The ruling is an 'earthquake for charities,' says lawyer
Accused of improper tax-receipt practices, Canada’s oldest Muslim-led international relief charity was recently denied at the Federal Court Appeal in its effort to delay the suspension of its privilege to issue charitable receipts to donors for tax purposes.
HCI has 60 days to file for leave to appeal and has not yet decided whether to do so, says Gerald Chipeur, a partner at Miller Thomson LLP in Calgary and counsel for HCI. The CRA’s internal appeal process is dealing with the allegations which led to the suspension. Before the Federal Court of Appeal, HCI argued it was contrary to the rule of law for HCI’s suspension to be imposed before those allegations were tried.
“This is an earthquake for charities,” says Chipeur. The consequence of the Federal Court of Appeal’s ruling is that a decision by the CRA to impose a suspension is not subject to judicial review unless the charity alleges bad faith, he says. “We’re not alleging bad faith at all, here. We are just saying, factually and legally, CRA is wrong. And we want our trial on that issue to be held prior to the penalty being imposed… The rule of law has always required a trial before punishment.”
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In 2014, Canada Revenue Agency initiated an audit, looking at HCI’s financial records for the two fiscal years between April 1, 2011, and March 31, 2013. The CRA then accused HCI of issuing donation tax receipts containing false information as part of a third-party receipting scheme – a practice by which a registered charity issues donation receipts on behalf of a separate organization.
In its audit of 31 projects, the CRA found that HCI had issued official donation tax receipts on behalf of six organizations that were not registered charities. The receipts covered charitable gifts amounting to $307,841.
The CRA issued a Sanction Administrative Fairness letter, asking HCI to make submissions on why its registration should not be revoked. HCI responded in writing in 2018, 2019 and 2020. After threatening revocation, the CRA ultimately decided on a one-year suspension of receipting privileges in July 2021. HCI filed a notice of objection.
The charity asked the Tax Court to postpone the suspension, under ss. 188.2(5) of the Income Tax Act, until the final determination of their assessment of penalties. The Tax Court applied the test in the Supreme Court of Canada’s RJR-Macdonald Inc. v. Canada to determine whether it would be just and equitable to do so. The Tax Court found HCI had not established it would suffer irreparable harm if the application were denied, nor had the charity demonstrated that the balance of convenience favoured granting it.
The Tax Court dismissed the application, and HCI appealed to the Federal Court of Appeal.
Though HCI claimed the Tax Court made numerous errors, the appellate court found the charity failed to raise any which would warrant the court’s intervention. HCI also argued the Tax Court should have “considered principles similar to rules of natural justice” and not enforce the suspension until a court upholds it, said the appeal court’s decision. But the court found there was “no merit” to this argument.
“That is a conclusion that concerns me greatly as a lawyer,” says Chipeur, “and should concern every charity because every charity in Canada can now lose their right to issue receipts for one year simply by CRA saying so. And there is no opportunity for judicial review.”
“That is not what Parliament said when it passed s. 188.2 [of the Income Tax Act]. And I’m surprised that the Federal Court of Appeal would ignore that clear statement of intent from parliament.”
HCI argued before the Tax Court that the six organizations were acting as intermediaries raising funds for HCI’s projects. The charity also submitted its penalties for culpable conduct were without basis because if they made errors, those errors were inadvertent and made in good faith.
The ability to issue charitable receipts allows donors to receive a tax credit for their gift to an organization. Under the Income Tax Act, charities can’t issue tax receipts for money donated to another organization, even if the charity receives the money and is used as a conduit for the funds to flow to that separate entity.
“Fundamentally, a charity has to maintain control and direction over the funds that it receives, over all its resources,” says Adam Aptowitzer, a tax lawyer whose practice is focussed on the charitable and non-profit sector. “You cannot issue receipts on behalf of a third party because then it’s a question of whether or not the gift was ever made to the charity in the first place.”
According to HCI, the projects for which it is alleged to have issued false donation receipts concerned orphan support, education and health, and were based in India, Somalia, Bangladesh and Kenya. The charity maintains its receipting practices were appropriate.
HCI also claims Muslim charities are unfairly targeted by the CRA’s Review and Analysis Division. HCI was among 130 organizations that signed a letter last June calling on Prime Minister Justin Trudeau to address CRA auditing practises, which they said were unfairly prejudicial toward Muslim-led charities. In August, following the federal government’s Summit on Islamophobia, Minister of National Revenue Diane Lebouthillier asked the Taxpayers’ Ombudsperson to examine the allegations raised in the letter, with a focus on how the CRA selects audit files, the quality of its services and the CRA’s efforts in addressing unconscious bias with employees.
