Charities and Non-Profit Organizations (NPOs) rely on public donations, grants, and government funding, which makes them accountable. To ensure transparency in how funds are used, the Canada Revenue Agency (CRA) has set specific financial reporting and assurance requirements that charities must meet to maintain their charitable status. Considering that charities have limited resources, reporting and review requirements are less stringent for smaller charities and more stringent for bigger charities with higher revenue.

Charities should know their federal and provincial reporting and review requirements and follow the more stringent one. Failing to do so can have serious repercussions and, in the worst case, lead to revocation of charitable status.

In this article, we will cover the CRA’s general rules. However, charities should consult a professional accountant specializing in NPOs for guidance on updated requirements and what applies to their situation.

CRA’s Generic Reporting Requirements for All Charities

The CRA regularly updates reporting requirements to ensure donations and grants are used for the right cause. At present, all registered charities in Canada have to comply with the following reporting requirements:

• File the Annual T3010 Registered Charity Information Return within six months of the fiscal year-end.
• The return includes financial statements prepared using recognized accounting standards.
• Properly document all revenue and expenses.
• A detailed report on programs and activities.

Professional accountants review and audit these documents, depending on the charity’s revenue. Revenue includes donations, grants, program revenue, and investment income.

Newly registered charities filing their first T3010 returns base their financial statements on projected revenue. This makes it difficult to determine their level of assurance. Since many charities start with minimum revenue, they use Compilation Engagement in the first year and are closely monitored by the CRA. Hence, it is important to stay up to date on your reporting and reviews from the first year.

CRA’s Revenue Threshold Requirements

While we are on the topic of assurance engagements, there are three levels of assurance – Compilation, Review, and Audit – each stricter than the other.

Compilation Engagement for Charities with Revenue Under $250,000

The CRA requires charities with annual revenue under $250,000 to have their financial statements compiled by an accountant with relevant experience. In this compilation engagement, the accountant does not independently verify the numbers or provide assurance about the information in the financial statements. They simply compile the information in the method suggested by the CRA.

Review Engagement for Charities with Revenue Between $250,000 and $1 Million

A CPA (Chartered Professional Accountant) with a valid public accounting license in the province where the charity is located must conduct the review engagement. The CPA must be independent of the charity being audited, meaning they should not be a board member, employee, or have any financial interest in the charity. They should have professional liability insurance.

The licensed CPA will review the charity’s financial statements using analytical procedures and inquire about certain numbers. However, they would not extensively verify the underlying evidence.

Audit for Charities with Revenue Over $1 Million

Large charities must have their books audited by a licensed CPA. Here, the auditor will independently verify each piece of financial information by gathering relevant evidence. They will also test a few transactions and offer the highest level of financial assurance.

Special Audit

Apart from the revenue threshold, the CRA imposes additional audit requirements under certain circumstances:

Charities receiving government grants: Such charities must have their annual financial statements audited regardless of revenue. They must separately audit the programs that received the grants, conduct a compliance audit of fund use, and report program outcomes and deliverables.

Charities operating internationally: The CRA requires such charities to provide detailed financial reports and audits of their international activities, including money transfers, and program outcomes. Auditors will verify whether the funds reached the right beneficiaries and were used for the right purpose. As a result, charities should maintain detailed records of partnership agreements, transfer documentation, and activity reports. They must also conduct due diligence on foreign partners and implement anti-terrorism compliance measures.

How Charities Can Prepare for an Audit

An audit is a tedious process and can be overwhelming if you do not maintain proper documentation. Although a normal audit takes 15 to 30 days, it can take longer depending on the complexity of the transactions being audited.

Set the date: To smooth out the audit process, contact an accounting firm and schedule charity audits in the spring and fall. Assign a person to represent your charity and give the auditor access to all financial records, staff, and any other information they need.

Prepare documents: The auditor’s main objective is to trace all transactions to their origin. Prepare documentation accordingly.

• Start with bank statements and reconciliations for all accounts that were used to compile your financial statements.
• Next, prepare supporting documents such as donation receipts and donor records, expense receipts, and approval documentation.
• The third layer is minutes and resolutions of Board meetings, vendor agreements, grant agreements and funding correspondence.

Charities should maintain financial records for at least seven years.

Special attention is paid to related-party transactions, such as board members providing services to the charity, a charity buying goods from a director’s store, or a director or employee giving or taking loans. The auditor wants to ensure the transactions were conducted at fair market value, used for legitimate charitable purposes, and approved by the board.

The Audit: During the audit, the auditor will request specific documents, interview key staff and board members, visit the charity’s premises, test internal controls, and ask questions about specific transactions. They will prepare an auditor’s report and management letter stating areas for improvement, even if no major problems exist. Charities should implement these recommendations to prevent future issues.

Penalty for Non-Compliance with Review Requirements

If charities fail to comply with auditing and reporting requirements, the CRA will send a compliance letter outlining the discrepancies, request additional information, and extend filing deadlines with warnings. Failure to comply with the CRA’s initial response will lead to:

• Financial penalties up to $500 per day for late filings
• Suspension of the privilege to issue tax-saving donation receipts
• A compliance audit by CRA auditors
• Public listing on the CRA’s non-compliant charities list

In the worst-case scenario, the CRA may revoke charitable status. Such organizations lose their registration and have to pay revocation tax on remaining assets. The revocation will appear on the CRA’s website, damaging the organization’s reputation and fundraising ability.

Charities can avoid this by filing returns on time, conducting audits, and responding to the CRA’s letters. Even if you are late, file the returns as soon as possible to prevent escalation.

Contact Glenn Graydon Wright LLP in Oakville to Help You with Reporting and Assurance Needs

At Glenn Graydon Wright LLP, our accountants and bookkeepers can provide services such as tax filing, compilation, review, and audit services. To learn more about how Glenn Graydon Wright LLP can provide you with the best accounting and NPO assurance services, contact us today at 905-845-6633 or connect with us online to set up an initial consultation.