Under the Microscope in More Ways than One!

It seems that everywhere we turn, not for profits and charities are being put under more and more scrutiny. Whether this is warranted or not remains up for debate but rest assured, this level of oversight is not about to let up any time soon.

While some of the scrutiny is well-known at this point, there are other new measures lurking on the horizon. These will be frustrating and will cause organizations to expend valuable time and energy in order to comply.

Below is a summary of the recent requirements that are now in effect, and a new area (potential changes to accounting standards) that is making its way through the system.

Canada Not for Profit Corporations Act – Deadline fast approaching
As readers are aware, federal charities and not for profit corporations have until October 17, 2014 to file their Notice of Continuance documents or face potential dissolution. At last check, only about 30 percent of organizations had completed their filing! To encourage organizations to ensure they meet the deadline, Corporations Canada has recently begun to make courtesy calls to those organizations that have yet to file. If you have not filed, you can expect to get one of these calls in the near future.

Ontario Not for Profit Corporations Act – Delayed
After much hype and activity, the ONCA has been further delayed due to the June provincial election. Present expectations are that this legislation will not come into effect until 2015 at the very earliest and more likely not until 2016.

Canada’s Anti Spam Legislation – Comes into effect July 1, 2014
The much-maligned federal legislation covering commercial electronic messages (CEMs) comes into effect in just three weeks. The impact on not for profits could be profound with the need to re-subscribe their email distribution databases, eating up time and potentially resulting in drastically smaller distribution lists. With three years to become fully compliant, and potentially huge penalties for non-compliance, this legislation will be something to pay attention to.

Canada Revenue Agency (CRA) - Not for Profit Risk Identification Project
Launched in 2009, this project looked at 1,337 not for profit organizations that were claiming tax exemption status, to determine if their activities were in compliance with the rules. The results of this project were released earlier this year. A large number of the organizations were found to not be in compliance with the Act, primarily due to engaging in activities that were deemed to be for-profit. While CRA states that they have always allowed not for profits and charities to earn a profit, that profit must be incidental to and must result from activities that contribute to the primary purpose of the organization.

What this means going forward is that we can expect CRA to be more vigilant in cracking down on charities and not for profits that are showing substantial surpluses on their financial statements.

Some of the things that may trigger a CRA audit of a not for profit or charity include:

  • Large cash reserves which are used for investment – the generation of interest revenue is seen as a profit-making enterprise
  • Budgets which forecast surpluses on a consistent basis
  • Indications that members are receiving personal benefits from the organization

While not connected directly with the Risk Project, here are some other potential CRA audit triggers for a charity:

  • High proportional administrative costs to receipted revenues
  • High proportional fundraising costs to receipted revenues
  • Leveraged donations
  • Improper receipting practices
  • Complaints or bad publicity
  • Failure to keep proper books and records

Accounting Standards for Not for Profit Organizations – Potential Changes
We suspect that no one is aware of this initiative. We believe it has the potential to cause some major headaches for not for profits and charities, including sport organizations.

In 2012, all organizations actually underwent a change in accounting processes, which most people outside of employees in the accounting department, bookkeepers or auditors probably didn’t notice.

Now, there is a movement afoot to further change the ways that organizations record and report their finances. Financial Reporting and Assurance Standards Canada has been working with its international counterparts to realign the reporting requirements of not for profits and charities so that there is greater comparability between organizations both nationally and internationally. Some of the proposed changes will have significant impacts on financial statements. Unless the proposed changes are amended, they are expected to come into effect in 2015.

Some of the more critical changes currently being recommended are:

  • The deferral of revenues to match with expenses will no longer be permitted. In the past, if an organization received funding late in their fiscal year for a project whose expenses would be incurred in the following fiscal year, the organization could defer recording the revenue until the following year so that the revenues and expenses matched up. This prevented there being a substantial surplus in one year followed by a substantial loss in the subsequent year. The proposed change would no longer allow this deferral to take place. All revenues would have to be recorded in the year they were received regardless of when the corresponding expenses take place. The impact of this is that financial statements may be more difficult to interpret as a means of overall stability of the organization and potential funders and other stakeholders may misinterpret the surplus or loss.
  • The internal restriction of funds will not be permitted. Some organizations segregate specific funds for capital projects or special projects so that those funds are seen separately on the financial statements and not grouped in with general operating funds. This segregation enables readers to quickly see what funds the organization has available for ongoing programming and operations. Disallowing this segregation means that all funds will be grouped together regardless of what they may be committed for.
  • Expenses will need to be reported in three ways rather than just one as is currently allowed. Most organizations report expenses on the income statement by either function (administration, programming, salaries) or by program (Coaching, Team, Events) or some combination of the two. Under the new standards, organizations will have to report by both function and program on the income statement AND report by object (rent, supplies, airfare, hotel etc.) in the notes to the financial statements. This represents a significant additional accounting burden for all organizations.
  • Organizations with revenues under $500,000 will no longer be able to write off capital purchases in the year they were purchased. All organizations regardless of size will need to keep a log of all equipment and assets purchased valuing more than $500 and record depreciation annually. This represents an additional administrative burden for small organizations.

Other changes to the standards are also in the works with respect to arms-length organizations and consolidated financial statements.

As we said at the beginning, the microscope under which not for profits and charities find themselves is likely to only get stronger over the coming months and years.

If you have any questions about any of the above changes, please feel free to contact Kathy Hare at KEH@sportlaw.ca

Recent Posts

From Efforting to Activating… Reframing through the MIN-MAX Principle

Lightening our Load

Understanding the psychology of loss...why we must do better.

Sport Law and NOVA Global Inc Strike a Partnership to Support Sport Leaders

Generative Tension


Sign up to our newsletter.
Let's resolve your challenges and realize your vision