~u~ ~~ - Canadian Charity Law

Charities Directorate , LPRAB Complex Audit Pro j ect

Action Plan ' y .... ---~

~u~ ~~

~ ~~~

~

000168

Overarching concern

• 86,000 registered charities assist millions of CanadiRns everv vear

16(1 )(c)

• Many of these strategies involve fou 1dations (pr"vate or public) which have seen the1r assets mor-e than double from $35 billion to

$73

000169

16(1 )(c)

000170

Currently .. .

•• Non-compliance is addressed through:

.,- Charities Education Program (CEP) visits

• Nudge initiatives (letters, automated calls)

., Audits (field and office)

Education letters, comphance agreerner)ts, sanot,ons.

revocations. annulments

• • Monitoring and filing enforcement

• Resolving issues with annual retums (T301 Os) Part V tax assessmenlS

000171

We do this by .. .

._, The Charities Directorate transfers funds to the Domestic Compliance Programs Branch (DCPB) to obtain field resources (mainly junior level auditors) who are responsible for conducting charity audits

• The Compliance Division in Charities HQ provides support to these field resources, inGluding activities such as screening, file selection and technical support (audit support as well as support for review of

charitable purpose and activities)

• The Compliance Division in Charities has partnered with ILBIB

1 6 ( 1 ) ( C)

~u~ ~~J

~ ~~~

~

000172

Going forward, we need to ...

16(1 )(c)

Maintain a balanced audit approach t<> ensure and Improve compliance across all speclrums

~u~ ~~J

~ ~~~

~

000173

Planning considerations

•• In the short term, there a number of approaches that can be taken within existing resources to address complex

transactions, while longer term strategic options are developed

· The long term goal to address complex transactions on a sustained basis is to provide more resources to staff senior auditors in the field and provide additional support in HQ

• We also need to consider:

Report from the Expert Panel (CEP 1s referenced in-the report)

• Media attention related to-pnvate foundatJons

16(1 )(c)

~u~ ~~J

~ ~~~

~

000174

Option 1 - maintain status quo

•• The benefits of maintaining the status quo Include:

Continued work on CEP & nudge campaigns and initiatives

Face to face presence m the sec1or. meaningful contact

Posrtive affect on compliance & supports education-first approach

Continued compliance across all levels. albeit at current levels

The following risks exist:

• 16(1 )(c)

000175

Option 2 - internal reallocation

., The benefits of reallocating funds within the Directorate or Branch include:

• Ability to target audits of highest nsk files (outlaws) whtle conbnued compliance at other levels

Protecung $eclor assets

· Positive mpact on government revenues Increase the pubhc's confidence In the sector

' The following risks exist:

• Impact on other areas or Directorate or Branch with 1oss of funding

• Time to implement (4-6 months)

Recruit/ iclen11fy eipenenc d senior ,iud,toB

,~ , ,~ """"~

000176

Option 3 - new fund ing

•' The benefits of new funding include:

• Ability to target audits or highest risk files while continued compliance at other levels, with no impact on other areas of the Directorate or Branch

Protecting sector assets

Pos1l1Ve impact on government revenues Increase the public's confidence in the sector

The following risk exists:

• Time to Implement (4-6 months)

• RecN1t/ ~nbfy e.1tpe11fflC&(i nn,oraud,:01"5 Tral"

°"

v!/

000177

Option 4 - reallocate to ILBIB from DCPB

' The benefits of fundin51 ILBIB senior auditors instead of DCPB junior auditors include:

Ability to target audits or highest risk files (outlaws) Protecbng sector assets

Access lo experienced senlof aud,tors

• Pos1uve Impact on government revenues

• The following risks exist:

Possible workforce concerns among the OCPB auditors m Ute reg1oos

16(1 )(c)

Reduction to CEP could be viewed negat.Jvel~ by he sector as this m1lJative has generally been well r ~ived to date

Changes In HQ supOOl1 l1moact to the number or HQ advisors required)

• nme to implement

I 6( 1 )( c)

Worl< wtlh DCPB lo end our agreeme11t (realocate their employees)

Wor1t with ILBIB to creatl! ne~ agreemeM. h1rehdenbf)' ud,tors. agree on \ reporting SUllCture. tra:n on cnanty l:?W

~u~ ~~J

~ ~~~

~

000178

Strategy - short term (2019-20)

· Communicate lo charities and public of lhe types of activities and organizations likely to be subject to audit

Develop nudge lnihat,ves among the target group of foundations where we have concerns about non-compliance (e.g .• awareness of disbursement quota)

Update webpages lo h1ghhghl thelTl<ltlc auprt approaches (e.g . non-arms length transactions). cons1stenl¹N11h the

recommendations In the report frQm the Expert Panel

Continue to use existing resources to gather business intelligence to confirm and better determine the scope of the issues

~u~ ~~J

~ ~~~

~

000179

Strategy - short term (2019-20)

• Continue our existing partnership with ILBIB:

._. Commence several audits at the complex level immediately as test cases for our future planning

... ILBIB will provide the audit resources for conducting the charity audits in the regions

, The Charities Directorate will ensure that tnere are sufficient number of screeners and audit advisors to support this work on a priority basis

• The Charities Directorate ill continue to be responsible for file selection, guidance and advice on non-

compliance issues and determining audit outcomes

t,

What we could do with money, negotiating with ILBIB

~<::

=

~

~~~~v©?J~

~ ~~~

~

000180

Strategy - short term (2019-20)

· Evaluate the current reporting model for field resources to determine the best structure for the Charity Audit Program Centralized model (field resources report directly to HQ) vs decentralized model (field resources report to Region) vs hybrid model (current model) or other options

• Evaluate internal resources required to conduct audit work and determine best approach for:

• Auditor requirements in the field

,d/

· HQ support

0~

~u~ ~~J

~ ~~~

~

000181

Strategy - long term (2020-21 and beyond)

• · Evaluate collaborations with ILBIB to determine best use of resources

- If a new reporting model for field resources is selected, implement the change

· If funding shifts to address compJex audits, align audit resources to match the work

• Reduce the number of junior level audits (field and office audits)

Realign audit resources for workload at the AU02 and AU03 levels

Align HQ support to match field -.,ork (e.g. advisors and screeners)

000182

Expected outcomes

' When abuse of the tax system is Identified during the course of an audit, corrective measures will be taken vis-a-vis the charity

• Results from completed audits would provide support to obtain new resources through SIP or Flnance Canada for addressing the non-compliance (the outlaws) in the sector

Audit findings could lead to proposed legislative changes to close gaps In the Income Tax Act ( n collaboration with Finance Canada)

~u~ ~~J

~ ~~~

~

000183

From:

Sent:

To:

Cc:

Subject:

Attachments:

Hi Rob,

Speakman, Michael March-29-1910:10 AM Delaney, Robert Dhawan, Rakhi

Charities compliance presentation deck Charities_Com pliance_2019_03_29. pptx

Please find attached the proposed deck for our presentation to the Offshore Complia nee Advisory Committee. This deck was a joint initiative between the two branches and will be presented by representatives of both the Compliance Division and the Audit Program Division (within the Offshore and Aggressive Tax Planning Directorate).

Thanks,

1 will share the deck with our colleagues in Offshore.

~ 0

If you have any questions, please let me know. ;::,

'1)_ ^~

R.f}~

~ V , ~ ~~

~a~~~~

9,1.ic/iae{

~ ~~~

~~

000184

Registered Chariti ·

A pril 2019

Dnad~

000185

Overview

• CRA as the Charities Regulator

• What is a charity?

• Charities Directorate's approach to compliance and recent audit findings

• Past work on tax shelters and charities

• Foundations

• Compliance concerns

• Going forward and th

000186

CRA as the Charities Regulator

• The Charities Direciorate. wi1hin the Legislative Policy and Regulatory Affairs Branch (LPRAB}. is responsible for all program activities related to the provisions of the Income Tax Act regarding

registered charities.

• Main responsibilities: registration , client service, education, policy developm 1-1t. and responsible enforcement.

• The Compliance Divi · charities complianc

Also regulates:

Registered Canadian Amateur Athletic Associations (RCAAAs) Registered National Arts Service Organizations (RNASOs) Other listed qualified donees

Canadian municipalities Prescribed universities

Public or municipal bodies performing a function of government Low cost housing corporations for the aged

Certain foreign charitable organizations

000187

What is a charity?

• The main advantages to being a registered charity:

• Exemption from tax

• Ability to issue ortlclal donation receipts for tax purposes

• Eligible o receive gifts from registered charities

• Registered charities can be classified as either:

• Chariioble orgonizo1ionsor

• Choriioble foundo ions. which ors u ,her divided into:

• Public toundarlons ( "\

o

• Prlvote foundot ons

~ Y._

• There ore over 86.000,egister~ chorHies 1n Canada

a{]) ... __ __

So not only are charities not subject to income tax, they can issue receipts to donors for tax deduction purposes.

(

Charitable Organizations are typically charities that actually conduct some kind of charitable activity- eg. a hospital or a food bank

))\

Charitable Foundations are charities that typically fund the charitable activities of charitable organizations, though they are still permitted to conduct charitable activities themselves. They are divided into public and private foundations based on their funding source and the relationships among their boards of directors. If a charitable foundation has many sources of donations and more than 50% of its directors deal at arm's length with one another, they would be classified as a public foundation - eg. sick kids foundation.

A charitable foundation will be considered a private foundation if more than 50% of its directors do not deal with each other at arm's length or more than 50% of the charity's funding comes from a person or group of persons that control the charity or make up more than 50% of the directors. There are separate, more restrictive provisions in the Act that specifically pertain to private foundation only.

000188

Private and public foundations tend to be the "givers", providing funds to the sector instead of carrying out their own charitable activities.

The number of private foundations is growing while the other designations remain fairly static.

000189

Compliance action

• CRA uses the following approaches to ensure charities comply:

• Education letter

• Compliance agreement

• Sanctions

• Monetary penol les

• Suspension of receipting J'(i I ~e

• Revocotion rf!ij;Z(}

e

c

0 u C C ._ ra 0.::

~ E

i

...,j u

000190

Audit findings

• Common reasons for revoking registration include:

• Failure to devote resources to charitable activities

• Carrying on unrelo ed businesses

• Failure to be constituledexclusively or chorltoble purposes

• Issuing receipts no In accordance wlrh the Income ox Act

• Failure to maintain odequo;e books and records

• Chorities hove the right to

Objection process ;;:::::>

~

The charities objection process is slightly different from the tax objection process in that objections skip the Tax Court and go straight to the Federal Court of Appeal (with the exception of objections to penalties, which then do go to Tax Court).

000191

Tax shel ters and charities

• In late l 990's. there was a significant increase in tax shelter identification numbers for gifting tax shelters

• Three main schemes were identified:

• Buy low, donate high

• Gl:tlng trusts

• Leveraged cash dona ions

• Compliance action foun gifting tax shelters wer many involving founda

When the Agency became aware of the schemes, immediate action was taken.

The CRA was committed to preserving the integrity of Canada's tax system, including protecting Canadians from abusive tax shelter gifting schemes, which included schemes where taxpayers received a charitable donation receipt with a much higher value than what they paid.

~~

000192

Tax shel ters and charities

• Dedicated teams were created to address compliance issues resulting from these schemes

• CRA launched marketing campaigns to inform taxpayers of these schemes

• CRA denied more than $7 billion in donation claims and reassessed over 208,000 taxpayer claims

e~ __ __ ~o

Most gifting tax shelter schemes were created for the primary purpose of avoiding the payment of required taxes rather than raising funds for charities.

The CRA continuously warned Canadians about non-compliant tax arrangements.

As a result of its multi-year, multi-pronged effort in deterring this form of non- compliance, the CRA has effectively eliminated mass marketed gifting tax shelters.

The CRA continues to use a risk-based approach to compliance to combat serious cases of non-compliance. In addition, the CRA educates taxpayers about the consequences of participating in abusive tax schemes, and works with the Department of Finance to close tax loopholes through legislative amendments.

000193

Tax shel ters and charities

• Assessed nearly $200 million in third party penalties against promoters and tax preparers who advised on participation in these scheme

• Referrals made to criminal investigations

• No tax shelter identification numbers have been issued for gifting tax shelters si ce 2014 - schemes

effectivelyeliminoted Q 0

e ---- fj~

000194

Evolving role of foundations in tax planning

• Higher growth rote of private foundations when compared to growth rote of other regis1ered charities

• High incidence of private foundations observed in high net worth population

• Number of foundations:

• 5.065 public ioundat ions

~

• 5.743 private foundotio~ )

e~ __ __

000195

Founda tions by the numbers

• Public and priva te foundations held about $73 billion in assets 1n 2016. which is a 210% increase from

• Private loundolions $41 bilfion

• Pubric foundations $32 bll!lon

• Public and priva te foundations made $5.7 billion in grants in

• Private loundo1ions grant

• Public foundations gron

Private and public foundations tend to be the "givers", providing funds to the sector instead of carrying out their own charitable activities.

The number of private foundations is growing while the other designations remain fairly static.

As the population continues to age this trend will likely continue.

000196

16(1 )(c)

000197

The way forward

• Strategic partnership between Charities Directorate and High Net Worth Compliance Directorate

• 16(1 )(c)

• ModernlZlng the Agency's risk management of trusts

• Increased international collaboration

p

T3 Task Force Committee;

5)

Stratify trust population to better assess risk;

Efforts to increase audits in trusts, including foundations;

Foundations are tax exempt and can issue receipts for tax purposes. Greater scrutiny will be placed on these entities;

Strategic partnerships between Charities and Offshore to explore and address compliance concerns.

Visions and Objectives of the T3 Task Force Committee:

The vision of this strategy is to ensure that the CRA is well-positioned in the administration of the income tax legislation surrounding T3 trusts. With the implementation of this strategy, the CRA should be able to:

• Effectively segment the trust population and develop risk-typologies

• Capture accurate and complete T3 trust and beneficiary data

• Reduce the administrative burden for low-risk T3 trusts

• Accurately trace income allocated from a trust to the ultimate beneficiary

• Effectively risk-assess the T3 trust population and allocate resources accordingly

000198

• Provide better service and effectively address the highest-risk taxpayers with a well- trained, technically competent workforce

• Rely on a cross-branch corporate governance structure to coordinate and guide the administration of T3 trusts

• Regularly engage key external stakeholders to play an active role in CRA's administration of T3 trusts

The Committee followed these principles:

• Reduce the administrative burden for low-risk taxpayers

• Enhance targeted compliance of high-risk taxpayers

• Make it easier for all taxpayers to comply

For the T3 Task Force Committee, a report will come out and be presented to the AC and all DG's soon.

One of the recommendations of the committee is to stratify the trust population based on their nature to better assess risks and to re-design the instructions customized for each category. For example, testamentary trusts represent a much lower risk than mutual funds trusts.

16(1 )(c)

Most foundations can issue charitable donation receipts, for tax purposes. This can lead the erosion of the Canadian tax base to different schemes that would take advantage of a foundation's ability to issue tax receipts. Offshore and Charities are collaborating to ensure that compliance concerns surrounding foundations are explored and addressed.

000199

Cha llenges

- - - ~

• 16(1 )(c)

• Potential impact on legiti · · nd foundations from negativ

• Legislative limitations

..

000200

Commi ttee Input

• What indicators would help distinguish legitimate foundarions from those created for tax avoidance purposes?

f:J;((j~ ~~~

~ ~~~

~

000201

Annex

000202

High Net Worth Compliance Directorate

-·--

....

...

---

~.... --- ^...

^{... ....,.}

^{,...._ ..}

.... ... . ^..

---· - - ^... --

--- _--- - ^... -

000203