CRA AUDITS AND NEW FEDERAL RULES ORGANIZATIONS

Transcription

1 CRA AUDITS AND NEW FEDERAL RULES FOR INCORPORATED NON-PROFIT ORGANIZATIONS

2 CRA AUDITS AND NEW FEDERAL RULES FOR INCORPORATED NON-PROFIT ORGANIZATIONS This material has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The presentation cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice.

3 The image cannot be displayed. Your computer may not have enough memory to open the image, or the image may have been corrupted. Restart your computer, and then open the file again. If the red x still appears, you may have to delete the image and then insert it again. The image cannot be displayed. Your computer may not have enough memory to open the image, or the image may have been corrupted. Restart your computer, and then open the file again. If the red x still appears, you may have to delete the image and then insert it again. OUR SPEAKERS Erica Teklits, CA - National Leader, Not-for-Profit Sector, BDO Canada LLP Bruce Ball, FCA - National Partner, Tax, BDO Canada LLP Susan Manwaring - National Chair, Charities and Notfor-Profit Group, Miller Thomson LLP CRA Audits and Related Tax Issues Page 2

4 CRA AUDITS AND NEW FEDERAL RULES FOR INCORPORATED NON-PROFIT ORGANIZATIONS Agenda Introduction and Changes in Accounting Standards for NPOs Erica Teklits, BDO Canada LLP CRA Audits Bruce Ball, BDO Canada LLP New Federal Rules for Incorporated NPOs Susan Manwaring, Miller Thomson LLP Questions and Answers CRA Audits and Related Tax Issues Page 3

5 CHANGES IN ACCOUNTING STANDARDS FOR NPOs Erica Teklits September 26, 2012

6 ACCOUNTING FOR NPOs Current accounting and choices Prior to January 1, 2012, Canadian NPOs reported under Canadian Generally Accepted Accounting Principles, which covered all entities In recent years, different types of entities have been moving to specialized reporting frameworks depending on users and whether they were private sector or public sector NPOs For year ends beginning on or after January 1, 2012, private sector NPOs have the choice of: - International Financial Reporting Standards (IFRS) - Accounting Standards for Not-for-profit Organizations (ASNPO) IFRS is tailored towards public and international entities as it has extensive disclosure and lacks NPO-specific standards such as fund accounting The vast majority of Canadian NPOs are expected to adopt ASNPO CRA Audits and Related Tax Issues Page 5

7 ACCOUNTING FOR NPOs Differences between ASNPO and previous GAAP The vast majority of standards have been brought forward with minor revisions NPO-specific standards (eg. Contribution revenue recognition, capital assets for NPOs) are almost completely unchanged Financial instrument standard simplified with only two classification categories: - Cost/amortized cost - Fair value Previous GAAP had limited guidance on deferring costs related to fundraising, exhibitions, live performances, etc. ASNPO provides further guidance as to when these costs can be deferred Amounts owing to governments must be disclosed separately (withholding taxes, GST/HST rebates, etc.) CRA Audits and Related Tax Issues Page 6

8 ACCOUNTING FOR NPOs Optional elections on first-time adoption ASNPO has several optional elections for an NPO to consider Most importantly, NPOs can elect to bump the cost of specific capital assets to fair market value, such as land and/or building This can be done on an item by item basis; NPOs do not have to be consistent with which items they choose to bump (eg. Could elect to bump one plot of land, but not another) The increase in cost is recorded as of the first date of adoption of ASNPO as an increase to capital assets and opening net assets Implications: - Cost of hiring appraiser or other expert to assess fair value - Impact on funders/donors if net assets suddenly increase - Potential increase in amortization expense if cost of buildings or other depreciable assets increases CRA Audits and Related Tax Issues Page 7

9 ACCOUNTING FOR NPOs Implications of adopting ASNPO Standard is effective for year-ends ends beginning January 1, 2012, with restatement of comparative period as well as presenting a third, opening balance sheet. For example, for a March year-end NPO, three balance sheets would be presented: - March 31, March 31, April 1, 2011 (the first day of the comparative period) All periods presented are in accordance with ASNPO, including re-statement of any figures due to differences upon adoption of ASNPO These differences, if any, must be disclosed in notes to the financial statements Your auditor will have to review the possibility of transitional differences between the standards for all three balance sheets CRA Audits and Related Tax Issues Page 8

10 NON-PROFIT ORGANIZATIONS CRA audits and related tax issues Bruce Ball September 26, 2012 CRA Audits and Related Tax Issues Page 9

11 NON-PROFIT ORGANIZATIONS CRA audits Agenda Introduction - non-profit organizations and taxes CRA research project and information audits General observations from audits Preparing for a CRA audit Cessation of education letters NPO Filing Obligations What s Next? CRA Audits and Related Tax Issues Page 10

12 NON-PROFIT ORGANIZATIONS Tax background Definition iti of Non-Profit Organization for Income Tax Purposes Key elements: a club, society or association not a charity organized and operated exclusively for social welfare, civic improvement, pleasure or recreation, or for any other purpose except profit no part of the income is payable to, or otherwise available, for the personal benefit of members If NPO tests met, income not taxable, (except investment income where the main purpose of the NPO is the provision of dining, recreational or sporting facilities for their members) CRA Audits and Related Tax Issues Page 11

13 NON-PROFIT ORGANIZATIONS Tax background CRA historical i comments Some characteristics that might indicate that an activity is non-profit: not operated in a normal commercial manner; goods or services restricted to members and their guests; operated on a cost recovery basis; and not operated in competition with taxable entities carrying on the same trade or business CRA Audits and Related Tax Issues Page 12

14 NON-PROFIT ORGANIZATIONS Tax background CRA Recent Comments Level of profits: Can earn incidental profits; Profits to fund not-for-profit objectives is not in itself a not-for-profit objective; Limited fundraising activities; Activities reviewed both independently and as a whole Capital Projects and Reserves: Can fund capital projects and establish operating reserves from capital contributed by members, from gifts and grants, or from accumulated incidental profits Reasonable operating reserves allowed for ordinary operations Reserves need specifically identified purpose CRA Audits and Related Tax Issues Page 13

15 NON-PROFIT ORGANIZATIONS CRA audits Background to Current Audits (research project) Historically, few audits had been done to confirm NPO status CRA initiated NPO Risk Identification project related to tax compliance to: characterize and quantify compliance, measure tax at risk associated with the NPO sector, and recommend courses of action. Over 3 years, about 1,500 NPO files examined Project currently in the third and final year CRA Audits and Related Tax Issues Page 14

16 NON-PROFIT ORGANIZATIONS CRA audits Example - Profile of a Recreational Club with Individual Members Private club Revenue from non-members using the club facilities Advertising revenue from third parties Third party revenue in the budget fees, rentals and advertising Incentives given to members for bringing g in new members Corporate structure allows for dividends CRA Audits and Related Tax Issues Page 15

17 NON-PROFIT ORGANIZATIONS CRA audits Recreational Club with Individual Members Issues Feedback from CRA: Incentives for new members is likely a distribution of profits Advertising revenue, rentals and non-member fees if significant, and if budgeted, not incidental Ability to pay dividends indicates ability for members to benefit from third party revenue Result May be taxable currently as a for profit May lose tax-exempt status on winding-up, if there is surplus CRA Audits and Related Tax Issues Page 16

18 NON-PROFIT ORGANIZATIONS CRA audits Issue of no benefit to members Possible solutions to dividends and surplus issue form as a corporation without share capital - no ability to pay dividends in the enabling documents, provide that on dissolution all assets and accumulated income be transferred to an organization with similar objectives that qualifies for the non-profit exemption Revenue from non-members using the club facilities and advertising revenue from third parties Apart from ceasing to bring in this revenue, issue more difficult to deal with CRA Audits and Related Tax Issues Page 17

19 NON-PROFIT ORGANIZATIONS CRA audits Example Profile of a Professional Association with Business Members All members part of same profession Membership fees cover trade publications and access to information of common interest to the profession Additional fees are charged for continuing education courses and conferences Continuing education courses available for non-members Non-members pay greater fees for courses than members Significant surplus has built up over time from fees charged to non-members CRA Audits and Related Tax Issues Page 18

20 NON-PROFIT ORGANIZATIONS CRA audits Professional Association with Business Members Issues: Offer of services to non-members may be a for-profit activity Build-up of a significant surplus also indicates carrying-on activities for profit, unless such reserves accumulated from incidental profits CRA Audits and Related Tax Issues Page 19

21 NON-PROFIT ORGANIZATIONS CRA audits Additional Observations From Audits CRA focusing on profitable lines as stand alone; NPO views as integral part of mandate Greater consultation necessary Key distinction between earning a profit that is incidental, and earning a profit in support of not-for-profit activities Appears that that CRA may not accept an organization that operates on an overall cost recovery basis but uses revenues from one activity to support another activity it CRA Audits and Related Tax Issues Page 20

22 NON-PROFIT ORGANIZATIONS CRA audits Additional Observations From Audits CRA has cited the following as specific examples of arrangements that would attract assessment as not operating as a non-profit: Golf club where the fees charged to non-members formed 60% of total revenue base NPO directly competing with for-profit businesses NPO paying bonuses to members to reduce funds accumulation NPO used as flow-through entities to protect for-profit businesses CRA Audits and Related Tax Issues Page 21

23 NON-PROFIT ORGANIZATIONS CRA audits Preparing for a CRA Audit Review organizational documents for evidence of ability to distribute profit to members Review minutes of meeting of board of directors and committees, if any, for comments regarding activities to be carried out at a profit Review budgets for past three years Are incidental revenues budgeted? Is there evidence that any surpluses that were achieved were planned for? Could surpluses be considered incidental for example due to under- spending compared to budget or windfall contributions ti? CRA Audits and Related Tax Issues Page 22

24 NON-PROFIT ORGANIZATIONS CRA audits Preparing for a CRA Audit When separating activities for reporting purposes, has the allocation of common costs to each activity or service line of the NPO created an accurate picture of the contribution or cost of each service line to the organization as a whole? For example is it more appropriate to allocate costs by activity level or time? This will likely vary depending on the type of cost A simplification of cost allocation may distort the service line or activity contribution and show a profit whereas a more detailed cost allocation may show a break-even or loss to the service line or activity CRA Audits and Related Tax Issues Page 23

25 NON-PROFIT ORGANIZATIONS CRA audits CRA Audits Education Letters Some NPOs have received an education letter from the CRA In response to lobbying efforts by the Canadian Chamber of Commerce and others, CRA stopped issuing these letters in March 2012 However, CRA is continuing these audits and will be keeping track of NPO deficiencies Without a formal letter to document issues identified, it will be important to keep full record of audit feedback and to know deficiencies identified NPOs not concerned about a written record of the audit may want to consider requesting a summary from the CRA CRA will issue education letters on request CRA Audits and Related Tax Issues Page 24

26 NON-PROFIT ORGANIZATIONS Tax essentials Filing obligations T Non-Profit Organization (NPO) Information Return File a NPO information only if certain parameters are met T3 - Trust Income Tax and Information Return Return is required for the deemed trust income that arises when the NPO s main purpose is the provision of dining, recreational or sports facilities for its members T2 - Corporation Income Tax Return Incorporated not-for-profit organizations Required if no taxes payable? CRA Audits and Related Tax Issues Page 25

27 NON-PROFIT ORGANIZATIONS Mixed messages from CRA on filing a T2 T2 Filing Obligations Many incorporated NPOs have not filed T2 returns In 2007, the CRA started a program of withholding GST and other refunds until all required returns had been filed. Refunds for NPOs continued to be allowed while the CRA reviewed the issue CRA announced in 2012 that refunds or rebates will not be withheld from tax- exempt incorporated non-profit organizations (NPOs), when they have outstanding T2 returns But, CRA also states that this administrative position does not remove the legislative responsibility of a tax-exempt corporation to file an annual T2 return As an information filing, there is a penalty of up to $2,500 for late-filed T2 returns CRA Audits and Related Tax Issues Page 26

28 NON-PROFIT ORGANIZATIONS CRA comments After current audits -what s next? NPOs found not in compliance with the legislation will be informed, and instructed on how to become compliant In cases of serious noncompliance, the CRA will re-assess Once project is completed, CRA will assess the results, including reviewing the future of the NPO compliance program Premature to comment on the results of the project and what further courses of action would be recommended until end of the project CRA Audits and Related Tax Issues Page 27

29 NON-PROFIT ORGANIZATIONS What comes next? Page 28

30 New Federal Rules for Incorporated Non Profit Organizations Susan M. Manwaring September 26, 2012 CRA Audits and Related Tax Issues 29

31 NEW FEDERAL LEGISLATION Canada Not-for-Profit Corporations Act in force October 17, 2011 Replaces Canada Corporations Act CRA Audits and Related Tax Issues 30

32 OVERALL VIEW Plain language Modern business corporations statutes Requires changes to governance and membership structures CRA Audits and Related Tax Issues 31

33 KEY CONCEPTS 1. Incorporation as of right 2. Corporations have capacity of a natural person 3. New category of Soliciting Corporation 4. Member rights strengthened 5. Class veto right to non-voting members in certain circumstances CRA Audits and Related Tax Issues 32

34 KEY CONCEPTS (Cont d) 6. Directors standard of care 7. New audit requirements 8. No Ex officio directors 9. New requirements for Articles versus By-laws 10.Special Act Corporations CRA Audits and Related Tax Issues 33

35 INCORPORATION AS OF RIGHT Consistent with business law statutes Timelines will be shorter By-laws no longer reviewed and approved Must file by-laws with the Director within 12 months of approval CRA Audits and Related Tax Issues 34

36 ULTRA VIRES Formerly limited to objects Powers of a natural person Are purposes necessary? To be listed in the corporations Articles Registered charity status (Income Tax Act) CRA Audits and Related Tax Issues 35

37 WHAT IS A SOLICITING CORPORATION? Federal corporation that receives more than $10,000 during a 3 year period from a government, another soliciting corporation or requested from a person other than member, director, officer or employee OR related persons Calculation for threshold done at financial year end Clock starts at AGM CRA Audits and Related Tax Issues 36

38 CONSEQUENCES OF BEING A SOLICITING CORPORATION Must have at least 3 directors Not more than 1/3 of directors can be employees or officers Stricter audit requirements On wind-up must distribute assets to a qualified donee Must file financial statements, prepared by a public accountant, with the Director May not have a unanimous members agreement CRA Audits and Related Tax Issues 37

39 MEMBERSHIP CLASSES Membership classes and the voting rights in the Articles Details can be in the by-laws Therefore, publicly available and cannot be changed without t additional government filing CRA Audits and Related Tax Issues 38

40 MEMBER RIGHTS All members are entitled to at least one vote on certain fundamental changes (i.e. amalgamation, continuance to other jurisdiction, extraordinary sale, leases or exchange of property) separate class votes on issues can limit in Articles Derivative action and oppression remedy are available to those who have some relation to the corporation (except religious corporations) CRA Audits and Related Tax Issues 39

41 CHANGES TO MEMBERSHIP CLASSES Consider what limits, if any, can be added to the articles on class votes/vetoes Consider dilution of membership voting rights Consider limiting who can become a member Use categories of supporters where need nonvoting category CRA Audits and Related Tax Issues 40

42 DIRECTORS AND OFFICERS STANDARD OF CARE Current Subjective Standard: As Person with Same Experience New Act s Objective Standard: Reasonably Prudent Person in Similar Circumstances Same as corporate statutes across the country Due diligence defense available Directors of charities considered d trustees t at common law CRA Audits and Related Tax Issues 41

43 AUDIT REQUIREMENTS 3 levels No review, Review engagement and Audit Different requirements for soliciting and non- soliciting corporations CRA Audits and Related Tax Issues 42

44 AUDIT REQUIREMENTS (Cont d) Soliciting Corporation: Audit required unless members pass an unanimous or special resolution No audit if gross annual revenues $50,000 or less; or Review engagement where gross annual revenues are between $50,000 and $250,000 Audit is mandatory where gross annual revenues are above $250, CRA Audits and Related Tax Issues 43

45 CONSIDERATIONS FOR DIRECTORS No ex officio or substitute directors all must be elected by members, or appointed by other directors (1/3) Consider adding a special class of membership to elect the ex officio director CRA Audits and Related Tax Issues 44

46 ARTICLES AND BY-LAWS Act mandates what must be contained in the Articles and by-laws Anything that must or may be in the by-laws may instead be in the Articles Therefore may only have Articles and no by-laws Act establishes default provisions that may be altered in the by-laws or Articles i.e. There is no restriction on directors borrowing powers, but the by-laws may provide otherwise CRA Audits and Related Tax Issues 45

47 SPECIAL ACT CORPORATIONS Provisions applicable to Special Act corporations Capacity and powers of a natural person Must file annual returns Must hold annual members meetings May be dissolved May continue under the Act, at which point the Special Act will cease to apply Special Act corporations should evaluate the pros and cons of continuing under the Act CRA Audits and Related Tax Issues 46

48 CONTINUING Must apply for a Certificate of Continuance within 3 years October 17, 2014 Failure to apply to continue may result in the dissolution of the corporation Industry Canada no fee continuance tools, model by-laws and guides CRA Audits and Related Tax Issues 47

49 FEDERAL CONTINUANCE STEPS 1. Review existing letters patent and by-laws 2. Draft articles of continuance 3. Draft new by-laws 4. Obtain the approval of directors and members 5. Submit documents to: Corporations Canada Canada Revenue Agency (only if the entity is a registered Charity) CRA Audits and Related Tax Issues 48

50 1. REVIEW EXISTING LETTERS PATENT AND BY-LAWS CNCA, all members are entitled to at least one vote on certain fundamental changes (i.e. amalgamation, continuance to other jurisdiction, extraordinary sale, leases or exchange of property) separate class votes on issues can limit in Articles (not completely) CRA Audits and Related Tax Issues 49

51 1. REVIEW EXISTING LETTERS PATENT AND BY-LAWS (Cont d) No ex officio directors all must be elected by members, 1/3 appointed by other directors Many other changes in CNCA Consider changes before continuance Consider what limits, if any, can be added to the articles on class votes/vetos t Dilution of membership voting rights Use categories of supporters where need non-voting category CRA Audits and Related Tax Issues 50

52 2. DRAFT ARTICLES OF CONTINUANCE Form 4031 Articles of Continuance Available on Corporations Canada s website dgc.nsf/vwapj/4031 EN.pdf/$FILE/4031-Form-EN.pdf CRA Audits and Related Tax Issues 51

53 2. DRAFT ARTICLES OF CONTINUANCE (Cont d) Corporate name, change Current corporate number Province or territory of registered office Number of directors Statement of purpose CRA Audits and Related Tax Issues 52

54 2. DRAFT ARTICLES OF CONTINUANCE (Cont d) Restrictions on the activities of the corporation CRA suggestions Classes of members Distribution ib ti of property remaining i on dissolution Additional provisions CRA Audits and Related Tax Issues 53

55 3. DRAFT NEW BY-LAWS Changes desired by corporation Changes dictated by CNCA Model by-law The by-law builder CRA Audits and Related Tax Issues 54

56 4. OBTAIN THE APPROVAL OF DIRECTORS AND MEMBERS Call meetings under existing by-laws Pass by-law under rules in existing by-law Special resolution of members necessary to pass articles of continuance (2/3), class votes if membership rights are impacted CRA Audits and Related Tax Issues 55

57 5. SUBMIT DOCUMENTS Corporations Canada: Form 4031 Ati Articles of fcontinuance NUANS Form 4002 Initial Registered Office Address and First Board of Directors By-law (12 months) Fax, or mail CRA Audits and Related Tax Issues 56

58 ONTARIO IS ALSO CHANGING Not-for-Profit Corporations Act, 2010 Royal Assent received October 25, 2010 in force day to be named January 1, 2013 (?) no Draft Regulations expected soon guides Replaces Corporations Act (Ontario) CRA Audits and Related Tax Issues 57

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60 CONTACT DETAILS Erica Teklits, BDO Canada LLP Bruce Ball, BDO Canada LLP Susan Manwaring, Miller Thomson LLP CRA Audits and Related Tax Issues Page 59

61 Questions and Answers CRA Audits and Related Tax Issues Page 60