Is it legal and ethical to take over a dormant Canadian charity?
This article considers the questions: "Is it legal and ethical to take over a dormant Canadian charity in order to avoid the long bureaucratic process of application? And if so, what is the best way to do this?"
There are a number of angles to these questions.
The first, and probably most important point, is that there has been a dramatic improvement in the timelines for registering a charity with the Charities Directorate of the Canada Revenue Agency (CRA). What used to take six to nine months now takes two to three months. In fact, CRA is now accepting some of our firm’s applications within six weeks. With this dramatic improvement in response times to charitable applications, it is now much quicker to obtain charitable status and start operating as a registered charity.
Second, just like a used car, you often do not know what you are getting when you take over an already existing organization. The nonprofit that "never did anything" may have outstanding liabilities, potential litigation, and regulatory issues that you may not find out about until it is too late and you have invested substantial effort in resurrecting the charity. Those involved with the dormant charity may not even know about the existence of the problems. As well, if financial statements and filings were not prepared or completed correctly, the cost of completing or revising the filings could be greater than the cost of just starting over.
Third, charities are not like businesses. They have objects which you have to stick with or change. The process of changing the objects of a charity have to be factored into the equation and you may need to get CRA’s approval for your object changes. Also, a registered charity has a Notification of Registration from CRA which may stipulate other limitations. If the name needs to be changed there will always be a record of the old name and when applying for grants, etc. you will have to provide the original letters patent with the old name, in addition to any subsequent supplementary letters patent.
Fourth, do you have an accurate list of members and can you get the quorum to effect the changes that you want like removal and replacement of directors? You do not want to find out a year after investing heavily in a charity that the members’ meeting was invalid and that you do not control the entity and the real members want you out.
In most cases it is easier and cleaner to just set up a new organization that is created for the needs of the charity. If, however, you decide to take over another nonprofit or charity, it is important that you do your due diligence, that you make sure that you have the support of at least enough members to effect the changes that are required, that you elect the new directors and officers, that you take care of other organizational matters, and that you notify the necessary federal and provincial authorities of the changes. If the process is handled correctly it can be done in a way that is both legally compliant and ethically appropriate.
I want to distinguish between a dormant charity, as discussed above, that was set up and not used for an initial purpose and a shelf charity which is one that is deliberately set up to sit on the shelf until someone comes along and pays a lawyer or someone else to use it. Shelf charities are sometimes used to avoid scrutiny and sometimes to have a charity available quickly. Either way, using a shelf charity is legally and ethically problematic and can result in subsequent scrutiny and problems.
On the charity application it notes, "This form must be signed by two directors/trustees or like officials of the organization who have authority to sign on behalf of the organization. It is a serious offence under the Income Tax Act to provide false or deceptive information. I certify that the information given on this form and any attachment is, to the best of my knowledge, correct, complete, and current."
To state that lawyer Bob, friend Gertrude, and secretary Billy will be the directors of the charity when the people establishing the shelf charity are reasonably certain that Bob, Gertrude, and Billy will almost certainly be resigning shortly in favour of others is, to say the least, deceptive. If you use such shelf charities, expect that at a minimum there will be greater CRA scrutiny of your charity and its activities.
Another issue relates to the potential liabilities of those who used to belong to the dormant charity as directors and officers. If they are not properly removed as directors and officers and in other ways from the charity, they could be potentially on the hook for any nefarious activities conducted by the newly invigorated charity. Some charity scams have been preying on dormant charities and trying to take them over for use in tax shelter schemes or receipting fraud.
CRA occasionally sends out letters to dormant charities encouraging voluntary revocation, as having dormant charities in the system is not useful, provides no public benefit, and provides an opportunity for some unscrupulous people to misuse charitable registrations. In other words, directors of dormant charities should seriously consider asking CRA for voluntary revocation to reduce the likelihood of their dormant organization being abused. For information on voluntary revocation see: http://www.cra-arc.gc.ca/tx/chrts/rvkng/menu-eng.html.
Over the last few years a large number of dormant charities have voluntarily applied to CRA to have their registration revoked and if you are involved with a dormant charity you may wish to do the same thing. As well, when dealing with substantial changes to a non-profit organization such as resurrecting a dormant charity, it is helpful to obtain legal advice from a lawyer who is knowledgeable about non-profits and charities.
Mark Blumberg is a lawyer at Blumberg Segal LLP in Toronto, Ontario. He works in the area of nonprofit and charity law. He can be contacted at firstname.lastname@example.org or at 416-361-1982. Mark is the editor of www.canadiancharitylaw.ca or www.globalphilanthropy.ca.
Disclaimer: This article is for information purposes only. It is not intended to be legal advice. You should not act or abstain from acting based upon such information without first consulting a legal professional.
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