Originally published in The TaxLetter, Vol. 24, No. 6, Your Guide to Tax-Saving Strategies, July 2006

by Eileen Reppenhagen, CGA

I can help. I had not learned my lesson yet. It is 8 a.m. on a Saturday morning. I stand in the hotel lobby nursing a coffee. The incoming president of the nonprofit organization I am proud to be a member of comes directly through the crowd to stand beside me. "I need help," she says. "How can I help?" "Well, we need another person on the board. I would like you to stand for the position."

I am not awake. I respond, "Of course I will help." Five minutes later, I stand proudly beside my fellow members, being introduced as a new board member. Someone else is the treasurer, which I think to myself is a good thing. I do enough accounting already.

I call my younger brother to tell him I am on this board. He responds with "What were you thinking, Eileen? You always tell me to do my homework before saying yes to belonging to a board." I respond, "Well they have audited financial statements and everyone says that they are very professional. They have a code of ethics and standards of behavior that seem admirable.

"What do I find? At the first meeting, the rough financial statements presented cause me instant concern. I ask a few key questions and after attempting to convey my concerns at the local and national level for the better part of a month, I resign my position. I feel like an outcast for taking this position, but I have no choice. My personal assets are on the line here. I have a higher standard of care, and anyone seeking redress could attack my assets first.

What did I find? Sales were over $50,000 last year, and there is no GST registration by the chapter. Assets were over $200,000, non active income from interest and rent is over $10,000, and there is no NPO report to CanRev. The chapter statements are not consolidated with the national organization’s statements, and the Errors and Omissions insurance coverage is based on the consolidated financial statements. My chapter, in fact none of the chapters, are included on those statements. My client in the insurance business tells me their insurance would not hold up to a claim. They hire people, but do not comply with employment standards, payroll, or WCB.

What I learned is that many non-profit organizations here in Canada and the in the US, including some larger names that would shock you, are not complying with various tax and regulatory laws. Non-profit organizations can be the target of unscrupulous individuals who utilize the cash flow of the organization for their own purposes. Board members belong to boards for the personal perks. I heard a story about how the open bar after meetings at one organization was locked by the new treasurer and three quarters of the board resigned.

Why would I worry about this? As an accountant, I have a higher duty of care because of what I know or should know. What do I know? I know that there are laws that govern nonprofits.

There are provincial laws governing the association of groups that operate non profits. There are federal laws about the reports they must file with Can- Rev. Charging and reporting provincial sales tax on products or services and GST/HST on sales over $50,000. Board and directors have liabilities for employment standards and payroll including Workers Compensation Board in case of accident or injury.

If you want to read more about responsibilities of directors and officers of non profits and charities, I highly recommend a government publication from Industry Canada titled Primer for Directors of Not-for-Profit Corporations (Rights, Duties and Practices), available at the Industry Canada Website www.ic.gc.ca.

Tips from the cops: The Durham Regional Police in Ontario have an interesting Website that shows how to prevent fraud in non-profit organizations. Often, fraud is perpetrated by someone who has been employed at a non-profit for years, and the theft is systematic. Bingos, co-operatives, sports, and other community associations are at risk. No one is exempt. Preventative tips on the Durham Regional Police Website (www.police.durham.on.ca) include separation of duties and good record-keeping along with budgets.

You are thinking that you never volunteer for boards or operate as director of a non-profit or charity. How would this affect you? Do you donate to these organizations and claim a donation tax credit? Do you care who is spending your money and how it is being utilized? You can request the financial statements of a charitable organization from CRA.

Do you know the difference between a non-profit and a charity? They may or may not be incorporated in their province under a "society’s act." A charity is a non-profit, but a non-profit may not qualify to be a charity. A charity has met the stringent standards to become a charity by having and performing charitable functions that meet a "Public Benefit Test." When someone comes to your door and presents you with the opportunity to donate to their organization, you can check out whether they are one of about 80,000 organizations with charitable status under the charities listings tab at CRA’s Website, www.cra-arc. gc.ca.

During tax time, I did just that, because a receipt did not look legitimate. There are requirements for what must be included on a charitable donation receipt, including the Website address for CRA and a notation that it is an official receipt for income tax purposes.

I discovered when I contacted the individual who issued the receipt that the name of the registered charity was totally different than the name on the receipt. They were unaware of the compliance requirements for charitable donation receipts. If my client had submitted the receipt as it stood, the claim for a sizeable donation would have been rejected outright.

The new receipt has the correct name and address of the issuing organization as well as appropriate wording and the Website for CRA. Sometimes non-profits will say that they have a tax number. But this is most likely a provincial society’s registration number or it might be a GST number, which may or may not be a charitable status number. Documentation about receipt requirements for charities is also available on the CRA website.

I have compiled a list of information about various aspects of governance of charities and non-profits. There is a tab on my Website (www.taxdetective.ca) with useful links titled "Non Profit Organizations." So if you’re approached to take up a volunteer directorship at a not-for-profit or charitable organization, think twice and ask lots of questions before you say, "I can help." It could be your assets on the line. And get professional advice if you are in doubt about the status of the organization you volunteer for.

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