Don't treat registration like an audit (But have your policies ready anyway)

A recent judicial decision reminded me of something worth sharing with anyone navigating charity registration in Canada under the Income Tax Act.

The Charities Directorate of the Canada Revenue Agency (“CRA”) has a habit of treating registration applications for registered charities and registered amateur athletic associations (RCAAAs) alike — a bit like audits.

The 2021 Federal Court of Appeal decision concerned a RCAAA but is relevant to registration as a charity. Registered charities and RCAAAs are very closely related statuses which share similar application processes and enjoy the same donation receipting privileges.

In Athletes 4 Athletes Foundation, 2021 FCA 145, Justice Webb wrote: 

[56] The particular concern in this case appears to be what expenses would be covered by the funding that would be provided to the athletes. In its Statement of Activities, A4A, for non-carded athletes, indicated that it “hopes to provide ‘bridging’ financial support for those athletes who cannot otherwise afford to train and pay for their daily living expenses”. It is not clear whether the “‘bridging’ financial support” would be for training or for the living expenses.

[57] Whether any particular payment made to an athlete will satisfy the requirement that it promotes amateur athletics in Canada can only be determined once the facts related to such payment are known. At this stage, A4A has applied to be registered as a RCAAA. This is not an audit of A4A but rather a question of whether its proposed payments to athletes, when read in light of its stated objects, satisfies the requirement that its only purpose and function is the promotion of amateur athletics in Canada on a nationwide basis.

(4) Reference to paragraph (e) of the definition of a CAAA

[58] The Minister, in this case, has effectively treated the application process as an audit of A4A. This is illustrated by the Minister’s comments on paragraph (e) of the definition of a CAAA. Neither party to this appeal referred to this paragraph or to the Minister’s comments thereon.

[59] In the Notice, the Minister, as an additional reason for denying the registration of A4A as a RCAAA, concluded that A4A had failed to satisfy the requirement of paragraph (e) of the definition of CAAA that the organization “devotes all its resources to that purpose and function”. The Minister noted:

Based on the information provided, the Applicant did not discharge itself of its obligation to prove this element as it has not demonstrated that it is involved in directing or otherwise verifying how its funds are spent by the athletes. As a result, we are left unable to conclude that the Applicant will devote all of its funds and resources towards the exclusive purpose of promoting amateur athletics in Canada on a nationwide basis.

[60] The verification of how funds are spent would be part of an audit. At this time, it is not clear whether A4A has any resources and, in any event, there is no indication that any payment has been made by A4A to any athlete. On its application for registration as a RCAAA, the focus should not just be on the proposed payment of money to athletes but also on the purposes for which such payment will be made, as stated by A4A in its application.

[emphasis mine]

But the ruling isn't a strategy

So, did this change how charity lawyers approach registration? Not really.

Yes, the decision confirms that CRA can't demand audit-level proof at the application stage. But leaning on that ruling as a shield — telling CRA "I don't need to prove this to you yet" — is a last resort, not a strategy.

For most founders, registration is not the finish line. It’s an early milestone in a story that may last lifetimes. If they want their organization to maintain registration, shouldn't they set policies and procedures (even very basic ones) that require the organization’s resources to be applied appropriately from the get-go? Probably... and here's why it matters beyond just getting registered.

Common reasons for losing charitable registration

Exercising this kind of foresight can prevent (or mitigate the risk) of some of the most common reasons for losing charitable registration:

• not devoting your resources to your charitable purposes and activities

• not keeping adequate books and records

• not having direction and control over your resources
  

Whether or not it is a bare-minimum requirement for registration, these conversations need to be had early on and revisited periodically as the organization evolves.

Start as you mean to go on

These aren't just CRA requirements. They're governance fundamentals. And the organizations that get into trouble later are often the ones that treated registration as the hard part and let the operational details slide.

Some organizations need to register before they have the resources to fully flesh out these important operational details, and this can feel like putting the cart before the horse.  It can be a delicate balance, and a difficult one to navigate without experienced counsel.

For those clients, I often help develop cost-effective micro-policies to guide decision-making and record-keeping in the early days, with built-in prompts to seek legal counsel as they outgrow that framework.

Registration is the beginning of the conversation, not the end of it.

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This is general information, not legal advice — and it may not reflect the current law.

Lex Klombies is a lawyer with Outsiders Law who advises charities, registered amateur athletic associations, non-profit organizations, and other tax-exempt entities. To discuss her services, book an introductory call.