Study Notes for Financial Reporting and Regulatory Compliance (Module 3)

Course and Module Information

  • Course Title: Financial Reporting and Regulatory Compliance

  • Module: 3

  • Topic: Financial Policies & Internal Control Measures

Section A: Internal Controls

Purpose of Internal Controls

  • The primary purpose of internal controls is to protect contributions from church members and other contributors.

  • Begins with appropriate procedures for collecting and counting funds during church services and events.

Setting Up a System of Internal Controls

  • Each church or nonprofit is unique; therefore, financial leaders must design systems tailored to their specific needs.

  • Important aspects:

    • Separation of Duties:

    • One individual should not handle all financial functions (e.g., counting offerings, making deposits, recording contributions).

    • Lack of separation can lead to concealment of wrongdoings and damage to the reputation of individuals involved.

Financial Activities in a Church/Nonprofit

  • Three basic types of financial activities:

    1. Authorization of transactions

    2. Recording of transactions

    3. Custody of assets

Internal Controls for Contribution Collection, Deposits, and Data Entry

Safeguarding Cash Receipts

  • Critical to protect contributions collected during services and received by mail.

Contribution Collection Procedures

  1. Encourage Envelopes:

    • Forms a written record and protects offerings until counted.

    • Assists in making the contribution entry process faster.

    • Encourage the use of checks or online giving to reduce theft.

  2. Usher Procedures:

    • Ushers must know the number of collections in advance.

    • No change should be given from collected funds; bags must be stored securely.

  3. Counting Contributions:

    • Should happen immediately after collection.

    • Perform counts with two unrelated individuals from a counting committee.

    • Rotate counting responsibilities frequently.

Recording Cash Receipts

  • Proper accounting begins with contribution counters:

    • Use a count sheet to record contributions, their purpose, and the means (check number or cash).

    • Ensure the amount on envelopes matches the cash inside.

    • Endorse all checks with "for deposit only".

Internal Controls for Disbursements

  • Disbursements must be:

    • Documented with a disbursement/check request form, signed by an approving official.

    • Paid using serially numbered checks rather than cash.

    • Inspected by two authorized signers who check the requests and supporting documentation.

    • Promptly posted to the General Ledger, including details like date, payee, amount, purpose, and check number.

    • Retained securely.

Internal Controls for Check Writing

  • Require two signatures on checks and define authorized signers.

  • Prohibitions include:

    • The individual preparing the checks must not sign them.

    • Signing blank checks or checks made to “cash” is not allowed.

    • Blank checks must be physically secured, and inter-bank transfers need to be authorized.

Section B: Compliance

Annual Charity Returns Requirements

  • Must be filed within six months after the year-end along with necessary financial statements:

    • Form T3010: Registered Charity Information Return

    • Form TF725: Registered Charity Basic Information Sheet

    • Form T1235: Directors/Trustees and Like Officials Worksheet

    • Form T1236: Qualified Donees Worksheet / Amounts Provided to Other Organizations

    • Include financial statements of the charity and certification from a director or trustee.

Taxable Payments

Implications

  • Honorarium payments (over $500) to residents and non-residents are taxable; for non-residents, 15% withholding tax must be applied at payment time.

  • Allowances/salaries to pastors, employees, or deemed employees are taxable.

  • Benefits provided to pastors and employees are also taxable.

Reporting and Filing Requirements

  • Report honorarium and allowances for residents through T4A slip.

  • Report payments to pastors/deemed employees through T4.

  • Report honorariums and allowances paid to non-residents through T4A-NR slip.

  • All filings must be completed by February 28 of the following year.

Remittance Due Dates and Payment Options

  • New or Regular Remitter (>$3,000 & < $25,000): due before the 15th of the month after deductions.

  • Quarterly Remitter: due before the 15th of the month after each quarter (April 15, July 15, October 15, January 15).

  • Payment methods include electronic payment services offered by CRA or others.

Taxable Payments: Clergy Benefits

  • Deduction for residence depends on whether the parish provides it:

    • If provided: deduction equals the amount included in income as taxable benefit.

    • If not provided: deduction equals the lesser of:

    1. Total remuneration

    2. One-third of total remuneration or $10,000 (whichever is greater)

    3. Rent paid (including utilities, or fair rental value for owned homes).

  • To claim these deductions, file with a prescribed form signed by the employer.

GST/HST: Rules

Applicability to Charities

  • Most supplies made by charities are exempt from GST/HST.

  • Charities must register for GST/HST only if they make taxable supplies or choose to do so.

  • If registered, they must follow the net tax calculation rules for charities.

  • Restricted ITCs: only claimable on certain items pertaining to commercial activities exceeding 50% use in those activities.

  • Charities can claim a public service bodies' rebate to recover a percentage (50%) of GST paid on eligible purchases, subject to exceptions.

Claimable GST/HST Paid

  • Eligible purchases include:

    • General operating expenses like rent, utilities, administration expenses.

    • Allowances and reimbursements to employees.

  • Cannot claim rebates for purchases made for personal use by officers, employees, or members.

Filing of HST/GST Rebate

  • Use Charity number as GST/HST account number for claims.

  • Obtain the GST/HST rebate form from the CRA website.

  • Filing deadlines:

    • Registrants can claim rebates up to four years from the due date of their GST/HST return.

    • Non-registrants have until four years from the last day of the claim period.

  • Claim periods for registrants align with accounting periods and can file monthly, quarterly, or annually. Non-registrants file semi-annually.

Questions and Answers

Question-1

  • Scenario: During the April 15, 2024 meeting of the Board of Trustees, it was questioned why the Annual Charity returns were not filed.

    • a) False - The parish is required to file Annual Charity Returns as registered charity.

    • b) False - The Returns are due on or before June 30, 2024.

    • c) True - The Returns being reviewed will be filed by the June 30, 2024 due date.

    • d) False - Previously, the zonal office does not include the parish information in filed returns for 2022.

Question-2

  • Scenario: An amount of $2,500 meant for welfare is discussed among parish ministers.

    • Arguments:

    • Dcn Mark believes documentation and a T4A should be issued.

    • Dcn Ruth argues it is not taxable and no tax slip should be issued.

  • Conclusion Based on Income Tax Act:

    • Social assistance payments, while not taxable, still require a T4A to be issued for the member, selecting the non-taxable box.

    • Proper documentation is necessary.

Conclusion

  • Financial leaders must establish robust internal controls, ensure compliance with regulatory frameworks, and manage taxable payments correctly to maintain operational integrity and uphold the organization’s reputation.