Among the few technical tax measures affecting the charitable and non-profit sector proposed in the federal budget tabled on April 19, 2021 (the "2021 Budget"), one of the proposed budget amendments expands the ability for the Minister of National Revenue (the "Minister") to revoke a charity or other qualified donee's registration where an individual has certain connections to a terrorist entity.
To do so, the 2021 Budget proposes to expand the definition of an "Ineligible Individual" under the Income Tax Act (Canada) (the "Act"). In light of these proposed amendments, we encourage charities to take this opportunity to review their director consent processes and practices and consider any updates that may be appropriate.
Consent of Directors
An individual must consent to being a director of a corporation before they will be deemed to be elected or appointed to hold office. Most legislation across the country contains specific provisions requiring persons who have been elected or appointed to the board to take action to confirm their directorship in order to take office. For example, under the Canada Not-for-profit Corporations Act (the "CNCA"), consent may be provided in the following manners:
- In the case of an individual who has been elected or appointed as a director and is present at the meeting when the election or appointment took place, such individual is deemed to have consented to serve as a director, unless he or she refuses; or
- In the case of an individual who is not present at that meeting, he or she must consent to their election, in writing, before the meeting or within 10 days after the meeting or alternatively, the person must act as a director after election or appointment.
It is generally encouraged for charities to develop written director consent forms and to adopt a process whereby newly elected directors execute written consent forms, whether they were in attendance at the meeting or not. This governance practice helps to mitigate any potential risk, misunderstanding or claim that a director did not consent to his or her term of office, and helps an organization to maintain accurate records of directors then in office. We also note that under the new Ontario Not-for-Profit Corporations Act, written consents in the prescribed form will become a requirement for directors.
It is also common for written consent forms to incorporate specific declarations that an individual meets the various legislative qualifications to act as a director, including an acknowledgment that such individual is not an 'Ineligible Individual,' as such term is defined in the Act.
Ineligible Individuals
The reason being that pursuant to section 149.1(1), if an "Ineligible Individual" is a director, trustee, officer or like official, or otherwise controls or manages a charity or a registered Canadian amateur athletic association, the Minister may refuse to register, revoke registration, or otherwise suspend an organization's ability to issue official donation receipts. A consent form, inclusive of Ineligible Individual language, serves as a protective measure for a charity to confirm the eligibility status of its directors.
Generally, a person will be considered an Ineligible Individual where he or she:
- has been convicted of a criminal offence related to financial dishonesty, including tax evasion, theft and fraud or any other offence that may be relevant to the operation of the organization;
- has been convicted of a non-criminal offence in the past five years that related to financial dishonestly, including an offence under the charitable fundraising legislation, consumer protection legislation, securities legislation or any other offence that may be relevant to the operation of the organization; or
- was connected to an organization whose registration was revoked for a serious breach of the requirements for registration whether as director, trustee, officer or like official, as an individual in a position of management or otherwise as a promoter of a tax shelter.
The "Ineligible Individual" provisions were introduced in 2011 as a result of apparent Canada Revenue Agency concerns that applications for charitable status were being submitted by individuals who had previously been involved with charities that had their charitable status revoked.
As reported in our 2021 Federal Budget Edition, the 2021 Budget proposes to add to this list of "Ineligible Individuals" the following:
- an individual that is, or is a member, director, trustee, officer or like official of a listed terrorist entity; and
- an individual who controlled or managed, directly or indirectly, in any manner whatever, a listed terrorist entity.
A listed terrorist entity includes any entity that has knowingly carried out, participated in or facilitated a terrorist activity or acted on behalf of, at the direction of or in association with such an entity, as established by the Governor in Council in accordance with Canada's Criminal Code. The relevant listed terrorist entities can be found here.
The proposed legislative changes to the definition of "Ineligible Individual" will become effective on Royal Asset. We encourage charities to take this time to review and consider any updates to their director consent forms that may be appropriate in light of the proposed expansion of the definition of Ineligible Individual. We would be pleased to assist your organization with these amendments to ensure compliance with the upcoming legislative changes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
