Income Tax Act Revisions Impose New Requirements on NSO Directors

Published April 5, 2012

We last wrote about RCAAAs (Registered Canadian Amateur Athletic Associations) in February 2012, noting that recent changes to the Income Tax Act have placed RCAAAs on the same footing as mainstream charities in terms of their legal obligations. As we learn more about the legislative changes, new wrinkles continue to emerge that will impact NSOs in Canada.

Under section 126 of the new Not-for-Profit Corporations Act (now in effect, and to which all NSOs and MSOs must transition before October 2014), a director of a corporation has to meet certain qualifications. Directors must be of legal age, they may not have been declared incapable by a court in Canada or another country, and they may not have the status of a bankrupt. The bylaws of many NSOs incorporated under the Canadian Corporations Act currently use similar language to define the pre-requisites to be a director.

The revisions to the Income Tax Act have added stricter provisions for NSOs that are also RCAAAs. In essence, they are being held to the same high standards of all charities. For example, RCAAAs must now have the promotion of amateur athletics in Canada on a nationwide basis as their exclusive purpose and function, and must devote all of their resources to that purpose and function. Previously, it was sufficient for a RCAAA to have amateur sport as its primary, rather than exclusive purpose.

The Income Tax Act revisions also set a clearer standard for the conditions that could lead to revocation of charitable status (note that in recent years a handful of NSOs have had their charitable status revoked – we wrote about this in 2008). The Income Tax Act states that the Minister may revoke the registration of a RCAAA for, among other things, having an “ineligible individual” as a director, trustee, officer, or like official of the organization, or who is in a position of controlling or managing the association, directly or indirectly, in any manner whatsoever.

The interesting provision here, and a new one for sport organizations, relates to this eligibility requirement of directors. Under the Income Tax Act, an “ineligible individual” is:

• Someone who has been convicted of a ‘relevant criminal offense’
• Someone who has been convicted of a ‘relevant offense’ in the past five years
• Someone who has been a director, trustee, officer, or held a similar position with a charity or RCAAA that in the past five years either, a) engaged in conduct that breached the requirements for RCAAA registration, or b) had its registration revoked
• Someone who has managed or controlled, directly or indirectly, a charity or RCAAA that in the past five years either, a) engaged in conduct that breached the requirements for RCAAA registration, or b) had its registration revoked
• Someone who has promoted a tax shelter that involved a charity or RCAAA

A ‘relevant criminal offense’ and ‘relevant offense’ are defined as crimes and offenses that would be relevant to the operation of the organization (such as fraud, tax evasion, theft, and financial dishonesty).  These offenses do not necessarily need to have involved the sport organization – they can be offences that are particular to the individual in his or her personal capacity or his or her professional and business pursuits outside of the sport domain.

This is a critical new requirement for board members of NSOs/RCAAAs. Under not-for-profit legislation, it is only necessary that a director not be underage, legally incapable, or bankrupt. It would be readily apparent to most casual observers if a director was any of these things. It is quite a different matter to know whether a director’s previous business or personal dealings may have rendered him or her “ineligible” to be a director of a RCAAA under these new requirements. The NSO assumes a significant risk of having charitable status revoked if it does not take reasonable steps to ensure its directors are not ineligible.

Our recommendation to NSOs that are RCAAAs is to make sure you know the history of your board members. A prudent approach is to advise all potential directors of these requirements and to seek a declaration as to their eligibility prior to their election, and consider having them make an annual declaration stating that they continue to remain eligible to be a director of the organization. Such a statement could even be combined with the directors adhering to a more comprehensive conflict of interest policy. The organization would be entitled to rely upon the representations made by a director as to their eligibility, and getting this in writing would help the NSOs to make its case that it was diligent in screening directors.

Such declarations might appear onerous, but since the NSO’s status as a registered charity is at stake, these are measures definitely worth taking!