Canadian Government to Match Donations by Individuals to Pakistan

Susan M. Manwaring, Toronto

The recent devastating flooding in Pakistan has left millions in need of emergency assistance. In addition to the physical toll left by the worst flooding the country has witnessed in the last 80 years, there is a real urgency of health risks, food shortages, and displaced populations. The Canadian government has already pledged up to $25 million to be provided through the Canadian International Development Agency (“CIDA”) for humanitarian assistance. In addition, a further $8 million will be provided for life-saving assistance and urgently needed equipment by the Global Peace and Security Fund, managed by the Department of Foreign Affairs and International Trade.

The Canadian government has recently established a Pakistan Floods Relief Fund to be administered by CIDA.  Donations by individual Canadians (up to $100,000 and made between August 2 and September 12, 2010) to Canadian registered charities that are earmarked for Pakistan flood relief efforts will be eligible for dollar for dollar matching.   To ensure that eligible donations will be taken into account, the participating charities are required to complete and send in the Pakistan Floods Relief Fund Declaration Form to CIDA on or before September 27, indicating the amount of eligible donations received.

The matched funds will not be provided to the charities raising the donation as has been the practice in the past.   This time, the funds will be allocated by CIDA to experienced Canadian and international humanitarian and development organizations with the vital in-country capacity to deliver the urgent humanitarian relief required in Pakistan.  It is interesting to note, that the government has chosen this route to administer the funds over the route of giving to charities chosen by Canadians which was the route  used in the past. Further information on this program is available here.

Back to top

New Charity Specific Graduate Degree

Robert B. Hayhoe, Toronto

Osgoode Hall Law School at York University has launched a new part time Master of Laws (LL.M.) degree specializing in Charities and Not-for-Profit Law. This degree, which we believe to be the first law degree of its kind anywhere in the world, is designed to facilitate an advanced theoretical and practical understanding of the place of charities and non-profit organizations in the legal system and the rules that apply to them.  The degree is intended to be available to lawyers generally and, on a limited basis, to non-lawyers with a sophisticated understanding of the legal regime for charities.
 
While the classes for the degree are taught in Toronto, they are scheduled as a series of intensive courses in order to facilitate participation from across Canada and elsewhere.  For more information on the program or to apply for admission, please click here.

Robert Hayhoe is one of two Program Directors responsible for the design of the degree program and Robert Hayhoe and Arthur Drache will be Adjunct Professors teaching a double course on "Tax Regulation of Charities and Non-Profits".  The remaining courses in the program will be taught by distinguished charity law practitioners and academics.

Back to top

The Long Arm of the CRA: New Policy for Acquiring Taxpayer Information

James Rhodes, Kitchener-Waterloo
Blair Botsford, Kitchener-Waterloo

Recently the Canada Revenue Agency released its long awaited policy “Acquiring Information from Taxpayers, Registrants and Third Parties”. This policy serves to enunciate the CRA’s views on its right to acquire taxpayer information and documentation under the various acts it administers, mostly notably the Income Tax Act (“ITA”) and the Excise Tax Act (“ETA”).

The policy statement reads as follows:

CRA officials are authorized to inspect, audit, review or examine:

1. the books and records of a taxpayer;
2. any document of the taxpayer that relates or may relate to the information in the taxpayer’s books and records; and
3. any document of any other person that relates or may relate to the information in a taxpayer’s books and records that may be relevant to the administration or enforcement of the ITA, ETA, and other relevant legislation.

Given that the CRA has wide and extensive investigation powers under most of the legislation it administers, this statement was expected and not in controversy. What makes this policy controversial is that the CRA has included third party working papers related to the taxpayer within item #3. It is this inclusion that makes this new policy important for every taxpayer and their advisor to review and consider the far-reaching implications.

While the CRA has always believed that it has an almost unfettered right to access taxpayer information and documentation, subject only to solicitor-client and litigation privilege, its position on requiring third party working papers had been uncertain. In the past, there had been considerable controversy when the CRA demanded that a taxpayer’s accountant or auditor produce its working papers on the taxpayer. The controversy was that if the taxpayer had provided its source documentation and accounting records, why did the CRA feel it was necessary to also request its accountant’s or auditor’s working papers?

In this new policy, the CRA has clearly indicated its view that it is entitled to third party working papers, which are not just limited to accountant’s and auditor’s working papers, for the purpose of substantiating a taxpayer’s position and identifying audit issues and concerns with regards to tax at risk. Therefore, those working papers can be obtained if they relate to advice given to the taxpayer by third parties who are not lawyers.

In the policy the CRA does give some comfort in that it states CRA officials will always attempt to collect information from the most direct source in the least intrusive manner possible, and that third party working papers are not ‘routinely’ required for the determination of a taxpayer’s liability. However, the CRA also states “information from third parties will be sought when the taxpayer cannot or will not provide this information when it is needed by officials to determine the CRA’s position on an issue and in accordance with the scope of the review”. Whether this means that CRA officials will simply request the third party working papers from the taxpayer, and then request them from the third party when the taxpayer refuses to produce them, or whether the CRA will only request third party working papers as a last resort, remains to be determined.

For charities and not-for-profit organizations (“NPO”), it will be important to consider the following:

1. What information and documents do their third party advisors collect, or have collected, as part of their work in advising the charity/NPO?
2. What information and documents does the charity/ NPO collect, or has collected, as part of their work in assisting taxpayers in carrying out their donative intentions?

With the increasing trend for charities, NPO’s, and third parties like banks and brokerage firms to collect detailed information on taxpayers to document their thoughts and instructions for charitable arrangements, it is necessary that all parties involved consider what problems could arise should the CRA request this information. As always, involving a lawyer early enough in the advice process becomes a necessity if the parties wish to have information and documents remain confidential from the CRA.

Back to top

Clergy Residence Deduction Denied

Amanda J. Stacey, Toronto

The CRA was recently asked to comment on whether an Executive Director of a charity was entitled to claim the clergy residence deduction made available in the Income Tax Act.  In order to be eligible to claim the clergy residence deduction in any given year, an individual must meet a “status” test and a “function” test.  The status test generally requires that a person be either a member of the clergy, a member of a religious order or a regular minister of a religious denomination.   The function test requires that the individual either be in charge of or ministering to a diocese, parish or congregation or be engaged exclusively in full-time administrative service by appointment of a religious order or religious denomination.

The executive director of the charity in question was not affiliated with any specific denomination as an ordained minister and the CRA did not have any further information to indicate that the individual was a member of the clergy.  Because the taxpayer did not meet the status test as a member of the clergy, the CRA considered whether the taxpayer was a member of a religious order.

In determining whether a taxpayer is a member of a religious order, the CRA uses the 6-part test set out by Justice Bowman in McGorman v. The Queen.  The CRA only considered the first part of this 6-part test here, namely, that the purpose of the organization should be primarily religious.  The taxpayer had described his employer as a non-denominational organization focussed mainly on the spiritual development of youth, evangelism, and short-term missions.  The CRA relied on two cases to conclude that the organization did not meet the first part of the 6-part test and was thus not a religious order.  Surprisingly, although the CRA found that the organization’s primary purpose appeared to be the “uplifting of youth through their spiritual development”, it found that this was not a religious purpose.  The CRA found that “while the aim of the Mission may be to further the principles set out in the doctrinal statements in one way or the other, there is no element of worship involved”.  The CRA stated that the constitution and statement of faith did not constitute a religious ideology.  Unfortunately, we are not privy to the organization’s constitution and statement of faith.  Because the organization did not meet the first part of the 6-part religious order test, the taxpayer’s employer was not considered to be a religious order, and thus the taxpayer could not satisfy the status test as a member of a religious order.

Finally, because the taxpayer described his employer as non-denominational, the CRA found that he could not be a regular minister of a religious denomination.  As such, the taxpayer did not meet the status test and thus could not claim the clergy residence deduction.  Given its conclusions, the CRA did not consider the function test.

While we are not privy to the details of this organization’s documents, we are concerned by the CRA’s conclusions in this technical interpretation.  We would have thought that an organization involved in the “spiritual development of youth, evangelism and short-term missions” would be primarily religious.

Organizations that have concerns regarding the eligibility of their employees for the clergy residence deduction should feel free to contact us.

Back to top

Ignorance of Receipting Rules Is No Excuse

Kate Lazier, Toronto

A recent Federal Court decision serves as a reminder that ignorance of the law is no excuse and that receipting fraud can have consequences to the all of the individuals involved.  In this case, the Canada Revenue Agency denied a tax preparer the privilege of filing his clients’ income tax returns electronically by way of the EFILE and SEND programs, as a result of the tax preparers’ involvement in a fraudulent receipting program.  The Chief of Appeals confirmed the CRA's decision.

According to the Court, the tax preparer accepted money from taxpayers who wished to donate to charitable organizations in exchange for “enhanced receipts” for tax purposes.  The tax preparer forwarded these “donations” to one of his clients, who then prepared inflated receipts.   The tax preparer received $25 for each “donation” forwarded.  For example, a client would pay $500 in exchange for a receipt for $7,500 from the tax preparer’s client.  The Court noted that there was no evidence that the receipts came from the charitable organizations or that the charities knew about this scheme.
 
The tax preparer argued that he had no reason to suspect that the enhanced receipts were fraudulent and therefore he had not engaged in any form of misconduct. 

The Court upheld CRA’s decision to deny the tax preparer the privilege to file electronically. The Court stated that electronically filing income tax returns is a privilege that can be denied to participants engaging in fraud or other conduct that is disreputable in nature.  The Court found the tax preparer’s conduct was disreputable in nature because of his involvement in selling charitable donation receipts to his clients for profit.   Even if the tax preparer did not have any reason to question the authenticity of the receipts his clients received, he certainly knew that the amounts paid by the clients were not equal to the amounts they were given credit for when he was preparing their income tax returns. The mere fact that the tax preparer did not believe his conduct to be fraudulent did not justify his involvement in the scheme. 

We note that charities involved in receipting fraud can have their charitable registration revoked and that the individuals involved may face criminal charges.  While the penalty to the tax preparer was small in comparison to these penalties, the case is a useful reminder that ignorance of the law is not an excuse.  It is important for individuals involved with charities to strive to know and comply the laws respecting charities. 

Back to top

Rotation of Directors: Ounce of Prevention, Pound of Cure

Hugh M. Kelly, Toronto

Many organizations find it useful to provide for a rotational board, that is, a board on which a specified fraction of the directors is elected at each Annual Meeting, for a term of multiple years. For example, half are elected each year for a term of two years; or one-third are elected each year for a term of three years.  The goal is to avoid a situation in which the entire board is replaced in a single year. The electoral cycle ensures that the board retains continuity but also provides for renewal.

The cycle, however, is interrupted when a director resigns from office before the end of his/her term and another person (the “replacement director”) is appointed or elected to fill the vacancy. In our experience, what frequently happens is that the replacement director is appointed or elected for whatever term of years has been selected for the electoral cycle (two or three in our example). What should have happened is that the replacement director was appointed or elected for the balance of the unexpired term of the person he/she replaces. Further resignations and replacements progressively compound the error, creating, in a very few years, an enormously tangled web that is difficult to un-weave.

The un-weaving solution is sometimes complex and time-consuming, but more likely achievable when all the persons who are – and especially those who have been – directors are alive, capable and cooperative.  Sometimes it is necessary, particularly where the tangled web is more complex or where there is a lack of cooperation of (usually the former) directors, to take a calculated risk that an imperfect and in fact incomplete un-weaving solution is the best that can be done.

As with many things, an ounce of prevention is better than a pound of cure. The prevention of inconsistencies in terms of office in the rotational cycle is much easier than any formula to resolve such inconsistencies. So we offer the following illustration to help in providing that ounce of prevention.

This illustration assumes that the corporation has nine directors, and that the term of office of each director is three years. It also assumes that the corporation has a rotational board in which each year, three directors retire and three directors are elected (or re-elected) to replace the retiring directors.

In Year 1, in order to begin the rotation, three directors are elected to serve for one year, three directors are elected to serve for two years, and three directors are elected to serve for three years. In Year 2, and each year following, the terms of office of the appropriate three directors end, and to fill their respective “slots”, three directors are elected (or re-elected) for a term of three years.

Thus, at the Annual Meeting each year (after the annual meeting when the rotation is started), each “slot” is filled by the election (or re-election) of one person as a director for a term of three years.

If the person occupying a “slot” resigns or retires before his/her term of office has been completed, there is a vacancy in his/her slot, and his/her replacement (sometimes by appointment, sometimes by election) fills his/her “slot,” but only for the remainder of the time left in that “slot”. At annual meeting at the end of the time remaining in that “slot”, that person (or another) is elected for the three-year time “slot”. 

If it is too late for your organization to be able to adopt the ounce of prevention, we at Miller Thomson have experience in providing the appropriate pound of cure.

Back to top

CRA Confirms Strict Interpretation of NPO Tax Exemption

Andrew Valentine, Toronto

On June 25, 2010, CRA released a follow-up technical interpretation to an interpretation released in December of 2009 addressing whether a condominium corporation could qualify as a non-profit organization when using surplus income to reduce members’ fees or to fund future capital projects. We commented on CRA’s December 2009 Technical Interpretation in the January 2010 edition of the Miller Thomson Charities and Not-for-Profit Newsletter.

CRA’s recently published interpretation confirms that CRA will apply a strict reading of when an organization will be found to be operating with the intentions of making a profit, such that it cannot qualify as a tax-exempt NPO.

CRA confirms that any “intentional” earning of rental profits may jeopardize a condominium corporation’s NPO status, regardless of whether this surplus income will be applied to reduce members’ fees or defray current or capital expenses. CRA states that this is particularly true when such profit is generated through income received from third parties (as opposed to members).

CRA states while an NPO should generally budget and charge fees for services so as to operate at cost, CRA will accept that a condominium corporation may charge members fees that include a portion to be allocated toward an identified capital project (such as a new roof). CRA also acknowledges that NPOs will be permitted to earn profits that are incidental to the organization’s non-profit purposes.  The question is when will the earnings be considered incidental rather than intended.

CRA also confirms that NPOs may maintain reasonable operating reserves, which refers generally to reserves maintained to meet existing but conditional liabilities.

Overall, CRA’s most recent technical interpretation confirms that CRA will take a relatively restrictive approach to the tax exemption for NPOs. Although we continue to be of the view that the CRA approach as expressed in these technical interpretations is out-of-step with the realities of operating an NPO (in which it is not practical or fiscally prudent to plan to spend all revenue in excess of costs each year) and the long-standing interpretation of this provision, it remains the case that NPOs will need to take additional care in their operations so as to reduce the likelihood of a CRA challenge to their NPO status.

Back to top

What's Happening at Miller Thomson

Robert Hayhoe was quoted in Janet Gadeski’s article “Keeping your Data at Home, Technically Speaking” in the July 31, 2010 issue of Canadian Fundraising & Philanthropy.

David W. Chodikoff wrote “Tax Shelters, Fiduciary Duties and Troubles Ahead for Some Chartered Accountants” in the July 2010 issue of It’s Personal.

Author Drache wrote “Revenue Publications are Not Law”, “Briefly Noted in August”, “HST Ruling on Gifts is Positive”, “Ruling on Recreation Non-Profit Corporation”, “Second Thoughts?”, “Shirley Thomson Dies”, “Prescribed Foreign Universities” and “New Charity Specific Graduate Degree” in the August 2010 issue of Canadian Not-For-Profit News.

Back to top