CRA

By the end of 2018 charities will be able to manage CRA filings online

Staff Post
By Anna Mathew

By the end of 2018 charities will finally be able to do most of their government submissions and communications online. The improvements are part of the Charities Modernization Project (CHAMP) which came out of funds earmarked in the 2014 Federal Budget for IT improvements at the CRA. 

From the CRA:

The 2014 Federal Budget provided the Directorate with $23 million to modernize its IT systems over a five year period. Improving these systems will allow charities to apply for registration and file their annual returns electronically, reducing their administrative burden.

As part of CHAMP, by the end of 2018:

  • Form T2050, Application to Register a Charity under the Income Tax Act, will be replaced by a new online application for registration e-service.
  • Registered charities will be able to file their annual returns online through the CRA's My Business Account.
  • The Charities Listings will be improved to help Canadians make informed choices about charitable giving.

Drache Aptowitzer has a September 2017 article which discusses the implications and how charities should prepare for the change to online submissions and communications. They advise:

  1. Assigning a person inside the charity to be the main authorized user;
  2. Ensuring that person is subscribed the the Charities Directorate e-lists and visits the Charities Directorate website regularly for updates;
  3. Ensuring that person is aware of what information about charities is publicly available on the CRA website and understands the concept of 'garbage in garbage out' (if a charity gives bad quality data to the CRA, that bad quality data is what will be displayed in the publicly accessible CRA systems); and,
  4. Ensuring that person is aware that all documents filed by the charity with the CRA will be available to all authorized users, so the charity should assess who currently has authorization and maintain their policy and update their authorization lists regularly.

Visit the full Drache Aptowitzer article here

At what point would our accumulated surplus be so large that we’d be in trouble with the Charities Directorate?

The Charities Directorate of the Canada Revenue Agency does, indeed, have rules around accumulation of property. The particular rule that charities are probably thinking about if they’re worried about the size of their accumulated surplus is the disbursement quota (DQ). The purpose of the DQ is to establish a minimum requirement for spending on charitable activities, with reference to the wealth that a charity has accumulated. As long as you maintain an appropriate level of charitable activity – measured through your spending – you are compliant with this rule.

CRA provides guidance about its spending requirements here. Note that there are separate rules for charitable organizations, which exist to deliver charitable programs and services, and foundations, which exist to support charitable programs and services.

Young Associates works with many smaller charitable organizations. Most groups in this category are unlikely to have accumulated property at a level that would cause non-compliance with the CRA. However, this is an issue that may involve complex legal and financial concepts. If you have concerns, it is wise to discuss your situation with a professional.

CRA defines its requirement for charitable organizations as follows:

If the average value of a registered charity's property not used directly in charitable activities or administration during the 24 months before the beginning of the fiscal period exceeds $100,000, the charity's disbursement quota is:
3.5% of the average value of that property.

The interpretation of this hinges on what property is not used directly in charitable activities or administration. CRA lists real estate and investments as examples. 

A charity, for instance, may hold long-term investments such as units in a mutual fund, and use the resulting interest revenue in its operations. However, the principal sits intact for multiple years, not directly used for charitable activity. (This is distinct from the case of a charity that places short-term investments to earn some interest revenue before the investment matures and the principal winds up in a chequing account, available for spending.)

A charity may also own a building that it doesn’t currently occupy; this may be the case for institutions such as hospitals, universities and churches, which may have considerable real estate holdings and needs that change over time.

Once you have identified property that meets CRA’s definition of “not used directly in charitable activities or administration,” you must calculate its average value over the two years before the start of the current fiscal year. CRA provides some latitude in how the average may be calculated. If your organization needs to make this calculation, the method for assessing value and calculating the average over time would be a good topic for discussion with your CPA.

Last step: calculate 3.5% of the average value. That yields the amount your organization is obliged to spend on its charitable activities or administration during the current year. 

Let's say your charity owns an investment portfolio, and you determined that its average value over the last 24 months was $100,000. Your DQ for the current year would therefore be $3,500.

You can see that this is actually a pretty low bar to jump over! Most organizations with the capacity to build a $100,000 investment portfolio would have operations that demanded more than $3,500 in program and admin spending. CRA’s rule is set at a level that catches inactive charities, but that is unlikely to cause compliance issues for most charities that are actively carrying out their mandates. 

UPDATED: Bureaucracy 101: Today, Class, We’ll File an RC59 Form!

Staff Post
By Heather Young

See update below on a new CRA form which allows changes to a charity’s director, trustee, or like official information .

Somehow, successfully completing an RC59 Business Consent form – which authorizes access to CRA accounts for HST, payroll and more – has often felt like a hit or miss process. Sometimes there’s no issue, and in other cases it has taken repeated attempts to get account contacts updated.

I had an illuminating conversation with a CRA officer that has helped to resolve some important misunderstandings, and I’d like to share what I’ve learned.

The RC59 form identifies two levels of authorization. Level 1 allows information-only access: that’s what your bookkeeper should have. Level 2 individuals are authorized to make changes to the account and the information it contains: that responsibility should belong to your organization’s senior staff. CRA lists the actions that can be performed by each level here.

One of the potential disconnects to understanding the process is that there’s actually a Level 3 which is not directly referenced on the RC59 form, although you’ll find its powers itemized on the preceding hyperlink. A Level 3 individual is also referred to as a Delegated Authority – a term that appears in the RC59 instructions section under the heading “Part 5 – Certification.” Only individuals authorized at Level 3 are allowed to sign (certify) RC59 forms. 

Note that, by virtue of their position, members of your board of directors automatically have Level 3 access to your CRA accounts. Your Executive Director or General Manager does not: they must be appointed by a Director. 

The RC59 instructions state, “This form must only be signed by an individual with proper authority for the business, for example, an owner, a partner of a partnership, a corporate director, a corporate officer, an officer of a non-profit organization, a trustee of an estate, or an individual with delegated authority.” 

The potential misinterpretation is to fail to recognize “delegated authority” as a legal term with a prescribed meaning. In the not-for-profit world, boards of directors commonly delegate a broad span of authority to their senior staff, who, for that matter, may have the term “officer” in their job title, as in Chief Executive Officer or Chief Financial Officer. The fact that you are responsible for CRA reporting, or that you sign T3010s or any other tax-related documents carries no weight, and the only officers CRA recognizes are the officers of your board of directors, such as the President, Treasurer or Secretary.

Individuals can be appointed to Level 3, Delegated Authority, upon proper completion of an RC321 form, Delegation of Authority. Since staff typically handle the nitty gritty of CRA interactions, it may be convenient for organizations to appoint their ED as a Delegated Authority, so that they have the ability to manage other account representatives. 

The whole system rests on CRA having access to a current list of directors and officers of the corporation. We’ve often been in the position of filing an RC59 after a long-serving staff member departs – and learning, after much bother, that the only other contacts on record with CRA are ancient history. 

And, here is another disconnect. Registered charities are accustomed to sending CRA a detailed board list annually as part of their T3010 Charities Return. All corporations (commercial and not-for-profit) must also file annual information returns to the appropriate jurisdiction (provincial or federal), naming their directors so that they can be added to the public record. However, CRA’s Business Number (BN) Services Unit does not employ these sources of information. 

You need to make a special request to CRA to update your board list for the purpose of BN administration. There is no official form for this task. According to the CRA officer I spoke to, you must write a letter requesting the update, listing your board members, and providing proof of their appointment; for instance, a copy of the AGM minutes including the motion electing the board. A search of the CRA website for confirmation of these verbal instructions yielded this link, which affirms the general intent, but does not specify the process. If you need to update your board list with CRA, perhaps a phone call to the Business Window (1-800-959-5525) would be the best place to start.

Note that CRA can ask board members to provide their Social Insurance Number. The Charities Directorate does not collect this information, but the CRA at large requires it because board members bear a personal liability for amounts held in trust for the Receiver General, such as unpaid payroll source deductions and HST remittances. 

With your board list up to date, you will always be able to update the RC59 as needed. Putting this on your AGM “to do” list sounds like a good addition to administrative best practices.

So, class, what are today’s main take-aways?

Well, I hope that this information helps to put RC59 woes behind us – but, really, the most important lesson to be learned is the significance of board members to what we usually classify as an administrative process. I suspect most ED’s would prefer that their board members stay out of the minutiae of CRA dealings – but in fact the law assigns Directors an essential role.

By virtue of their position, they have full access to the corporation’s dealings with CRA, and they are the gatekeepers to staff, who are typically charged with direct responsibility for tax filings, remittances and related matters.

And let’s not forget the financial liability issue. When someone joins your board, they assume personal responsibility – legally, up to the point of being held accountable for payment! – for ensuring that taxes are collected, reported and remitted according to the law.

The issues around processing RC59s serve as a good reminder of board members’ fiduciary responsibilities, the details of which may become lost or blurred in the day to day reality of their role as informed, engaged and active volunteers, supporting the paid professionals who carry out administrative operations.

Update:

Some feedback from one of our clients: 

Both Young Associates and [redacted] now have Level 1 authorization to quote "interact with the Canada Revenue Agency." 
I should give a big thank you for all parties involved, with a special shout-out to Heather for giving us very detailed instructions, and for her written column on the RC59, and for [redacted]'s assistance is helping us submit the forms 7x, or so.
I know more now than I ever wanted to do about this process.

update 2: 

As of December 2016, the CRA has created a form to change or update a charity’s director, trustee, or like official information. The form can be submitted by email, fax, or snail mail. Visit the CRA website for more information. 

Note from the CRA: 
This form does not replace the requirement to complete Form T1235, Directors/Trustees and Like Officials Worksheet, when you file your Form T3010, Registered Charity Information Return. Form T1235 is used to update the director, trustee, and like official information in the Charities Listings.

New CRA Guidance on Arts Activities and Charitable Registration

Staff Post
By Jerry Smith

recent post by Andrew Valentine with the Miller Thomson Law Firm shone some light on a new piece of guidance from the Canada Revenue Agency. If you are currently considering an application for – or already possess – charitable status, the CRA has recently delivered the final version of the Guidance for Arts Activities and Charitable Registration (Reference CG – 018, December 14, 2012).

Building on feedback from the sector, including organizations such as CAPACOA seeking a broader definition of who could qualify, this finalized version attempts to clarify what CRA finds as acceptable examples of appropriate purposes to merit charitable status.

First, there are three broad categories of arts-related activities that could qualify as charitable purposes under one or more of the four heads of charity, including:

  • Advancement of education;
  • Exhibitions, performances and presentations of artistic works;
  • Activities that enhance an art form or style within the arts for the benefit of the public.

In particular, CRA has clarified and expanded details in its arts forms and styles appendix, thus opening the door for more presenter members of CAPACOA to garner or maintain standing as a charity.

If you are interested in exploring these ideas in more detail, these links will be of value:

Accounting for In-kind donations

Staff Post
By Heather Young

The topic of accounting for in-kind donations came up on one of my LinkedIn groups, and I thought I would share some content.

The person asking the question reported that her not-for-profit agency has an operating budget of about $300,000, but each year secures about $200,000 more in donated goods and services. She’s been struggling for years with how to reflect this appropriately to her donors and funders – particularly given an accountant who doesn’t understand the issues and can’t provide the advice she needs.

That seems like a good place to start. A chartered accountant with not-for-profit expertise is a tremendous resource when it comes to measurement, reporting and disclosure issues such as this. The not-for-profit sector has specific accounting needs, and having the right expertise on board is crucial to getting the best financial advice and reporting.

The reporting – or not – of in-kind donations in your financial statements is a matter of accounting policy. You – with advice from your accountant – need to develop the best policy framework for your organization. Here’s what the Canadian Institute of Chartered Accountants offers as guidance:

“Donations-in-kind also present accounting considerations that require judgment. If the accounting policy is to record donations-in-kind, a contribution of goods or services may be recognized in the financial statements when a fair value can be reasonably estimated and when the donated goods or services would otherwise have been purchased. Fair value would be estimated using market or appraisal values at the date of the donation.”

(From A Guide to Financial Statements of Not-For-Profit Organizations, available online.)

Can you substantiate the fair market value of the donations? That tends to be relatively easy for physical objects, much harder for services/pro bono work/volunteer time. Because of this measurement difficulty, an accountant might steer you away from including in-kind gifts in your financials – or they might agree with reflecting tangible gifts but advise against trying to quantify volunteer time and other services.

The Charities Directorate of the Canada Revenue Agency has specific requirements for determining the fair market value of donated items, detailed here.

If your policy is not to include the value of in-kind donations in your statements, you should be able to find other avenues for conveying the full scope and impact of your organization. For instance, you might discuss with your accountant the appropriateness of a detailed note to your financial statements describing the in-kind support you receive.

You could also look at the different types of financial reports you produce. Your formally prepared audit may not capture in-kind gifts, but you might also present to donors and funders a supplementary statement that adds the value of in-kind items to your formal statements.

An annual report could provide an avenue for describing these resources and what they mean for your organization’s work. Annual reports often contain photos, graphs, charts and other illustrations that add impact to your description.

The area of social accounting tries to get to grips with this issue – an important one for many nonprofits, because cash transactions reflect only a portion of our economic activity. Here are a couple of links to publications that might help by discussing the accounting issues and proposing practical solutions:

On the whole, it’s to your advantage to reflect all the value you can within your organization. However, it’s also important to know the government regulations and generally accepted accounting principles that guide the reporting of this information.