight points from Phase 2: - Reporting requirements for controlled NPOs and controlled for-profit organizations
- Reporting requirements for expenses by function in the financial statements and by
object in the Notes
- Eliminating the deferral and restricted fund methods
Accounting Standards Improvements for Not-for-Profit Organizations
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Highlight points from Phase 3: - Eliminating the $500,000 exemption for expensing tangible and
intangible capital asset purchases
Accounting Standards Improvements for Not-for-Profit Organizations
26 Audit Report Potential changes could come into effect for years ending December 15, 2017 or after
Updated report would include (in order) - Audit opinion - Basis for opinion (if necessary) - Report on Going Concern - Affirming independence and ethical responsibilities of the auditor - Description of the auditor’s responsibility and key features of the audit
Changes made with an effort to enhance transparency and readability
28 Agenda Banking Changes
Payroll Changes
29 Banking Changes Online bank access
EFT Payments + Receipts
Deposits using cheque scanners
30 Control Considerations
Learning Curve
Ensure controls existing pre-implementation match controls post-implementation, specifically - Cheque signing - Segregation of duties Fraud Risks
31 Best Practices Supporting documents reviewed by cheque signers
Email approval of EFTs prior to payment
Bank EFT approvals (tokens or fobs)
Review and sign off of bank reconciliations
Storage policies for banking documents
32 Payroll Changes Electronic/paperless employee files
Paperless timesheets
33 Control Considerations Safeguarding and retention of records
Ensure controls existing pre-implementation match controls post-implementation
34 Best Practices Password protection and data encryption of employee files
Proper authorizations documented for any changes to employee files
Timesheets submitted promptly and properly authorized
Storage policy for timesheets and payroll documents
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Q&A
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Break
October 3, 2016
ANNULMENTS, REVOCATIONS AND AUDITS OF REGISTERED CHARITIES – RECENT DEVELOPMENTS
PRESENTED BY: CAROLE CHOUINARD
• Paragraph 168(1)(c) authorizes CRA to revoke a charity’s registration for failure to file an information return as and when required under the ITA or regulations.
• Two recent FCA decisions – Jaamiah Al Uloom Islamiyyah Ontario (2016 FCA 49) and Opportunities for the Disabled Foundation (2016 FCA 94) provide guidance on the interpretation of paragraph 168(1)(c).
REVOCATION FOR FAILURE TO FILE AN INFORMATION RETURN
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REVOCATION FOR FAILURE TO FILE AN INFORMATION RETURN
• In Jaamiah, the CRA had issued a notice of intention to revoke the charity’s registration on the basis of the charity’s: (1) failure to maintain adequate books and records; (2) issuance of receipts not in accordance with the ITA and regulations; (3) failure to issue T4s and T4As.
• The charity took the position that revocation was unreasonable because it had taken remedial steps to prevent these failures, including the retaining of experienced and qualified accountants.
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REVOCATION FOR FAILURE TO FILE AN INFORMATION RETURN
• The FCA stated that CRA can revoke registration if the non-compliance can be regarded as serious.
• The FCA held that the revocation was justified, since there was serious non-compliance – failure to maintain adequate books and records.
• In Opportunities, CRA revoked the registration of the organization on five grounds, including failure to file an information return.
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REVOCATION FOR FAILURE TO FILE AN INFORMATION RETURN
• On appeal, the FCA said that the onus was on the charity to demonstrate that CRA acted unreasonably in issuing the revocation notice.
• As regards the failure to file a T3010 as required by the ITA, the FCA pointed to 10 apparent errors and omissions.
• The charity argued that the inaccuracies were the result of the “arbitrary reallocation of expenditures by the CRA auditor” and did not evidence a failure to file the T3010 as required by the ITA.
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REVOCATION FOR FAILURE TO FILE AN INFORMATION RETURN
• In response, the FCA said: “… I do not wish to be taken as having concluded that any minor inaccuracy in a T3010 will justify a Ministerial decision to issue a notice of intention to revoke the registration of a registered charity. In the circumstances, I am satisfied that the record amply demonstrates that the inaccuracies in the T3010…. are well beyond what might reasonably be viewed as minor.”
• Lesson to be learned: not only must form T3010 be filed on an annual basis within the prescribed time, it must be reasonably accurate. A T3010 that contains serious errors is not a form that was filed as and when required by the ITA and is therefore an independent ground for revocation.
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ANNULMENTS • CRA can annul the registration of a registered charity if it
is of the view that the charity should not have been registered.
• In Credit Counselling Services of Atlantic Canada Inc. v. M.N.R. (2016 FCA 193), the charity was appealing CRA’s annulment of its registration as a registered charity.
• The basis for CRA’s annulment was that Credit Counselling’s purposes and activities were not exclusively charitable.
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ANNULMENTS • In CRA’s view, since Credit Counselling’s services were not
limited to individuals who were poor, its services were more properly classified as relating to prevention of poverty rather than relief of poverty;
• The FCA agreed with CRA and dismissed the appeal. Since Credit Counselling was assisting many individuals who were employed and who had assets and therefore, would not necessarily be considered to be in poverty, at best, Credit Counselling’s activities could be described as related to prevention of poverty.
• Since prevention of poverty is not a charitable purpose, the annulment was upheld.
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AUDITS – CRA REQUESTS FOR DOCUMENTS • On June 3, 2016, the SCC released two important decisions
dealing with requests made by CRA for information.
• The two decisions are:
1. Canada (Attorney General) v. Chambre des notaires du Quebéc, 2016 SCC 20; and
2. Canada (National Revenue) v. Thompson, 2016 SCC 21.
• Although neither case involved a charity or a not-for-profit organization, the cases are relevant as CRA can send requests for information to any entity.
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AUDITS – CRA REQUESTS FOR DOCUMENTS • The central issue in both cases: whether the documents requested had
to be disclosed to CRA because they were subject to solicitor-client privilege.
• When a document is subject to solicitor-client privilege, this means that it is a communication between a lawyer and his or her client. This gives the client the right to refuse to disclose the particular communication on the grounds that it is confidential.
• If there is a dispute over whether a particular document should be disclosed, a court would first have to determine whether solicitor-client privilege actually applied to the document. This requires a Court to review the document and consider a number of factors, including its contents and what it might reveal about the relationship and communications between a client and its legal advisor.
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AUDITS – CRA REQUESTS FOR DOCUMENTS • In Chambre des notaires du Québec, CRA had been issuing
requests to notaries in Québec asking for accounting documents and information about their clients. CRA maintained that the information it sought fell within the accounting records exception in the ITA and was therefore not privileged.
• In the Thompson case, CRA requested various documents relating to the personal finances of Mr. Thompson (a lawyer) as well as his current accounts receivable listing. Mr. Thompson claimed solicitor-client privilege over the details of his accounts receivable, as they included the names of his clients.
• In both cases, the SCC found that the accounting records exception relied on by CRA was unconstitutional.
• Lesson to be learned: if an organization receives a request for information or documents from CRA, it is important to consider the nature of the information or document requested and whether they are subject to solicitor-client privilege. If solicitor-client privilege applies, the information or document should not be produced.
AUDITS – CRA REQUESTS FOR DOCUMENTS
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COMMON ISSUES FACED BY NPOS
NEIL McCORMICK October 6, 2016
• Removing a director
• Relationship with branches
• Signing authority
COMMON ISSUES FACED BY NPOS
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• An NPO may wish to remove a director for a variety of reasons Breaking the law;
Making defamatory comments;
Personality conflicts;
Bringing the NPO into disrepute
• What do you do?
• What happened?
• What are your options?
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REMOVING A DIRECTOR
• For most NPOs, directors have to be removed by the members
• Use of director consent forms
REMOVING A DIRECTOR
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• Branches or chapters are a common structure for national not-for-profit corporations
• The biggest problem with the branch model is that the liabilities or actions of one branch could expose the corporation as a whole to liability
• Also, often the members of a branch may not understand that they are not a separate organization
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RELATIONSHIP WITH BRANCHES
• A clear relationship between a national organization and its branches prevents disputes
• Key provisions include: the branch is a division of the national association, and its continuing existence is
dependent upon the board of the national association;
the use of the intellectual property of the national association by the branch;
all of the income received by the branch is the property of the national association;
what happens to the property “acquired” by the branch upon its dissolution; and
regular reporting requirements
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RELATIONSHIP WITH BRANCHES
• It is very common for the By-laws of an NPO to contain a provision on signing authority, such as:
Contracts, documents or other instruments in writing requiring the signature of the Corporation, shall be signed by any two (2) Directors, any two (2) Officers, or a Director and an Officer, and all contracts, documents and instruments in writing so signed shall be binding upon the Corporation without any further authorization or formality. The Board of Directors shall have power from time to time by resolution to appoint any individual who shall be empowered on behalf of the Corporation to sign specific contracts, documents and instruments in writing.
56
SIGNING AUTHORITY
• What happens when corporations do not abide by the signing authority provisions of their By-laws?
• Two approaches to remedy Have the Board approve a resolution authorizing the execution of
contracts that have not been signed in accordance with the By-laws;
Revise the By-laws to provide for how signing authority actually takes place in your corporation.
57
SIGNING AUTHORITY
gowlingwlg.com Gowling WLG (Canada) LLP is a member of Gowling WLG, an international law firm which consists of independent and autonomous entities providing services around the world. Our structure is explained in more detail at gowlingwlg.com/legal
Neil McCormick Associate
613 786 0274
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Some Interesting Facts
Federal Government says that 2,000,000 Canadians employed in the NPO and Charities sectors in Canada
93% of charities are voluntarily compliant
30,000 NPOs file either T2 Corporate returns. T3 trust returns or T1044 returns although uncertainty concerning the number of NPOs in Canada
CRA random audits productive 12.2% of the time whereas targeted (risk-based) audits 46.7% of the time according to 2012-2013 CRA annual report
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Technical Assistance to internal & external sources Tls and ATRs
Policies, compliance, audit, education Registered charities and others T3010
Project initiated in 2009 to assess compliance with law. Report issued in 2014
RULINGS DIRECTORIATE
CHARITIES DIRECTORIATE
NPO RIP (Risk Indent. Project)
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2014-0542791E5: Rulings provides commentary on tax exempt status of an affordable housing provider
The Rulings Directorate Mandated to interpret the provisions of the ITA for all of CRA
Some recent interpretations of interest:
2015-0584931I7: Rulings provides technical assistance to the Charities Directorate on functions of government for tax exempt and qualified donor status 149.1 2015-0565601E5: Rulings provides detailed technical commentary on the accumulation of surpluses in an NPO plus added comments on the profit and income to members
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T1044 required filing if… - Certain income in excess of $10,000 (Dividends, royalties, interest, rents) - The FMV of assets exceed $200,000
NPORIP
Number of NPO Filings - Approximately 30,000 (T2, T3, or T1044) - Total number unknown
NPORIP Findings “many would fail” CRA Concerns - Earnings & profits are not incidental (CRA 2010-0386301C6) - Surpluses/reserves accumulated (6-12 months) - Income made available to members
CRA Administrative Policies N043-12 (News Release) ensured that rebates and refunds would not be delayed or held up for failure to file returns.
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Charities Directorate
Registered Charities Registered Canadian Amateur Athletic Associations Registered National Arts Services Organizations Federal political parties
New Director General – Mr. Toni Manconi (August 2016)
Required filing T3010
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Three Top Concerns - Rob Delaney (Director of Compliance- December 2014)
Completing the T3010
Late filing the T3010 (subsequent revocation)
Accurate and complete receipting information
Other Charity Concerns- 2015 CRA Report Registered charities lending their registration number to others
Inadequate books and records
Inflated receipts
Involvement in fraudulent tax shelter arrangements (e.g. gifting)
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Main Audit Screening
Random
Media
Referral
T3010
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CRA audit coverage (1% annual average) 60 special audits over 4 years (mostly political activity related)
Note: audits either desk (request for documents etc.) or field (on-site)
800-900 regular audit annually
Education letter
Sanctions (Penalties/ Suspensions)
Compliance agreements (follow-up)
Main CRA audit action
Revocation (late filing responsible for the majority)
69 Latest Charity audit Statistics (as of March 31, 2016)
Type Total % of Total Audit revocations Poverty 19,000 22% 30%
Education 14,000 16% 8% Religion 33,000 38% 45%
Other 20,000 23% 17% Total 86,000
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Revocations (1,429 for 2015-2016 year)
708 for failure to file annual return on time
20 as a result of an audit
701 voluntarily revoked
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Q&A
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