The Canadian Charity Law Podcast

The Canadian Charity Law Podcast Trailer Bonus Episode 32 Season 1

How to Prepare for a CRA Charity Audit: Process, and Compliance

How to Prepare for a CRA Charity Audit: Process, and ComplianceHow to Prepare for a CRA Charity Audit: Process, and Compliance

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This episode provides guidance to Canadian charities on preparing for and managing audits by the Canada Revenue Agency (CRA).

It highlights the potential consequences of audits, including revocation of charitable status and reputational damage.

The discussion details the CRA audit process, common audit triggers, and possible outcomes, ranging from education letters to revocation.

Furthermore, it outlines steps charities can take to prepare for an audit, such as maintaining proper documentation and seeking professional support.

Finally, the episode identifies common audit issues like inadequate record-keeping and impermissible political activities, emphasizing proactive compliance and professional advice to mitigate risks.

This episode is jointly sponsored by B.I.G. Charity Law Group Professional Corporation, a Charity Law Firm exclusively serving charity and not-for-profit clients in Toronto, Ontario and across Canada with registration and governance, and B&H Charity Accounts Group, a bookkeeping firm serving Canadian charities in Ontario with all their financial and tax filing needs.

https://www.charitylawgroup.ca/
P: 416-488-5888

https://www.charityaccountingfirm.ca/
P: 289-301-8883

Creators & Guests

DJ
Producer
Dov Goldberg, J.D.
Dov Goldberg is a manager partner at B.I.G. Charity Law Group Professional Corporation, a Charity Law Firm Providing Services Exclusively to Charities Across Canada

What is The Canadian Charity Law Podcast ?

Exploring the ins-and-outs of Canadian Charity Law in a way that can be understood by the layperson, including Charity Registration, Not-for-Profit Incorporation, Charity Governance, Charity Fundraising, Tax Receipting, and much more!

Sara:

Hey there. Looks like we're going deep into the world of Canadian charities.

David:

Specifically, how they handle CRA audits.

Sara:

Yeah. The kind that make you sweat. You know?

David:

It's not something to take lightly. The stakes are pretty high.

Sara:

Okay. So high stakes. Like, what's the worst case?

David:

Worst case, a CRA audit gone wrong could mean the end

Sara:

The end.

David:

Of the charity, revocation of their status.

Sara:

So not just fines, but they can't even operate anymore.

David:

Exactly. Exactly. Plus the damage to their reputation.

Sara:

Right. All those news stories hurts donations.

David:

And public trust, plus just the cost of dealing with the audit itself.

Sara:

Taking money away from their actual work. Exactly. Now the CRA, they always say education first. Right?

David:

They do.

Sara:

So are they always willing to work with charities?

David:

They emphasize education. It's true. Often provide guidance

Sara:

Mhmm.

David:

To help charities, you know, get back on track. But

Sara:

That's not a guarantee.

David:

Sometimes they'll take action.

Sara:

If it's serious?

David:

If they find serious violations. Yeah.

Sara:

So a bit of both them.

David:

You they could say that. That's why preparation is so important.

Sara:

Okay. Got it. So types of audits, what are we talking about?

David:

Two main types. Office audits and then field audit.

Sara:

Oh, office audit. That's like reviewing paperwork.

David:

Yeah. Like a document review.

Sara:

Lesson terms.

David:

It's remote usually. They don't come to you.

Sara:

Okay.

David:

But still very thorough.

Sara:

Gotcha.

David:

Now a field audit, that's different. They come to you.

Sara:

Oh, it's more intimidating.

David:

It can be, especially if you're not prepared.

Sara:

Makes sense.

David:

No matter what type, though, you gotta have your records straight.

Sara:

Alright. So what gets a charity on the CRA's radar?

David:

Well, sometimes, honestly, it's just random.

Sara:

Like bad luck?

David:

Like winning a bad lottery. Yeah. But, usually, there's a trigger.

Sara:

Okay. Like what?

David:

Problems in their t thirty ten filing. That's common.

Sara:

The annual return they have to do?

David:

Exactly. Mistakes, things missing, any inconsistency.

Sara:

Red flag.

David:

Red flag. Then there's public complaints.

Sara:

Like someone reports them.

David:

Right. If the CRA gets complaints, they have to look into it.

Sara:

And bad press too, I bet.

David:

Negative media coverage? Yeah. That can trigger it too.

Sara:

So it's not just what the charity does, but what people say.

David:

Exactly. And connections matter too.

Sara:

Connection.

David:

Like, if a charity is linked to, say, a tax shelter or another organization that's being investigated.

Sara:

Makes sense. Guilt by association kinda thing.

David:

You could put it that way.

Sara:

Okay. Let's say the charity does get audited. What happens first?

David:

Usually, they get what's called a pre audit questionnaire.

Sara:

Sounds fun.

David:

That's where the CRA really digs deep.

Sara:

Into what?

David:

Everything. The charity's mission, how they fundraise

Sara:

Okay.

David:

Their governance

Sara:

Yeah.

David:

Even their political activities.

Sara:

Wow. Thorough.

David:

It is. And that questionnaire, it's important.

Sara:

To answer? Well, I'm guessing.

David:

To respond quickly, thoroughly, show you're cooperating.

Sara:

Right. Right. And what happens after the audit? What can the CRA do?

David:

It varies. Sometimes it's just a letter clarifying some rules Okay. Or maybe a compliance agreement. The charity has to fix things.

Sara:

And worst case.

David:

The worst is revocation.

Sara:

Meaning.

David:

Charity loses its status completely. Often, they're hit with a big tax bill too.

Sara:

Ouch. Anything else that

David:

bad? Annulment. It's rare.

Sara:

But What's that?

David:

Basically, the CRA says, you should never have been a charity.

Sara:

So they were registered by mistake?

David:

Something like that.

Sara:

Not a good outcome.

David:

No. Now charities can appeal the CRA's findings, but

Sara:

It's tricky.

David:

Very complex. You'll need expert help, lawyers, accountants.

Sara:

Not a DIY project then. Definitely not. This is all really helpful. So what can charities do to get ready for an audit?

David:

Get the right team in place. Lawyers, accountants early on.

Sara:

Don't try to do it alone.

David:

Exactly. They can guide you, make sure you're compliant.

Sara:

Yeah.

David:

And importantly, set up that solicitor client privilege right away.

Sara:

Makes sense. Other proactive steps.

David:

Documentation, detailed records, everything. Keep them for six years.

Sara:

Six years. Wow.

David:

CRA requirement. And it's not just about the receipts. Oh. You need to explain every expense, show it connects to your mission.

Sara:

Even small stuff.

David:

Everything. And if you know there's a problem, fix it before the audit.

Sara:

Get ahead of it.

David:

Yeah. Exactly. Then there's voluntary disclosure, but that's

Sara:

Risky.

David:

It can be. You're telling the CRA you messed up.

Sara:

So why do it?

David:

Sometimes it can lessen penalties, shows good faith.

Sara:

Okay.

David:

But you need legal advice there. It's complex.

Sara:

So proceed with caution.

David:

Got it.

Sara:

Got it. Now what are some things that get charities in trouble during these audits?

David:

Well, like we said, bad record keeping, that's number one.

Sara:

Right. No receipts, no proof.

David:

Exactly. Unclear purposes is another one.

Sara:

Meaning?

David:

The charity's goals are too vague, don't align with CRA rules.

Sara:

So you can't just say, we wanna do good. It has to be specific.

David:

It has to fit their definition of charitable, then there's gifts to the wrong people.

Sara:

Meaning?

David:

The money goes to someone who isn't also a CRA approved charity.

Sara:

So rules about where the money can go?

David:

Absolutely. Unrelated business activities, that's another one.

Sara:

Like what?

David:

Say you're an environmental charity, but you're also running

Sara:

Uh-huh.

David:

A for profit bakery. That's unrelated.

Sara:

So any business they do has to connect to their goals?

David:

Has to be in support of their mission. Yes.

Sara:

Makes sense.

David:

Then you've got political activities. Gotta be careful there.

Sara:

Like, what's allowed, what isn't?

David:

Some advocacy is okay, but no endorsing candidates, that sort of thing.

Sara:

Right. No picking sides.

David:

Exactly. And finally, private benefits, that's a big no no.

Sara:

Meaning?

David:

Charity work can't be for the personal gain of the people running it.

Sara:

So it really has to be for the public good.

David:

Exactly.

Sara:

This has been incredibly helpful. Really appreciate it.

David:

Glad to be here.

Sara:

We've covered so much. Types of audits, triggers, what to do, what not to do.

David:

We've laid some good groundwork.

Sara:

We have. Anything else we should hit before we move on?

David:

One more thing. Terrorism financing.

Sara:

Oh, wow. Okay.

David:

It's serious. Yeah. The CRA, they have very strict rules.

Sara:

To prevent what?

David:

Charities being used to fund terrorism, even accidentally.

Sara:

So it's about national security too?

David:

Exactly. And the penalties, they're huge.

Sara:

Like what?

David:

Criminal charges, immediate loss of charitable status.

Sara:

That's a lot of pressure.

David:

It is. But the CRA, they provide guidance. Oh, good. Other groups too like the Canadian Centre for Philanthropy.

Sara:

So charities can get help with this.

David:

Absolutely. But they have to be proactive. You know?

Sara:

Really understand the rules.

David:

And put good systems in place.

Sara:

It's not just checking boxes. It's about actually doing it right.

David:

Exactly. Has to be part of their culture.

Sara:

This is eye opening. We've talked about audits, financials, and now this, which is obviously huge.

David:

It's a lot to take in.

Sara:

It is. I feel like we've given our listeners a good overview, though.

David:

I think so. They're ready for a deeper dive now.

Sara:

Definitely. But let's give them a moment to process all this. We'll be back soon to really unpack some of these topics.

David:

Back again. Hope you had a minute to think about all that.

Sara:

Lots to digest for sure.

David:

There is. Let's dig into some specifics. The T3010, for example.

Sara:

The dreaded T3010. Yeah. It seems like a big deal.

David:

It is. Think of it like, a detailed report card for the charity. Okay. The CRA, they use it to really understand how the charity operates. And it has a deadline six months after their fiscal year ends.

Sara:

So no late submissions.

David:

Not a good look. Makes the CRA suspicious, like you're hiding something.

Sara:

And it's not just about getting it in on time. Right?

David:

Right. The information inside the t thirty ten, that's key.

Sara:

It all has to be correct.

David:

Accurate, complete, match up with all their other records.

Sara:

So any little mistake

David:

Could lead to a bigger audit. Yeah.

Sara:

Makes sense.

David:

Yeah.

Sara:

You mentioned donation receipts earlier, another tricky area.

David:

Donation receipts. Yeah. They're important.

Sara:

For the donors. Right.

David:

Exactly. So the donors can get their tax credits, but there are rules. Lots of them.

Sara:

More than just a thank you note.

David:

Oh, yeah. Specific format, charity's registration number has to be there.

Sara:

Okay.

David:

Donor's info, what the donation was, cash, property, all that. Very specific.

Sara:

The CRA is picky.

David:

They have to be. It's about preventing abuse, making sure those receipts are legit.

Sara:

So what if a charity messes that up?

David:

Big consequences. They can lose their receiving privileges.

Sara:

Meaning?

David:

They can't issue those tax receipts anymore.

Sara:

Wow. That's gotta hurt donations.

David:

Huge impact. Yeah. Donors want that tax break.

Sara:

Makes sense. So really important to get those receipts right.

David:

Crucial. Good financial controls, understanding the rules, getting expert help if you need it.

Sara:

Okay. So t 30 tens, receipts, anything else financially that trips charities up?

David:

Ineligible individuals.

Sara:

Ineligible. Like, what does that even mean?

David:

People who shouldn't be in charge of a charity's money.

Sara:

Because?

David:

Past convictions, legal problems, that sort of thing.

Sara:

Like fraud, something like that.

David:

Could be. Yeah. The The CRE wants to make sure the people handling the money are, you know, trustworthy.

Sara:

Makes sense. So what if they find someone who's ineligible?

David:

Bad news for the charity. Could lose their status, get shut down.

Sara:

Wow. Serious stuff. It's not just about the numbers. It's about the people too.

David:

It all matters. Background checks, due diligence, that's crucial.

Sara:

Speaking of money, what about investments? Any rules there?

David:

There are. Charities can invest their assets. But

Sara:

No gambling at all on Bitcoin.

David:

Not exactly. The CRA expects them to be prudent. You know?

Sara:

Safe investments.

David:

Lower risk.

Sara:

Yeah.

David:

And it has to align with their charitable purpose.

Sara:

So they can't just chase big returns. Has to be responsible.

David:

Right. If the CRA thinks the investments are too risky, they'll take a closer look.

Sara:

Makes sense. Wanna protect those charitable dollars.

David:

Exactly. And speaking of protection, gotta mention terrorism financing again.

Sara:

Right. We talked about that earlier. Huge issue.

David:

It is. The CRA, they're really focused on preventing that.

Sara:

Making sure charities aren't used to fund terrorism even by accident.

David:

Even by accident. Yeah. The consequences are serious. Criminal charges even?

Sara:

Wow. So much for charities to keep track of.

David:

It is a lot, but there's help out there.

Sara:

Like what?

David:

Guidance from the CRA, training from groups like the Canadian Center for Philanthropy.

Sara:

So they're not alone in figuring this all out.

David:

Not at all. But they do have to take it seriously.

Sara:

Really understand the rules and put those safeguards in place.

David:

It's about more than just following the letter of the law. It's the spirit of it too.

Sara:

Doing things the right way.

David:

Exactly. And speaking of doing things right, there's one more thing. Making sure that charities work actually benefits the public good. That's key.

Sara:

That's, like, the whole point of charity, isn't it? What does that mean for the CRA, though?

David:

They wanna see proof that the charity is actually making a difference, living up to its mission.

Sara:

So a nice mission statement isn't enough. You gotta show results.

David:

Exactly. They'll look at the programs, the spending, make sure it's all adding up.

Sara:

What are some red flags there?

David:

If they can't show how their work is helping, that's a problem. Or if too much money goes to admin costs, not enough to the actual cause.

Sara:

So finding that balance being efficient but also effective.

David:

Exactly. Transparency is big too. Mhmm. The CRA wants to see good governance, clear financial reports, accountability.

Sara:

Okay. So we've covered a ton. T 30 tens, who's running the charity, investments. Now this whole idea of proving you're actually doing good, it's a lot.

David:

It is. But these rules, they're there for a reason.

Sara:

To protect the whole sector. Right?

David:

Exactly. Keep things honest. Maintain public trust.

Sara:

Important stuff. Before we wrap up, can you talk more about those experts you mentioned, the lawyers, accountants?

David:

Oh, they're crucial, especially when it comes to audits.

Sara:

Why is that?

David:

They know the rules inside and out. They can help charities interpret them, stay compliant.

Sara:

So they help with the t thirty ten, that questionnaire we talked about.

David:

All of that. Plus, they've got experience. You know? They've seen it all.

Sara:

Real world advice, not just textbook stuff.

David:

Exactly. And, honestly, they just take some of the pressure off.

Sara:

Peace of mind, knowing someone's got your back.

David:

Exactly. Yeah. Getting expert help, it's not a sign of weakness. It's being smart.

Sara:

I like that. So audits, they're serious but not impossible to handle.

David:

Not at all. Preparation is key and having the right support.

Sara:

Okay. This has been super helpful. But before we finish up, I wanna talk about how charities can actually balance all this, fulfilling their mission, but also staying compliant. Seems tricky. It is tricky.

Sara:

It's like they wanna do good. Right?

David:

Right.

Sara:

But they gotta do it by the rules. Tough balance.

David:

It is. A lot of charity struggle with that.

Sara:

Especially with what we've talked about, the penalties, the the bad press, losing trust.

David:

Yeah. No one wants that.

Sara:

So how do they manage it all?

David:

Well, I think it helps to remember why those rules are there.

Sara:

Okay.

David:

It's not to make things difficult. It's to protect everyone.

Sara:

Protect the charities themselves.

David:

Them, the donors, the whole system. Make sure things are done honestly.

Sara:

So compliance is about more than just avoiding trouble.

David:

It should be part of their values.

Sara:

Like, built into how they operate.

David:

Exactly. From the top down.

Sara:

Board of directors, staff, everyone. Everyone.

David:

Governance, financials, programs, fundraising, everything.

Sara:

It can't just be one person's job then.

David:

Nope. Gotta be a whole culture of compliance.

Sara:

And that probably takes work keeping up with changes.

David:

Oh, yeah. It's ongoing. Training, getting advice, always check-in to make sure they're doing things right.

Sara:

I bet technology helps with that.

David:

Huge help. Software for accounting, donor management, all kinds of tools. Makes it easier to stay on top of things.

Sara:

So it's not just about paperwork anymore?

David:

Definitely not. Technology can make a big difference.

Sara:

Good to know.

David:

And charities, they don't have to figure this out alone.

Sara:

Right. There are those groups we talked about.

David:

And others. Networks, conferences, they can share ideas, best practices, get advice.

Sara:

Strength in numbers kind of thing.

David:

Exactly. That's one of the great things about the sector.

Sara:

I like that. So it's tough, but there's support out there

David:

Absolutely.

Sara:

To all those charities out there doing amazing work.

David:

We see you. Keep it up.

Sara:

We do. And remember, compliance, it's not the enemy.

David:

It's about doing things right, building trust, making a bigger impact.

Sara:

Couldn't have said it better myself.

David:

Thanks for having me.

Sara:

This has been great. Really insightful stuff.

David:

Hope it helps those charities out there navigate all this.

Sara:

I think it will. And to our listeners, thanks for joining us for this deep dive.

David:

Stay curious.

Sara:

Stay informed, and keep making a difference.