Understanding the Charity Audit Process

The Canada Revenue Agency (CRA) annually ensures charities comply with registration requirements through various activities. They connect with many charities to promote compliance and education, addressing minor issues before they escalate.

Using a risk-based approach, the CRA focuses its audit resources on charities that may have more severe compliance problems. Audits can lead to different outcomes, from educational letters to the revocation of charitable status.

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Why Charities Are Selected for Audit

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Charities may be chosen for an audit for several reasons, including:

• Referrals from other CRA departments
• Public complaints about suspected tax fraud
• Information from other government agencies
• Media reports or publicly available data
• Reviews of specific legal obligations under the Income Tax Act
• Information from the charity’s T3010 annual return
• Follow-up on prior compliance agreements

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How the CRA Conducts Audits

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There are two main field audit types: regular and restricted. The nature of the audit depends on the charity's size, complexity, and specific issues.

• Regular Audit: This audit usually lasts three to five days at the charity's location. CRA auditors review financial records, bank accounts, contracts, and other relevant documents. They may also interview directors and tour the premises to better understand the charity’s operations.
• Restricted Audit: This limited audit focuses on specific risk issues. Auditors review the charity's file with the CRA, which may include its governing documents, program descriptions, and compliance agreements. Additional information may be requested, and an onsite visit could be necessary.

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After the Audit

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Once the audit is complete, the CRA sends a letter detailing its findings. If everything aligns with the Income Tax Act, the CRA will confirm the charity’s registered status remains unchanged. If issues are found, the CRA will issue an Administrative Fairness Letter (AFL) outlining concerns, suggesting corrective actions, and providing the charity a chance to respond before making a final decision. Generally, charities have 30 days to reply, though they can request an extension.

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Possible Outcomes After an Audit

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The CRA aims to address non-compliance through education or compliance agreements before imposing sanctions. Serious consequences like sanctions or revocation occur only in a small percentage of audits.

• Education Letters: For minor non-compliance, the CRA will issue an education letter that identifies issues and offers guidance. This letter does not affect the charity’s registration status, and the charity is not required to respond.
• Compliance Agreements: For moderate non-compliance, the CRA may propose a compliance agreement detailing the issues and required corrective actions, including timelines and potential consequences for non-compliance.
• Sanctions: In severe or repeated non-compliance cases, the CRA may recommend financial penalties or temporarily suspend the charity’s tax receipting privileges.
• Revocation of Registration: If the charity's registration status is revoked due to significant non-compliance, the CRA may propose revoking it. This is generally a last resort and can occur if the non-compliance is serious and intentional, has harmed others, or has a history of serious issues. If a charity’s registration is revoked, it must distribute its assets to other registered charities within a year or face a 100% tax on any remaining assets.

• Annulment of Registration: The CRA may propose annulment in rare situations where a charity was improperly registered or no longer qualifies. Although annulled charities cannot issue tax receipts, they can keep their assets.

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Recourse for Charities During and After an Audit

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Charities can respond to the AFL, explaining their position or proposing changes to address concerns. The CRA considers these representations before deciding on compliance measures.

If the charity disagrees with the CRA’s decision, it can file an objection by writing to the Assistant Commissioner at the Appeals Intake Centre within 90 days of receiving the final letter.

The Appeals Branch will review the case independently. If the charity is unsatisfied with the result, it can appeal to the Federal Court of Appeal or the Tax Court of Canada.

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Charities in Canada should understand the audit process to prepare for audits effectively, meet CRA requirements, and uphold their commitment to transparency and accountability.

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