Compensation Cap for Charity Employees

Kate Lazier, Toronto

A recent private members bill introduced by Albina Guarnieri, Member of Parliament for Mississauga East, would give the Canada Revenue Agency the discretion to revoke the charitable status of a charity where it pays a single executive or employee annual compensation over $250,000.  The threat of revocation would effectively deter charities from paying salaries and benefits over this cap.  The proposed legislation would also allow the CRA to publish the name, job title and annual compensation of each charity’s five highest paid employees and executives.  If passed, the legislation would be effective in 2011 and onward.

As this is a private members bill, no consultation was undertaken with the public or the charitable sector as to the content or impact of the proposed legislation.  

Salary Cap

For many charities, the salary cap will not be an issue.  Charity employees are often paid less than their counterparts in the for-profit sector.  Other than a few isolated cases of high salaries which have been published by the media, it is not clear that charities are paying inappropriate salaries.  The directors of a charity are usually unpaid volunteers.  The directors have a fiduciary duty to ensure the charity’s funds are expended appropriately, and as part of this responsibility the directors oversee the salaries paid to employees.  The charity’s directors consider the employee’s level of responsibility, the labour market and make compensation decisions.  Some larger charities, including hospitals and universities, often need to pay higher salaries to attract skilled and experienced individuals.

The compensation cap raises several issues.  Will charitable institutions need to break existing employment contracts?  Will large charities be able to find qualified staff members willing to accept lower salaries?  Will charities need to split up the responsibilities of existing jobs into several jobs to attract qualified people willing to work for the lower salary?  Will the cap encourage charities to reduce their size and lose economies of scale?  These issues should be considered before any legislation is passed.

Transparency

As for the disclosure of salaries, the T3010B Charity Information Return currently requires charities to indicate the pay range of their top 10 highest paid employees.  The return includes 9 ranges from under $39,999 to over $350,000.  Thus, donors currently have access to information about employee salaries.  This new proposal would provide the exact amount within the range, the name of the individual receiving the compensation and the individual’s title.  While transparency in the charitable sector is generally desirable, where the salaries are modest, the proposal to disclose individual salaries may be an unnecessary disclosure of personal information.

We will update you on the status of Bill C-470 as it proceeds.

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What Counts as a Donor Benefit? A Recent Case on Scholarships

Andrew Valentine, Toronto

In January 2010, the Tax Court of Canada released its decision in Coleman v. M.N.R.  The case provides guidance on the approach that courts will take in determining whether a benefit has been received by a donor in respect of a charitable donation.  Although the case was decided in the pre-split receipting context, it is likely that this decision will be used as a basis for determining when an advantage has been received by a donor in respect of a donation under the split-receipting rules.

The Coleman case considered certain donations made to a charity which provided scholarships to students at a Christian university.  The donations in question were made pursuant to a scholarship program promoted by the charity.  Under the terms of the Program, students were required to fundraise on behalf of the charity in order to be eligible for a scholarship or bursary.  The scholarship amounts given to students were in part a function of the amount of funds raised by those students – the greater the amount raised by the student, the greater the available scholarship (provided that the student otherwise met certain academic and financial criteria).  Students were encouraged to solicit donations from family and friends.  At issue was whether donations to the charity from relatives of students who had fundraised through the Program, and who subsequently received scholarships from the charity, constituted gifts which could be receipted.

As the donations in question preceded the introduction of the split-receipting regime in the Income Tax Act, the Court analyzed the donations according to the common law definition of gift, which requires that no benefit flow to the donor in respect of the gift.  The Court canvassed earlier case law which addressed whether donations to religious schools by the parents of students at these schools gave rise to a benefit which vitiated the gift.  The Court identified three principles from these cases which apply to the determination of whether a benefit has been received:

• The benefit to the donor need not arise as a result of meeting a legal obligation
• Anticipation of a benefit may be sufficient to deny a gift
• There must be a connection or link between the donor’s payment and the benefit

The Court then indicated that a two-step inquiry will apply to determining whether a benefit has been received.  First, the Court must identify the benefit in question (which must be quantifiable and cannot consist purely of “moral satisfaction”).  Second, the Court must analyze the strength of the link between the benefit and the donation.  The Court identified several factors which will go to determining the strength of the link:

• Is there a relationship between the donor and the ultimate beneficiary?
• Is there any correlation between the amount of the donation and the amount received by the beneficiary?
• What are the circumstances surrounding the donation?  In particular:
  • What did the donor know or expect would happen to the donation?
  • What did the beneficiary know or expect would happen to the donation?
  • What did the charity know or expect would happen to the donation?
  • What was the donor’s intention?
  • How was the amount of the donation determined?
  • How was the money donated?
  • Was the donor under any moral or legal obligation to the beneficiary?
• Did the donor have any control over the charity’s use of the money?

Applying these criteria in this case, the Court held that there was a sufficiently strong link between the donations and the (scholarship) benefit such that the donations to the charity by donors related to students who received scholarships under the Program did not qualify as gifts.

This case provides insight into the approach that courts may take when determining whether a donor benefit exists in respect of a gift.  It is also reasonable to expect that a similar analysis may apply to analyzing whether an advantage has been received in respect of a gift under the split-receipting rules.  The case also indicates, consistent with other case law in this area, that courts will take a relatively expansive view of donor benefits.

Charities and donors who are uncertain whether a charitable donation gives rise to a benefit or advantage should consult legal counsel before issuing or claiming donation receipts.

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HST Primer for Charities and Non-Profits

Katherine Xilinas, Toronto

Ontario and British Columbia will be “harmonizing” their provincial sales tax with the GST, effective July 1, 2010.  Instead of a 5% GST and 8% Retail Sales Tax (Ontario) or 7% Social Service Tax (B.C.), there will be a single Harmonized Sales Tax of 13% in Ontario and 12% in B.C.

Generally, HST will apply to consideration that becomes due, or is paid without having become due, on or after May 1, 2010 and before July 1, 2010 on goods and services supplied on or after July 1, 2010.  The supplier will account for HST collected in its GST/HST return for its reporting period that includes July 1, 2010 and, to the extent that the recipient is eligible to claim input tax credits (ITCs), the recipient will claim such ITCs in its GST/HST return for its reporting period that includes July 1, 2010.

Some “non-consumers” (which generally include most charities and non-profit organizations) will be required to self-assess the provincial portion of the HST on consideration that has become due, or was paid before becoming due, after October 14, 2009 and before May 1, 2010 in respect of goods and services supplied to them on or after July 1, 2010.

As with the GST, Ontario and B.C. will provide rebates of the provincial component of the tax (8% in Ontario and 7% in B.C.) to registered charities and qualifying non-profit organizations at a rate of 82% for Ontario and 57% for B.C.  The GST rebate rate for pubic service bodies will remain the same, at 50%.

Because the rebate rate for the provincial portion of the HST will differ as between the provincial and federal components of the HST, charities and qualifying non-profits will need to track the federal and provincial portions of the HST payable on their inputs.

Under the provincial sales tax regimes of Ontario and B.C., no credits or rebates are generally available to permit a charity or non-profit organization to recover tax paid.  Accordingly, charities and non-profits that currently pay Ontario Retail Sales Tax or B.C. Social Service Tax on purchases should consider deferring such purchases to July 1st or later, so as to permit a partial recovery of the provincial portion of the tax through a rebate. Conversely, to the extent possible, any purchases that are currently not taxable for RST or SST purposes but which will be taxable for HST purposes (e.g. most services) should be purchased before July 1st.

The Canada Revenue Agency (CRA) administers the HST on behalf of the federal and provincial governments.  To assist charities with their GST/HST compliance, the CRA recently released (in March 2010) two new GST/HST Information Sheets.  GST/HST Info Sheet GI-066 explains how a charity calculates the net tax to be reported in its GST/HST return.  GST/HST Info Sheet GI-067 provides basic information on some of the most common issues relating to how the GST/HST applies to charities.  Both of these publications can be found on the CRA’s website at www.cra-arc.gc.ca. 

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Expedited CRA Charitable Registration

Robert B. Hayhoe, Toronto

In the past we have been critical of the CRA Charities Directorate for slow decisions on applications for charitable registration.  However, even when the general registration backlog has been significant, it has always been possible to request expedited service in appropriate circumstances.

Registrations are now being granted in routine applications in less than two months.  In the rare cases when that is not fast enough, the CRA will still expedite registration.  We have seen registration letters granted in as little as two days after we sent the application.

Expedited registrations require applications that are complete and detailed.  They also require a good reason for the rush registration.  Examples of rush registrations that we have seen include an applicant that will miss an opportunity to receive a large gift or an opportunity to acquire a particular property for use in charitable activities.  Rush registrations may also be granted in order to facilitate fundraising for response to a particular disaster.

The CRA's cooperation in expediting registrations is to be commended as is the general speeding-up of the registration process.

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New Exemptions from Land Transfer Tax for Charities in Ontario and Manitoba

Elena Balkos, Toronto

We have good news from two provinces regarding the application of land transfer tax to charities that are restructuring.

Ontario

The Ontario Budget 2010 proposes regulatory amendments to the Ontario Land Transfer Tax Act to exempt certain transfers of land to registered charities from provincial land transfer tax.  The exemption will facilitate reorganizations of charities.  Transfers of land after March 25, 2010 from trustees to a non-share capital corporation or between two non-share capital corporations will be eligible for the exemption if: 

1. the non-share capital corporation will be continuing the same charitable purpose for the same members; and
2. no consideration is paid, other than the assumption of any existing liabilities registered on the land.

On March 26, 2010, the Ontario Ministry of Revenue released a policy stating that until this new regulation is filed, land transfer tax must be paid on all transfers of land to charities.  The refunds of tax paid by charities on exempt transfers will be processed after the regulation is filed. 

The City of Toronto municipal land transfer tax provides that no tax is payable on a transaction that is exempt under the Land Transfer Tax Act.  Therefore, once the Ontario regulation is filed, the qualifying transfers of land located in Toronto will also be exempt from municipal land transfer tax.  

Manitoba

The Manitoba Budget 2010 proposes that "transfers between a registered charity and its wholly controlled non-profit organization will be exempt from land transfer tax on transfers of title registered after June 1, 2010.”  While such transfers may become exempt from land transfer tax, charities should be aware that transfers to a non-profit that is not a registered charity should be done at fair market value to avoid issues under the Income Tax Act .

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NPO Status: The Requirement Not to be a Charity

Esmail Bharwani, Calgary

CRA has recently provided guidance on one aspect of the requirements for tax-exempt status as a non-profit organization (“NPO”) under the Income Tax Act.  Specifically, CRA commented on the requirement that, in order to qualify as an NPO, an organization must be “in the opinion of the Minister, not a charity within the meaning assigned by section 149.1(1)”.  It is important that organizations that wish to qualify as NPOs take account of this requirement, as a failure to do so can jeopardize the organization’s tax exempt status.

CRA’s comments were provided during the Round Table on the Federal Taxation APFF 2009 Conference.  CRA was asked about the requirement that, in order to qualify as an NPO, an organization cannot be a charity in the opinion of CRA.  CRA was asked what it requires with respect to this element of the definition of NPO.

CRA confirmed that an organization that meets the definition of a charity can only enjoy tax-exempt status by obtaining registration as a charity.  In other words, if an organization would qualify as a charity – even if it is not registered – it cannot qualify as an NPO.  Such an organization would simply be an unregistered charity and may as such be taxable.

CRA stated that the question of whether an organization is a charity comes down to whether the organization is organized and operated exclusively for charitable purposes.  The four categories of charitable purpose generally include: (1) relief of poverty; (2) advancement of education; (3) advancement of religion; and (4) purposes beneficial to the community recognized at law.  An organization that has objects and activities which fall exclusively under one or more of these categories will generally qualify as a charity within the meaning of 149.1(1).

CRA noted that although the tax exemption for NPOs in the Income Tax Act refers to “the opinion of the Minister”, this does not require that an organization obtain an opinion from CRA regarding its status as a charity.  CRA noted that the question of whether an organization is a charity is a question of fact.  Thus, an opinion from CRA that the organization is not a charity would be of limited value, as CRA noted it would not mean that the organization was not previously or will not subsequently be a charity.  Furthermore, the denial of charitable registration does not guarantee that an organization is not a charity within the meaning of 149.1(1).  For example, as CRA stated, a foreign charity cannot be registered under the Income Tax Act but may nonetheless be, in the opinion of the Minister, a charity within the meaning of 149.1(1).

With respect to the advance rulings available regarding NPO status, CRA separated its view into two parts: it indicated that it is willing to comment on the organization of an NPO but not on whether it meets all requirements for NPO status.  CRA’s view is that in the course of an advance tax ruling request, the Income Tax Rulings Directorate may issue a ruling to the effect that the taxpayer is organized in such a manner so as to be able to benefit from the tax exemption for NPOs.

However, when it comes to ruling on whether the taxpayer operated in a manner which satisfies the conditions for NPO status, CRA’s position is that it will not issue a ruling on this question because it is a question of fact which can only be resolved by considering all the activities of the taxpayer during the year in question. This determination can only be made at the end of the year.

CRA invites those who wish to confirm their NPO status in regards to its activities to contact their local tax services office.  The CRA may likely refer people to their guidelines as the CRA is not likely to issue any ruling on the operational side before the end of the NPO’s fiscal year. 

Miller Thomson’s Charities and Not-for-Profit lawyers can advise organizations on their status as NPOs or as charities.

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Customizing Boards and Committees

Arthur B.C. Drache, Toronto

One of the most important aspects of operating a non-profit is to have a board which can give direction to the organization. Without being comprehensive in terms of board duties, it must set policy, manage investments, handle personnel issues, raise funds and make strategic decisions, both long and short term.

But it should be pointed out that every board need not deal with every issue. A fully funded organization need not worry about fundraising. An organization which has no substantial endowment need not worry about investment management.

In putting together a board, the needs of the organization should be taken into account and this should determine who is invited to serve.

In our view, the most important single requirement of board membership is a genuine commitment to the organization over the long haul, a willingness to devote the time necessary and to make meeting attendance a priority and, in our view, a compatibility with other board members.

This brings us to a key approach which more than thirty years of work in the field has shown to be a key to successful boards. Keep it small!

There is a temptation, especially in a country as large as Canada to strive for representation from all areas where the organization operates. This may lead to very large boards which become ineffective…and then in an attempt to solve specific problems, the board creates board sub-committees. Our experience is that small boards work better if there is a commitment by the members to make meeting attendance a priority and where structures are put in place to access specific expertise.

Consider the Nunavut Trust, a trust created to invest the Inuit land claim money and to dispense the funds in a prudent manner. The organization manages about a billion dollars in capital. It has six trustees, each appointed for three years by one of the regions of Nunavut. It has just three full time employees. None of the trustees has specific expertise except that they have intimate knowledge of the beneficiaries and beneficiary organizations.

Investments are split between many investment firms in several countries. There is an investment advisory committee (IAC) of four (all of whom have been in place for fifteen years) who advise the board on investment strategy. The Board makes decisions based on the input of the IAC as to what broad investment moves will be made. They do not get involved in specific purchases and sales.

This lean structure allows all decisions to be made by a six person group which also decides how much income each year will be used for the benefit of the Inuit without making decisions on specific distributions. The recommendations about distributions is made by a separate organization which has a larger staff and which can examine specific requests, evaluate them and make decisions which are ratified by the Trustees of the Nunavut Trust.

Given that the Trust is fully funded, the six trustees have developed an efficient system for managing investments and making distributions without having a bloated board or bureaucracy.

The International Centre for Not-for-Profit Law (ICNL) operates out of Washington but carries on projects around the world. It has no endowment but gets funds from a host of government and private sector funders to carry on various projects.  Years ago, it had a large board which tried to reflect the interests in play including representation from all of the geographic areas in which it worked. Having board meetings became difficult, both in terms of getting a quorum and funding travel to a central meeting place at least twice a year. The big board also was plagued with a lack of commitment in terms of time spent.

A few years ago, ICNL reorganized. It has a board of nine (plus two senior staff who are non-voting) which meets twice a year in person and twice a year by conference call. Six of the nine are from outside North America but there is no specific regional representation per se. It also has a carefully selected Advisory Council of about 40, all of whom have agreed to be “on call” when issues relating to their areas of expertise or geographic locations come up.

The time commitment of the Advisory Council members is substantially less than that of Board Members but the group serves as a pool from which new directors may be recruited when a director leaves.

The small existing board not only gets to know each other well but is able to concentrate on strategic initiatives, not getting involved in day to day operations. The small size also allows costs of board meetings to be kept to a minimum even though it may be that it is more efficient to have a meeting in (say) Budapest than in Washington.

These two examples are just that, examples. However, they show how small boards can operate within the context of managing hundreds of millions of dollars, or operating in fifty different countries.

Things get a little more difficult where there is fundraising involved. If an organization is undertaking large fundraising efforts, likely a professional fundraiser or fundraising organization is involved. This kind of operation is separate from the board but the board must be in ultimate control of policies. On the other hand, we know of many organizations which operate specific fundraising programs such as galas. This sort of work can be done by a separate non-board committee which reports to the board.

One phenomenon that we’ve seen which tends to expand boards is the tendency to offer to major donors seats on the board. We have often felt that both the offer and acceptance are more a matter of politeness. Just because an individual makes a large gift of money does not mean that he or she really wants to devote significant time to attending meetings. One argument is that these individuals can themselves generate other major gifts. While it is true that they can often open doors, it does not mean they have to be on the board. Our own experience is that a good executive director is best suited to dealing with potential new and large donors once the door is open.

We would also accept that in the case of foundations which do nothing more than fund beneficiaries and raise large capital donations, a board which is overweight with those who have committed financially is often more than acceptable if the board is backed up by competent technical staff.

We are quite aware that there will be situations where large boards may be both useful and comparatively efficient. Nevertheless, our experience over literally decades is that “small is beautiful” if careful thought is given to board structure and membership. Even organizations which operate on a big geographic scale and those which have substantial endowments to manage need not have large boards if they are backed up by alternative mechanisms, bearing in mind that in every case, it will ultimately be the Board which makes the final decisions.

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What's Happening at Miller Thomson

Robert Hayhoe wrote “CRA Attempts to Narrow Non-Profit Tax Exemption” in the Lawyer’s Weekly, Vol. 20 No. 40 March 5, 2010 issue.

Susan Manwaring, together with Laird Hunter, presented a 90-minute professional development webinar session entitled “Mission-related / Community Investing: What Does the Law Say?” on March 24, 2010. 

Hugh Kelly led a workshop on the impact of Bill 177 on school board governance for the Dufferin Peel Catholic District School Board on March 11, 2010 and March 24, 2010.

Iain T. Benson republished “Church Property Ownership Debate Sparked by Dispute over Doctrine of the Anglican Church” in the March 2010 issue of Charity Talk, Canadian Bar Association Charities and Not-for-Profit Law Section.

Kenneth Burnett republished “B.C. Society Act – review – Government Consultation Process” in the March 2010 issue of Charity Talk, Canadian Bar Association Charities and Not-for-Profit Law Section.

Andrew Valentine wrote “Federal Court of Appeal Rejects Constitutional Challenges to CRA Jurisdiction” in the March, 2010 issue of the Ontario Bar Association Newsletter, Volume 13, No. 3 March 2010.

Susan Manwaring wrote “CRA’s Not-for-Profit Administrative Policy Revisited” in the March, 2010 issue of the Ontario Bar Association Newsletter, Volume 13, No. 3 March 2010.

Arthur Drache wrote “Charity Scholarship Funding Plan Fails”, New Horizon Funding Available”, “Novel Arguments Get Very Short Shrifts at FCA”, “Prudent Investing Need Not be Aggressive” and “The (New) Philanthropist Well Worth the Read” in the April 2010 issue of The Canadian Not-For-Profit News.

Susan Manwaring led a discussion on Legal Issues and Corporate Governance with the MBA Non-Profit class on April 8, 2010 at the Schulich School of Business.

Sandra Enticknap presented on "Will Gifts to Charities" at the Canadian Association of Gift Planners roundtable in Vancouver on April 8, 2010.

Robert B. Hayhoe and Susan Manwaring led a seminar on “Budget 2010: Implications of the Disbursement Quota Changes” on April 9, 2010 at Miller Thomson.

Kate Lazier presented on "Tax Effective Charitable Gifts" at the CIBC Client Educational Conference on April 10, 2010.

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