Charities Audits: Dealing With the CRA - Riley Burr and Jonathan Wright Bull, Housser & Tupper LLP
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Charities Audits: Dealing With the CRA
Riley Burr and Jonathan Wright
Bull, Housser & Tupper LLP
For Presentation at Pacific Business and Law Institute
May 2014Riley R. Burr and Jonathan J. N. Wright
Bull, Housser & Tupper LLP
CHARITIES AUDITS: DEALING WITH THE CRA
Any taxpayer can be audited. With certain taxpayers or certain types of taxpayers it happens
often. For large businesses or high net worth individuals it is a fact of life. Registered charities
are also a type of taxpayer that is disproportionately audited, but a charity audit usually feels
very different from a business audit.
For other taxpayers, the fight is usually about income or expenses. Maybe an item is income or
capital. Maybe an expense is deductible or not. In most cases, a significant amount of tax is
being paid and disputes are typically on the margins. With registered charities, which do not pay
Part I tax, the dispute is more typically about compliance and principles, rather than counting
and methodology. Instead of numbers on the margins, the stakes are often existential for the
charity.
The Canada Revenue Agency (the “CRA”) certainly sees charities primarily as beneficiaries of
tax benefits, and not as contributors to the fisc in the same way that taxable enterprises are.
This is the fundamental point to remember when dealing with the CRA on an audit. The CRA
views their work in this area (i.e. enforcing the strict requirements necessary for a charity to
receive favourable tax treatment) as important, and it is the Act’s requirements, and not the
social importance of the charity’s mission, that should be focussed on in order to achieve the
best success when dealing with the CRA on an audit.
In other words, the CRA is generally indifferent to the importance of the work of the charity if
that work cannot be accomplished or is not being accomplished in a way that meets the
requirements of the Act. They are an administrative police force aimed at ensuring that the
“registered charity” (or other “qualified donee”)1 stays within the boundaries set by the Income
Tax Act of Canada (the “Act”) and case law. And they are a busy police force. In 2012/2013
alone, the CRA’s Directorate’s Compliance Division completed 799 audits of charities.2
On a more practical note, the audit can be a major disruption. The process of preparing for the
possibility of an audit and responding in a manner acceptable to the CRA can be a significant
hassle, and will often involve extra work for the most important people in an organization, and
extra spending on professional fees. Also, it is not the sort of business that a charity is usually
involved in. The focus of the charity is its mission. That work (the relief of poverty, advancement
of education, advancement of religion or certain other purposes beneficial to the community3) is
what everyone wants to be doing. Spending time on detailed record keeping can sometimes
take a backseat to the compelling work of a charity, but when the CRA begins asking questions,
how well such records and documentation are kept and how careful a charity has been about
1
Subsection 149.1(1) of the Income Tax Act of Canada. Though the tax-exempt status and ability to issue
gift receipts for donations are available to all “qualified donees”, this paper will confine itself to a
consideration of “registered charities” (subsection 248(1) of the Income Tax Act of Canada).
2
Canada Revenue Agency, Charities Program Update – 2014 (Feburary 26, 2014), .
3
Vancouver Society of Immigrant and Visible Minority Women v. Canada (Minister of National Revenue -
M.N.R.), [1999] 1 S.C.R. 10, at 144.
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scrupulous compliance with the Act requirements may mean the difference between sanction
(including revocation) and being left alone by the CRA.
Room to resist the demands of the CRA is limited. Charities and other taxpayers who have
asserted privacy over their documentation have been told by the courts that their expectations
should be set low.4 In the end, in the event the CRA does choose to audit a charity, it is
important to be responsive and helpful to the extent possible, while at the same time taking
steps to ensure that the CRA follows the rules set out for it in the Act and otherwise.
This paper seeks to provide guidance on this subject by offering a general overview of
documentation requirements for charities and CRA powers to audit, in addition to presenting
some advice both on how to prepare for audits and how to properly respond (including comment
with regard to privacy and solicitor-client privilege).
AUDIT POWERS
The Act sets out both the requirements for charities with regard to keeping records and the
powers of the CRA to examine these records and to audit the charity or other taxpayer. This
section focuses on the requirements for charities specific to audits.
The majority of taxpayers selected by the CRA for audit are done randomly, based on
recommendations made by its audit software. The CRA also, at times, undertakes audit projects
on particular groups of taxpayers if certain “results indicate that there is a significant non-
compliance within [a] group” or targets particular taxpayers based on leads from other files or
their connection to other problematic taxpayers.5
In general terms, the purpose of auditing a charity is to enable to CRA to:
(a) verify revenues, including all charitable donations received;
(b) verify that resources are spent on charitable programs; and
(c) verify that the charity’s purposes and activities continue to be charitable.
The CRA’s power to audit is found in subsection 231.1(1) of the Act. The CRA is explicitly
permitted to inspect, audit or examine the books and records of a taxpayer and any document of
the taxpayer or of any other person that relates or may relate to the information that is or should
be in the books or records of the taxpayer. It is also granted certain investigation rights, such as
the authority to enter into the premises of the taxpayer and the ability to require the
management of the taxpayer to give it “all reasonable assistance and to answer all proper
questions relating to the administration or enforcement of [the Act]”.
The powers to audit are clearly very broad, essentially allowing the CRA to demand anything
that contains information6 relevant to whatever is or should be in the books or records of the
4
Redeemer Foundation v. Minister of National Revenue, 2008 SCC 46, at 25.
5
Canada Revenue Agency, Information Circular 71-14R3 (June 18, 1984), at 14-16.
6
Cf. the definition of “record” in subsection 248(1) of the Act.
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taxpayer. The auditor is also permitted to obtain information on unnamed persons during the
audit of the taxpayer without seeking judicial authorization. In the context of charities, the
identification of unnamed donors is relevant in determining the legitimacy of the donations and
issued receipts and thus the validity of the taxpayer’s charitable status.
Information from third parties may also be sought when the taxpayer cannot or will not provide
the information the CRA is authorized to demand. Thus, in addition to the working papers
prepared by the taxpayer’s internal accountants, the CRA is also empowered to demand the
working papers of third-party accountants and auditors where it is needed in accordance with
the scope of the CRA’s review.
Under subsection 238(1) of the Act, a failure to comply with a demand for information or
documents is an offence which can result in fines or imprisonment.
Subsection 230(2) of the Act sets out the requirements for charities, among others, to keep
records and books of account, for a period of two to six years (depending on the type of
document),7 containing the following:
(a) all information in such form as will enable the Minister to determine whether there
are any grounds for the revocation of the charity’s registration under the Act;
(b) a duplicate of each donation receipt for a donation received by it; and
(c) information in such form as will enable the Minister to verify the donations to it for
which a deduction or tax credit is available under the Act.
These records may be kept in electronic format, but if so, they must be “retained in electronically
readable format” for the entire required retention period referred to above.8
In cases where an audit reveals non-compliance, the CRA has a number of corrective tools for
enforcement purposes including:
(a) Education letters: An education letter does not adversely affect a charity’s
registration. The letter identifies where the charity has not complied with the Act
or CRA policy. The letter provides guidance to the charity so that it can take the
required steps to become fully compliant.
(b) Compliance agreements: In more serious cases of non-compliance, the CRA
may enter into a compliance agreement with the charity which outlines the non-
compliance issues and the remedial actions that the charity has agreed (perhaps
reluctantly) to undertake, sets out timelines for the changes, and outlines the
consequences if the charity fails to abide by the agreement.
(c) Sanctions: In even more serious cases of non-compliance, sanctions may be
imposed. Sanctions may include a temporary suspension of a charity’s tax
7
Subsection 230(4) of the Act and Regulation 5800 of the Income Tax Act Regulations.
8
Subsection 230(4.1) of the Act.
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receipting privileges, suspension of its status as a qualified donee or financial
penalties.
(d) Revocation of registration: This is the most serious enforcement tool available to
the CRA: where there is a serious case of non-compliance, the CRA will revoke
the charity’s registered status.9
It is evident that there are potentially serious implications arising from a failure to keep proper
records and books of account. As an example, not keeping the required documents may be
grounds for revocation.10 However, in order to succeed on this ground, the Minister must clearly
identify the information which the charity has failed to keep, and explain why this breach justifies
the revocation of the charity’s registration.11
In order to determine the scope of the records that must be kept, “grounds for revocation”
should be examined. Other grounds for revocation include, in addition to failing to keep
necessary records:
(a) carrying on certain types of businesses;
(b) failing to expend, on its charitable activities and by gifts to other qualified donees,
amounts at least equal to the charity’s disbursement quota (or entering into
transactions designed to avoid this requirement);
(c) making a distribution by way of gift other than in the course of its charitable
activities or to a donee who was a qualified donee at that time;
(d) if an “ineligible individual” is a director;
(e) failing to file an information return for the year; or
(f) improperly issuing a gift receipt.12
These are the requirements for record-keeping for charities and the scope of the CRA’s powers
to audit charities and access these documents for the purposes of enforcing the requirements
for compliance under the Act. Next, we turn to how a charity may prepare for such an audit.
HOW TO PREPARE
All organizations, long before they are audited, should be prepared in the event that an audit or
other request for information arrives. The basic idea is to keep all the documents that tell the
financial and legal story of the charity, and have them organized in a manner that would allow
for, at least, the production and disclosure of the documents in a logical and timely manner.
Even better than simply having the documents organized and ready is having them and other
historical information of the charity arranged in such a way that the charity and its professional
9
Canada Revenue Agency, Pamphlet T411- Auditing Charities, (March 31, 2008), at 4.
10
Paragraph 168(1)(e) of the Act.
11
Prescient Foundation v. Canada (National Revenue), 2013 FCA 120, at 47.
12
Subsections 149.1(2) and (4.1) and 168(1) of the Act.
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advisors can use that raw material to craft a compelling narrative in a hurry if forced to by a
serious audit action.
This means everything, starting from the constitution and bylaws that set out the charity’s
purposes and rules for operation set out the purpose of the charity, in addition to other legal
requirements for operations within the charity. Invariably, this will be one of the first documents
the CRA will wish to see upon the beginning of an audit, and will often play a substantial role in
framing the audit. That is, the CRA will in many cases be auditing to determine whether a
charity has valid charitable purposes and that it is operating in accordance with its purposes.
When responding to accusations that the charity is not being operated in accordance with its
charitable purposes, the charity must, to effectively refute such accusations or characterization
of its activities, be able to relate each one of its activities to one of its specific charitable
purposes as set out in its constitution. One practice that will make it much simpler to respond to
a future audit is to document, at the outset of each discrete project or activity of a registered
charity, which specific charitable purposes of the charity the project or activity is meeting, with
reference to the constitution of the charity. This could be done in a project mission statement
document, minutes of the meeting establishing the project or internal memorandum, for
example.
In addition, the charity should ensure that it drafts, and keeps, those documents which both tell
and corroborate the legal and financial story of the charity’s activity. Some of these will be
strictly required under the obligation to keep proper books and records. Crucially, the charity
must keep copies of all the gift receipts issued. These can assist in tracking where the charity’s
resources have come from and also stand as key evidence in proving to the CRA that there are
no irregularities in the charity’s receipting procedures. In addition, keeping copies of all payroll
accounts and bank statements assist in tracking how the money of the charity has been dealt
with. Along the same lines, it is very helpful to have financial statements that show useful
information and the presentation of which is tailored to the charity’s activities. And finally, the
charity should be sure to draft and retain the minutes of board or members’ meetings, the
resolutions of the board, decisions taken outside formal meetings and all agreements entered
into by the charity. These documents tell the legal story of the charity and the more regularly
they are kept as a matter of principle, the more helpful they will be in proving to the CRA that a
charity is complying with the requirements of the Act – and in all cases, the closer a record is
created to the decision or activity it is documenting, the more persuasive it will be.
When demands for information are made, a charity might find that there are missing records or
missing important pieces of information. In particular, it might discover that not every corporate
action was properly undertaken (in a formal sense – that is, a decision of the board might not
have been made at a duly constituted meeting, or signatures may be missing on unanimous
consent resolutions, etc.). If there are significant gaps in the corporate records, it may be
prudent to pass an “omnibus resolution” which acknowledges the problems in the records,
confirms the charity’s continuing efforts to fix them and which indicates that the decisions
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undertaken in the resolution reflect actual past corporate actions to the best of the knowledge
and belief of the directors and members and that all such decisions are ratified accordingly.13
Organization of the required documents is also vital. The Prescient case, mentioned above,
involved an appeal against revocation by a charity, Prescient Foundation, which was involved in
a number of irregularities, including certain improper transactions and a donation to a US
charity. In addition to these irregularities, Prescient had been slow in responding to the inquiries
of the CRA and had not retained documentation with regard to the donation discussed above.
The Federal Court of Appeal found that Prescient’s registration could be revoked simply on the
basis of the poor maintenance of its books and records:
Though Prescient was remiss in maintaining proper records of the Farm Sale
Transactions, the CRA auditor was nevertheless supplied with a considerable amount of
information concerning these transactions which allowed her to understand both their
scope and their nature. In my view, it would not have been reasonable for the Minister to
revoke Prescient's registration on that basis alone. On the other hand, Prescient's failure
to maintain adequate records and books of account showing that its contribution to DATA
was made to an American charity, coupled with its failure to voluntarily and promptly
disclose this fact to the auditor, constitutes a very serious matter. Thus, both failures,
taken together, are sufficient, in the circumstances of this case, to conclude that the
Minister acted reasonably in revoking Prescient's registration on the ground that it had
failed to maintain adequate books and records.14
Presumably in this case the court felt that the lack of proper documentation was indicative of an
attempt to conceal facts, but nevertheless, this passage nevertheless illustrates the importance
of the ability to respond promptly and in a fulsome manner to the CRA’s audit requests. Had
Prescient maintained proper records and supplied them willingly, we could imagine a situation in
which the result may have been different – maybe the sanction applied would not involve
revocation.
The importance of keeping proper records becomes clearer with the knowledge that an appeal
against revocation must proceed directly to the Federal Court of Appeal15. These appeals are
based on written record only, and the materials placed before the CRA prior to the appeal will
form the body of “facts” placed before the court. That is, no new evidence is permitted. The
evidence is only that evidence that was before the Minister when the decision to revoke was
made. Further, the only way to successfully appeal the CRA’s decision in this area is to
demonstrate that the CRA’s conclusions were unreasonable.16 Without a coherent evidentiary
foundation to support the charity’s arguments at the audit stage, proving that the Minister was
unreasonable in revoking registered status can be an insurmountable challenge.
Finally, the ability to be transparent may be helpful, not only in preparing for an audit, but also,
perhaps, in precluding one. The CRA has recently adopted an approach to compliance that
13
Alexandra Tzannidakis, “Books and Records For Charities: Part III (What to Do about Missing
Records)”,
14
Prescient, supra at note 11, at 56.
15
Subsection 172(3) of the ITA.
16
Loba Ltd. v. Canada (Minister of National Revenue), 2004 FCA 342, at 2.
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evaluates the risk of the taxpayer. Specifically, it has said, at least in the business context, that
“[b]usinesses can lower their risk profile by being transparent and accountable and engaging
constructively.”17 The CRA is allocating its resources toward auditing the riskiest taxpayers, and
it stands to reason that a charity should do its best to avoid being such a taxpayer if at all
possible. A good way to do that is to show clean books the first time they are looked at.
So, as with all advocacy, preparing for an audit involves developing a compelling and truthful
story with regular and ample evidence (in this case mainly documentary evidence) to support
that story. Nothing is more persuasive to an auditor than a charity capable of placing its legal
and financial story, in the form of properly kept gift receipts, bank statements, accounts,
financial statements, board resolutions and other legal documents, at the hands of the auditor
upon request in a form that can be understood. It is to the actual audit process that we turn next.
THE AUDIT
The CRA engages in two primary types of audits: let’s call them the field audit and the office (or
“desk”) audit. The size and complexity of a charity’s operation will sometimes dictate the type of
audit chosen. Sometimes the nature of a suspected offence or irregularity will.
A field audit is conducted on the charity’s premises, while an office audit is conducted by the
Charities Directorate at CRA Headquarters. While an office audit usually only involves a review
of the information and documentation available in a charity’s file, including its governing
documents and financial statements, the field audit process is more detailed and usually
includes examining the charity’s ledgers, journals, bank accounts, expense accounts,
investments, agreements, contracts, governing documents, annual reports, minutes or other
records of board or staff meetings, and other documents that relate to the charity’s activities.18
Where a field audit is being conducted, paragraph 231.1(1)(d) of the Act requires that an owner
or manger of the property or business (or any other person on the premises) give the auditor all
reasonable assistance and answer all proper questions of the auditor relating to the audit.
The principles with regard to preparation for an audit do not change when the audit commences.
In fact, they intensify. At this point, the charity’s ability to tell a compelling story through its
financial and legal documentation is absolutely crucial. Transparency and organization remain
the best means of ensuring a smooth audit, but by this point it is too late to create the
documentary support. Rather, the task turns to organizing and managing it.
Generally, it is the right idea to get appropriate professionals (i.e. accountants and/or lawyers)
involved at the earliest opportunity when audits commence or other requests for information are
made that might be sensitive or lead to some audit or enforcement action, and in any event it is
certainly a good practice to have the response to the audit demands made or co-ordinated by
an outside professional such as a lawyer who has knowledge of the charity’s workings but who
17
Carole Benoit, Susan Betts, and Andrew Kingissepp, “Taxpayer Access to Government Papers and
Government Access to Taxpayer Papers”, an edited transcript of a panel discussion presented at the
2012 Tax Dispute Resolution, Compliance and Administration Conference (June 6, 2012).
18
Canada Revenue Agency, supra note 9 at 3.
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can be objective enough to focus the response on the compliance matters that will mean
something to the auditor and to the CRA, who speak a different language than charities do, for
the most part.
The central point of this paper, and the most important thing to remember when facing the audit
process, is that vis-à-vis the CRA, the most important thing, perhaps the only important thing, is
compliance. Many charities do important and difficult work of great social utility. That is not so
important to the CRA. The CRA will revoke or sanction charities that do great works but which
do not comply with their obligations under the Act, yet will register other charities of very limited
public interest or utility, provided that such charities comply with the terms of the Act of their
registration.
In other words, social usefulness or moral importance is not an effective answer to a question of
whether an activity of the charity falls within one of the four recognized heads of charity, or as to
whether sufficient documentation about receipting is kept or as to whether agreements with
foreign contractors reflect reality. Such questions are much more usefully approached by
supplying a narrative with evidence, submissions that look like a combination of a statement of
defence, the evidentiary record, as well as an appeal brief or factum. This document should be
put together by a lawyer working with the charity staff to craft a persuasive narrative that is
complete enough so that it will either persuade the auditor and CRA officials involved in the file,
or that it can be convincingly argued on appeal that it is unreasonable to revoke the charity’s
registration given the evidence before the Minister in the form of this narrative.
There may be circumstances where the charity feels that the auditor is not being completely
forthright about what the audit is about and what the stakes are. The auditor may be vague
about her requests or, later in the process, refuse to give any meaningful update as to how the
audit is progressing. In these circumstances, it may be best to begin with an informal request to
the CRA that they provide further information with regard to the progress of the audit or specifics
as to what precisely may be required.
In certain instances, something more than an informal request will be necessary. Andrew
Kingissepp notes in “Taxpayer Access to Government Papers and Government Access to
Taxpayer Papers”,19 a dialogue with the CRA and the Department of Justice, that “the manner in
which the CRA exercise its [audit] powers … is discretionary and is determined by the CRA
auditor in each case”. Needless to say, this does not give the CRA or its auditors license to
unfairly target a charity or to pursue it with undue aggression or malice, and the CRA’s policy
that “officials will always attempt to collect information from the most direct source in the least
intrusive manner possible”20 is not always followed.
Where it is expected that an incident along these lines is occurring, it may be best to initiate a
formal request for information under the Access to Information Act of Canada or the Privacy Act
of Canada. These statutes allow the charity or other taxpayer to access information drafted by
19
Ibid.
20
CRA, “Acquiring Information from Taxpayers, Registrants and Third Parties”, .
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government bodies, redacted to remove information about other taxpayers, about that charity
that may provide more fulsome knowledge as to the nature of the audit and, if any exists, reveal
any bad faith of the auditor or department.
Such requests to the CRA are made using the RC378 “Access to Information and Personal
Information Request Form”. These may be drafted broadly, such as:
We would like to request any and all documentation on file with respect to Health and
Love Charity Society, including all documentation using the name “Health and Love” or
“Charity Society”, and including, but not limited to, all audit reports, T20s, records of
conversation both internal and external to the Canada Revenue Agency, and electronic
records, for the period beginning January 1, 1957 to the present date.
Or in a more limited fashion:
We would like to request any and all e-mails and internal communications of the Canada
Revenue Agency on file relating to the most recent audit of the Health and Love Charity
Society.
The broader the scope of the request, the more expensive it will be to have the CRA process it;
however, the more limited, the more likely it is that an important document may be missed. In
our experience, it is best to begin broadly. If the request turns up a large number of documents,
the CRA will notify the charity and ask if it would like to narrow its search. It is at this time, if
necessary, that the scope of the request should be limited.
In circumstances where the CRA is demanding documents that the charity refuses, or is unable,
to provide, the CRA may initiate a proceeding under subsection 237.1(1) to compel compliance.
In these circumstances, when all that can be done by the charity has been undertaken, and
perhaps the records simply do not exist or cannot be found, the charity has a due diligence
defence.21
Finally, if the result of the audit is incorrect in the estimation of the charity, it may file an
objection under subsection 168(4) of the Act, addressing it to the Assistant Commissioner,
Appeals Branch of the CRA. If this objection is not accepted, an appeal may be initiated.22 As
noted above, the appeal must proceed directly to the Federal Court of Appeal, and will be based
on written record only. The materials placed before the CRA prior to the appeal will form the
facts placed before the court – again, a compelling reason on its own to spend the time and
money necessary to put together the submissions to the auditor with the same care as one
would put together a factum and evidentiary record for an appeal court in a different context.
21
See, for example, Canada (National Revenue) v. CD²I Coopérative de Services en Développement
International, 2009 FC 820.
22
Subsection 171(3) of the Act.
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PRIVACY AND PRIVILEGE
As noted earlier, the charity does not have a very strong claim to privacy in the midst of an
audit.23 There are a few, but not many, basic privacy afforded to taxpayers at law. These
preclude warrantless intrusions into a person’s dwelling and access to privileged information.
However, as was recently discovered by the Redeemer Foundation in a Supreme Court of
Canada case cited above, there is no protection in the course of an audit afforded to
documents, such as donor lists, containing the information of third parties.
In Redeemer, the CRA requested that the Redeemer Foundation provide information about the
identity of its donors in the course of an audit primarily concerning a forgivable loan program
which appeared to be offside the requirements of the Act in providing a private benefit to certain
donors. There was no question that the CRA had the power to request such information under
section 231.2 of the Act, but the question in this case was whether the CRA could require that
this information be given in the course of an audit which is initiated under subsection 231.1(1) of
the Act.
The conclusion in this case was that the section 231.2 information request will only be
necessary in the course of an audit of a charity where the situation is such that the requested
information is not required in order to verify the compliance of the taxpayer being audited. If this
information would be required in order to determine compliance, nothing should prevent these
documents from being handed over in an audit initiated under subsection 231.1(1):
Regardless of whether or not there is a possibility or a probability that the audit will lead
to the investigation of other unnamed taxpayers, the CRA should be able to obtain
information it would otherwise have the ability to see in the course of an audit.24
The result is that if, in the course of an audit, documents are requested of a charity which reveal
personal information about third parties, one should consider first whether the requested
documents are relevant to the audit, and if so, these should be provided to the CRA.
A minor limitation on the CRA’s investigative powers is the requirement that they obtain a
warrant in order to enter a person’s “dwelling-house” for the purposes of an audit. In order for a
warrant to be obtained successfully, there must be reasonable grounds to believe that the
house is a place of business or where property, books or records of the charity is being kept,
entry into the house is necessary for the enforcement of the Act and entry into the house has or
will likely be refused.25
Where documents which are subject to legal privilege are requested, a charity is under no
obligation to disclose them—and if the CRA insists, there are procedures in place for ensuring
that privilege is upheld without any detrimental effects to the charity. Commonly, in a charities
context, privileged documents will generally fall under the categories of those protected by
solicitor-client privilege or by litigation privilege.
23
Redeemer, supra at note 4, at 25.
24
Ibid., at 22.
25
Subsection 231.1(3) of the Act.
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Litigation privilege is straightforward and can be summed up for present purposes as
communications related to ongoing or reasonably contemplated litigation the dominant purpose
of which is related to that litigation.
Solicitor-client privilege is the privilege that protects certain communications between a person
and his or her solicitor. In order for a record or communication to be privileged, it must be oral or
written communication of a confidential nature between a client (or his or her agent) and a legal
advisor (or his or her agent), including in-house counsel, and the communication must be
directly related to the seeking, formulating, or giving of legal advice.26 That a person’s
communications with her legal advisor are to be permanently protected from disclosure except if
that client chooses to waive protection is a fundamental legal right,27 and at the heart of this
right is the concept that people must be able to speak candidly with their lawyers so as to
enable their interests to be fully represented.28
Not every item of correspondence between a solicitor and a client is automatically subject to
privilege. Records which are purely factual are not privileged because they are not
“communications” as such.29 Examples of this may be legal bills or accounting records.
However, the courts have also recognized that there is a “continuum of seeking or giving legal
advice such that privilege [may attach] in the particular circumstances even though the
document itself does not incorporate specific legal advice.”30 For example, in the Supreme Court
of Canada decision R. v. Fink,31 the court noted that the name of the client, an inherently factual
piece of information, may be protected by solicitor-client privilege. And in Donell v. GJB
Enterprises Inc.,32 trust account ledgers were found to be potentially privileged if they could be
used to deduce communications protected by privilege. The crux is that the question of whether
a record or communication is subject to privilege is fact-specific and will depend not only on the
nature of the record or communication itself, but also on the surrounding circumstances.
Charities should be aware that this privilege can be waived if the holder of the privilege is aware
of the existence of the privilege and shows that she voluntarily intends to waive that privilege.33
Additionally, in certain circumstances, waiver has been implied even where express intention is
not present, but there is some limited manifestation of a voluntary intention to waive privilege.34
For example, should a director of a charity who is generally aware of the existence of solicitor-
client privilege provide a legal memo to the CRA in order to demonstrate his or the charity’s
bona fides, this will certainly waive privilege over this document if the audit develops into a legal
26
British Columbia (Securities Commission) v. C.W.M., 2003 BCCA 244, at 46
27
Descoteaux v. Mierzwinski, [1982] 1 S.C.R. 860, at page 873.
28
Regina v. McClure, [2001] 1 S.C.R. 445, at page 449.
29
Wirick (Re), 2002 BCSC 1355.
30
British Columbia (Securities Commission) v. B.D.S., 2002 BCSC 664, at 17.
31
2002 SCC 61, at 28.
32
2012 BCCA 135, at 64.
33
S & K Processors Ltd. V. Campbell Avenue Herring Processors Ltd. (1983), 45 B.C.L.R. 218, at page
220.
34
Great Atl. Ins. Co v. Homes Ins. Co., [1981] 1 W.L.R. 529.
4977935.0313 Riley R. Burr and Jonathan J. N. Wright
Bull, Housser & Tupper LLP
proceeding, and may result in the requirement to disclose related documents over which the
director did not intend to waive privilege.35
In circumstances where the auditor has requested a document which a charity suspects is
subject to privilege, the process to be undertaken, as prescribed by subsection 232(3.1) of the
Act is to place that document in a sealed package and retain it until it is produced to a judge in
order to obtain an order with regard to the status of the document. This provision refers only to
potentially privileged “documents in the possession of a lawyer”, but since solicitor-client
privilege is a common law right, it is likely that the CRA would be compelled by a court to extend
the procedural protections under this section of the Act to situations where such a document is
requested of a charity.36
CONCLUSIONS
Though an audit can be a very unpleasant experience, the pain can be lessened by due
preparation and documentation. Before an audit and near its commencement, the auditor’s
understanding of the charity’s situation will not be nuanced, and she will be looking for warning
signals. Reticence or apparent disorganization, whether real or for ulterior motives, will be a
trigger for an auditor and has the potential to turn what might have been a routine audit into a
witch hunt or wild goose chase.
Instead, the best advice for the charity that has been complying or which wants to comply with
the Act is to have the legal and financial documentation in place to be able to tell a compelling
and truthful story of its good intentions and careful practices in attempting to comply with the
Act. Be responsive and helpful so far as it is possible, while at the same time taking steps to
ensure that the CRA does not itself cross the boundaries set for it in the Act. And where the
required documentation is simply not available, being as open and transparent as possible
should ensure that the consequences of these deficiencies are minimal. If the unthinkable
happens and the CRA’s decision is to revoke the charity’s registration, the appeal process is
available as a final recourse, but there is so much that can be done before matters escalate to
that level that will make it easier for the CRA to permit a charity to repair and correct
deficiencies and non-compliance than for it to bring out the hammer of revocation.
35
Though a more nuanced approach was taken in similar circumstances in the British Columbia Court of
Appeal case of Power Consol. (China) Pulp Inc. v. B.C. Resources Invt. Corp., 32 B.C.L.R. (2d) 320.
36
Lisa Heddema and Grant Russell “CRA Requests For Information Under the Income Tax Act: A Review
of Sections 231.1 and 231.2”, 2008 BC Tax Conference.
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