There’s never a bad time to establish good habits. While the subject of "recordkeeping" can elicit yawns, proper financial and accounting records are the foundation of a well run nonprofit and charity. Good record keeping provides support in numerous ways:
- minimizes risk to the board of directors and the organization,
- facilitates timely and accurate financial statements and thereby effective decision making,
- ensures accountability to members and the public, and
- helps the organization operate efficiently and effectively.
As well, proper record keeping is essential in order to meet government obligations. Thus every nonprofit and charity should establish an appropriate recordkeeping system and get into the habit of maintaining timely, accurate books and records.
Keeping the taxman happy
The Canada Revenue Agency (CRA) requires registered charities, non-profit organizations and registered Canadian amateur athletic associations to maintain certain books and records. While there is no rule that establishes the specific books or records that must be maintained, the CRA requires these documents to be able to:
- determine various government taxes payable or the taxes or other amounts that must be collected, withheld or deducted;
- substantiate that a charity or Canadian amateur athletic association qualifies for registration under the Income Tax Act; and
- confirm all charitable, athletic and political donations received for which a deduction or tax credit is available.
As well, an organization must have source documents available that allow verification of the information in the books and records. The CRA may use these financial records to verify revenues generated, donations received, payroll and related matters, and amounts expended on charitable activities. This information is also necessary to complete and file Registered Charity Information Return T 3010 in order to maintain a charity’s registered status.
Receipts, receipts, receipts
While the specific books and records that are maintained will vary from one organization to another, they typically include general ledgers, subledgers and supporting documentation and receipts and invoices.
Thus it is also essential that official tax receipts for cash, gifts-in-kind, and other donations meet CRA requirements. Since these requirements are frequently updated, registered charities should review official receipting requirements at least annually. If these requirements are not met, the CRA may suspend a charity’s right to issue donation receipts or even revoke its charitable status.
- For charities that issue electronic receipts, the CRA has certain security requirements to "maintain the accuracy, integrity and security of electronic business systems" that generate these receipts. Information Circular IC 05-1, Electronic Record Keeping outlines the specific requirements.
- There are also requirements regarding what information must be included on official donation receipts. Sample receipts are available on the CRA website at www.cra-arc.gc.ca/tx/chrts/pbs/rcpts-eng.html. Charities should compare their own receipts with these samples to ensure they include all of the necessary information. If a receipt is improperly issued, the CRA may levy a penalty of 5% of the eligible amount.
- All donors are entitled to receive an official receipt for income tax purposes for the amount of their donation. There is no requirement by the CRA regarding a minimum threshold for issuing a receipt - sometimes a charity's board of directors may establish a minimum amount for the automatic issuing of receipts. Thus donations below this threshold would be receipted only if specifically requested.
- Receipts for cash donations may be issued individually for each donation or, for a series of donations, may be accumulated for the calendar year and issued as one receipt.
- Donors of gifts-in-kind are also entitled to receive an official receipt that reflects the fair market value of the gift. It is important, however, to ensure the donation meets the CRA definition of “eligible gift,” which is defined in Interpretation Bulletin IT-110R3. Some gifts, such as donations of services or volunteer time, for example, are not eligible to receive official tax receipts.
- The onus is on the charity to ensure the fair value is accurate. Since gifts-in-kind may include property, licences, shares, even the inventory of a business, this can sometimes be challenging. Be sure to secure professional accounting assistance when necessary, especially since there are special rules for issuing receipts for gifts-in-kind.
Keeping the books
All financial records and books must be kept in a secure environment at the place of business in Canada. Responsibility for maintaining books and records remains with a nonprofit or charity even if this function is contracted to a third party.
Records may be in paper or electronic format. For records in hard copy format, an organization does not have to retain all of the paper if a complete electronic image of the documents is produced.
Electronic records must be in a format that can be traced to supporting source documents and which can be provided in a format that is readable and useable by the CRA. Even if an organization maintains records electronically, it must retain all source documents such as sales invoices, purchase invoices, and other relevant documents.
It’s also important to ensure a proper record backup in case originals are damaged or destroyed. Should an organization lose its electronic records and have no hard copy of the information, it must report this situation to the CRA and recreate the files within a reasonable amount of time.
Most nonprofits and charities must keep books and records for a minimum of six years from the end of the last tax year to which they relate. This retention period will be extended if returns are late-filed or if there is a notice of objection or appeal underway.
An exception to the six-year rule applies to records related to the acquisition and disposal of property, the share register of a corporation and other historical information that would have an impact on the sale, liquidation or wind-up of an organization. These records must be maintained indefinitely.
Official donation receipts must be kept for two years from the end of the calendar year that the donation was made while official receipts for 10-year gifts must be retained as long as the charity is registered.
Choosing the right system
The right accounting software package can provide invaluable assistance in maintaining the appropriate records for the appropriate period of time. There are a variety of packages available to suit a range of needs (such as issuing official donation receipts and managing donor databases) and budgets. Every organization should carefully evaluate the cost/benefit of various packages; consult with an experienced accountant if you don’t have the requisite expertise.
Maintaining accurate, complete and timely financial books and records is not only important for government requirements, it is also essential for the effective operation of a nonprofit or charity. These records, for example, enable the members of the board of directors to discharge their responsibilities related to ensuring proper donation receipting, monitoring expenditures and forwarding government remittances such as GST, employer health tax and withholding taxes. Thus every nonprofit should include rules within its constitution or bylaws describing how all records are to be retained and stored.
By establishing a reliable recordkeeping system for your nonprofit or charity, you can be assured that you are providing your board of directors with a trustworthy foundation for decision making - and reassurance that your organization is on the right side of the Canada Revenue Agency.
Bob McMahon, CA, is a partner of BDO Dunwoody LLP. He provides auditing, accounting and advisory services to nonprofit, private and public organizations. You can reach Bob at (905) 270-7700 or email@example.com.