Tax problems.

AuthorBroder, Peter
PositionNot-for-Profit Law

As I write this a controversy is playing out in the United States over apparent targeting of Tea Party and other conservative groups by local offices of the Internal Revenue Service (IRS) to determine if they met American statutory requirements for exemption from tax. Under U.S. law such groups must be constituted primarily for social welfare purposes, rather than political purposes, to be eligible for status as exempt organizations. The controversy stems from the fact that groups were said to have been identified for scrutiny based on their political leanings, rather than on more neutral criteria.

In Canada, as in the U.S., there is ever present tension between the right of individuals and groups to organize their affairs in such a way as to minimize their tax liability and the powers given to tax authorities to protect the fiscal integrity of the tax base and ensure that everyone pays their fair share. There is wide consensus that the U.S. authorities overstepped their bounds. It is, however, also true that public outrage can be triggered when the groups are perceived as not having paid what they ought to have. This lack of appetite for tax dodgers can be seen in the furor over General Electric not paying tax in the U.S. in 2010 and the protests over Starbucks paying only minimal taxes in the U.K. over a 15-year period.

Non-profit groups are no different and there is likely not much public sympathy for dealings involving voluntary sector groups that potentially undermine the integrity of the tax system. One suspects that American taxpayers would not be upset if the IRS had ferretted out groups abusing the system without going about it in such a ham-fisted way.

Three recent developments in Canada touch on where the balance is between the powers of tax authorities to deal with suspected misconduct involving registered charities or their donors and the right of groups and individuals to arrange their affairs as they choose.

Budget 2013 introduced a measure designed to discourage participation in questionable charitable donation tax shelters and reduce the risk of amounts owing related to such schemes becoming uncollectible. The provision allows the Canada Revenue Agency (CRA) to collect 50% of disputed tax, interest or penalties pertaining to these transactions even where the taxpayer has legally objected to the assessment and the matter is still pending.

While this change widens the powers of the CRA, the courts have recently weighed in in...

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