Charities Directorate Receives Positive Review From Auditor General

Andrew Valentine, Toronto

On October 26, 2010, the Auditor General of Canada released its Fall Report to the House of Commons.  The Report included a review of the performance of the Charities Directorate.   Although the Report noted some areas in which the Directorate could improve, on the whole the Auditor General gave a positive review of the Directorate’s performance.  The following summarizes some of the highlights from the Report.

Registration process

The Report commented generally that the Directorate’s process for registering charities is thorough, and that the controls in place are adequate to monitor and manage the process for approving an organization’s application for charitable registration.  The Report noted that the registration process is important as it may be the most in-depth involvement the Directorate has with a charity during the charity's life cycle.

The Report did note that the Directorate had not historically met its service targets for the processing of registration applications.  The Directorate had set a goal of responding to 80% of simple applications within 2 months, and 80% of regular applications within 6 months.  In the 2007-08 year, the Directorate responded to 42% of simple applications within 2 months, and 53% of regular applications within 6 months.  In the 2008-09 year, these figures were 58% and 22% respectively.  The Report commented that CRA had taken steps to address these service issues and that its performance had improved in 2009-2010.

Annual information returns

More than 33,000 charities did not file their annual information returns on time in 2008.  The Directorate sends out automatic reminder letters to late-filing charities and de-registers such charities after 10 months of non-filing.  The Report noted that most charities did file their returns after being reminded. However, between 2007-2009, approximatey 3,000 charities had their registrations revoked for failure to file.  The Report recommended that the Directorate review its current processes for dealing with annual information returns and consider whether steps could be taken to meet its objective of increasing compliance and receiving returns on time.

Audits

The Report noted that the Directorate conducts risk-based and random audits to verify compliance, and that it has a range of tools available for cases of non-compliance.  These include education letters, negotiated compliance agreements, intermediate sanctions and revocation.  The Report commented, however, that the Directorate lacks sufficient internal guidance for the application of intermediate sanctions, and that it continues to rely on education letters, compliance agreements and revocations.  It noted that the Directorate is in the process of developing internal guidance for the application of intermediate sanctions, which is currently expected to be available by March 2011.

Communications

The Report commented that the Directorate’s communication to charities and donors is good, with information accessible through several channels (including the Directorate’s website, telephone hotline, webcasts, and outreach programs).  The Directorate’s website can be used to check whether a charity is currently registered, suspended from issuing tax receipts, or has had its charitable status revoked.  The Report also noted that the Directorate has processes to ensure that the information on its website is accurate as well as feedback mechanisms to verify that users’ needs are being met.

Tax shelters

The Report noted the Directorate’s concern with some tax shelter gifting arrangements and its warnings to donors about the risks involved with participation.  As of December 31 2009, a total of 172,300 tax shelters were active.  One of the stated purposes of the audit of the Directorate was to review the CRA’s efforts at increasing compliance with respect to tax shelters.  The Report noted that CRA had audited many of the active tax shelters by March 2009 and had reassessed the amount of charitable donations claimed by over 69,000 participants who had invested in these arrangements.

Disposition of property

The Reported commented that the Directorate had only an informal process for monitoring whether a charity has made appropriate disposition of its assets during the wind-up process and following revocation.  The report recommended that a formal monitoring process be developed.

Conclusion

Overall, the Report gave a positive review of the Directorate’s performance.  Where it noted areas of possible improvement, its recommendations were generally that the Directorate give consideration to how its processes could be better designed and administered so as to further the Directorate’s goal of increasing compliance with the Income Tax Act.

The Report is valuable not only for its evaluation of the Directorate’s performance, but also as an overview of the operations of the Directorate, its mandate and priorities, and the issues that it faces. The Report is available at the following link: http://www.oag-bvg.gc.ca/internet/English/parl_oag_201010_07_e_34290.html.

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CRA Comments on New Disbursement Quota Rules

Amanda J. Stacey, Toronto

In a recent technical interpretation (document number 2010-0370841E5) the CRA was asked to provide comments on a proposed gift between two related charities.  As we reported in the March 2010 edition of this Newsletter, the 2010 Federal Budget proposed a significant reduction in the disbursement quota obligation applicable to charities.  As part of these changes, the proposed new rules strengthen the existing anti-avoidance rules related to gifts between related charities.  Where a registered charity receives a gift from a non-arm’s length charity, it is proposed that the recipient charity be required to spend the full amount of the gift on its own charitable activities, or to transfer the amount to another arm’s length qualified donee, within the current or subsequent year.  However, if the donor charity designates all or a portion of the gift as a “designated gift”, this designated portion will not be subject to the immediate disbursement requirement.  Where the recipient charity fails to meet this disbursement requirement, it can lose its charitable status and/or it will be subject to a penalty equal to 110% of the amount by which the fair market value of the gift exceeds the amount required to be expended.

In this recent technical interpretation, the CRA was asked to comment on a gift of real property that is used in charitable activities from a registered charity to a related charitable foundation.  The CRA was asked to comment specifically on the following two hypothetical scenarios:

1. The full value of the gift will be designated as a “designated gift” by the donor charity.  The donor charity will meet its disbursement quota irrespective of the gift.
2. The donor charity will have a $100,000 disbursement obligation without taking into account the proposed gift.  The donor charity intends to designate all but $100,000 of the value of the gift.  The donor charity will use the $100,000 “undesignated” portion of the gift to satisfy its disbursement quota obligation.

Under the first scenario, the CRA confirmed that since the donor charity intends to designate the full value of the gifted property, it would be precluded from using the designated gift to satisfy its disbursement quota.  Because of the designation, the recipient charity would not be subject to an immediate disbursement requirement.

Under the second scenario, the CRA confirmed that the portion of the gift that is not designated may be used to meet the donor charity’s disbursement quota.  The recipient charity would in turn have an obligation to spend $100,000 (in addition to its existing disbursement quota obligations) in carrying on its own charitable activities or by way of gifts to qualified donees with which it deals at arm’s length in the current or subsequent taxation year.

The CRA also noted that the proposed amendments can subject donor and recipient charities to revocation of their registration if it may reasonably be considered that a purpose of the transaction was to avoid or unduly delay the expenditure of amounts on charitable activities.  The CRA also notes that whether any purpose of a transaction is to avoid or unduly delay the expenditure of amounts on charitable activities is a question of fact and must be determined on case by case basis.

It remains to be seen how these new rules will be interpreted in practice.  In particular, the proposed rules regarding gifts between non-arm’s length charities do not provide guidance on the meaning of arm’s length in this context.  Unfortunately, this was not one of the questions raised for CRA comment in this technical interpretation.  We will have to wait and see whether the Department of Finance provides guidance on this topic and how the proposed amendments are interpreted by the CRA.  Charities looking for guidance on these issues should feel free to contact us for advice.

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First Excess Business Holdings Penalty

Kate Lazier, Toronto

The CRA has publicly announced the first penalty for excess corporate holdings. According to the CRA’s registered charities database the Radcliffe Foundation was penalized $147,749 for its excess corporation holdings.

The 2007 budget introduced the so-called excess business holdings rules that require private foundations to divest shareholdings over certain thresholds.   In general, where a private foundation and persons related to the private foundation own more than 20% of the shares of any class, either these parties must reduce their combined holdings to less than 20% or the private foundation must reduce its holdings to below 2%.

According to the Globe and Mail (http://www.theglobeandmail.com/report-on-business/philanthropist-frank-giustra-hit-with-tax-penalty/article1803479/) the CRA informed the private foundation that it held excess shares last year.    A spokesperson for the Foundation stated that the Foundation has paid the penalty by making a gift to another charity.

The Charity and Non-Profit Lawyers at Miller Thomson LLP can assist private foundations to understand and comply with these rules.

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Gifts To Charities By Will: Timing And Valuation

Hadielia Yassiri, Toronto

Charities often receive gifts by Will. But at times the donation is not made by the estate by the due date for filing the deceased’s terminal return, and at times the value of the donation may increase or decrease from the time of death to the time of delivery to the charity. How does a donor claim a gift made by Will if the gift is not received by the charity by the due date for filing the terminal return? How should the gift be valued if the property changes in value between the date of death and when the property is transferred to the charity?  These queries were put to a CRA representative at the 2010 STEP conference in June.

CRA noted that when a gift to a registered charity is made pursuant to an individual’s Will, the Income Tax Act deems the gift to have been made immediately before the individual’s death. The donations should be included in the individual’s final return. Charitable donations may be claimed through the Will, as long as the donations are supported. The type of support that the donor must provide to CRA depends on when the registered charity or other qualified donee will receive the gift.  For gifts that will be received right away, an official receipt is to be provided by the personal representative of the deceased.  

For gifts that will be received later by the charity, a copy of the following is to be provided to CRA: (i) the Will; (ii) a letter from the estate to the charitable organization that will receive the gift, advising of the gift and its value; and (iii) a letter from the charitable organization acknowledging the gift and stating that it will accept the gift.  CRA indicates that it will accept this documentation on an administrative basis on the understanding that a receipt will be provided by the charity when the charity actually receives the gift.  The receipt must then be provided to CRA.

How does a charity determine the amount of the donation?  Suppose, for example, that at the time of death the value of the donation, a percentage of the residue of  the estate, is $100,000, but in the period from the time of death to the time the donation is delivered to the charity, the assets appreciate to $150,000, such that $150,000 is ultimately received by the charity.  What is the amount of the donation to be recognized by the deceased?  What if the donation declines in value?  What if the donation is a specific gift, e.g. 1,000 shares of  a public company, "Publicco"?

CRA stated that with respect to the amount of the gift, the value to be used to determine the eligible amount of the gift is the fair market value (FMV) at the time the gift is made, which is the date of death.  To take the examples above, where the value of the residue on death is $100,000 but the assets appreciate to $150,000 at the time of receipt by the charity, the value of the gift for donation purposes would be $100,000.  In the case of the specific gift of 1,000 shares of Publicco, the value of the Publicco shares that are donated would be their FMV on the date of death.

Where the value of the gift cannot be reasonably determined, no gift is allowed. An example is where a specific gift has been designated in the Will but it is unclear if the estate will have sufficient funds available to make the gift after the estate liabilities have been paid.

Donors and charities will need to ensure that they comply with these rules when claiming and receipting gifts by Will.

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BC Court of Appeal Upholds Right of Anglican Diocese to Retain Church Property From Dissident Parishes

Iain T. Benson, Toronto

The B.C. Court of Appeal has recently upheld the November 2009 trial decision in Bentley v. Anglican Synod of the Diocese of New Westminster.  We reported on the trial judgment in the January 2010 issue of this Newsletter.  The case addressed, among other things, the right of four incorporated Anglican parishes that disagreed with their Bishop’s position on same-sex unions to secede from their Diocese and to have certain church properties turned over to them.  At trial, the judge held that the parishes did not have the right to unilaterally leave the Diocese or take control of the church properties.  The plaintiff parishes appealed this decision, and a unanimous Court of Appeal upheld the trial judge’s ruling. 

The appellant parishes sought a declaration that the parish properties are held on trust either for “Anglican worship” without more, or (as argued in the court below) for orthodox Anglican ministry, as they regard themselves as remaining true to the fundamental doctrines of the Anglican Church (“the ACC”).  They argued that the Bishop’s willingness to bless same-sex unions by clergy in the Diocese broke with orthodox Anglican doctrine.  The parishes argued that they alone remained true to orthodox doctrine and should therefore not be deprived of their rights to the use of the parish properties.  The Bishop argued that because the plaintiffs have allegedly left the Church and removed themselves from its supervision, and are in fact attempting to form a new conservative group in opposition to the Church, they have ceased to be true adherents to Anglican doctrine. 

The Court of Appeal rejected the appellants’ argument, and one of the central holdings was a rejection of the approach to religious legal disputes taken by American courts.  When deciding property disputes of this sort between religious bodies, U.S. courts have sought to refrain from resolving religious doctrinal controversies and to interpret the legal rights provided for in church documents in purely non-religious terms.  The Court of Appeal in Bentley cited a leading Canadian academic in this area, Margaret Ogilvie, in disagreeing with the U.S. approach:

The effect of this deference [in the U.S.] in the interests of the free exercise of religion has been to create a quasi-sovereign or virtually autonomous sphere for churches, justified by the de facto legislative power of the American Supreme Court, which has no parallel in a parliamentary system.  Even an entrenched Charter neither permits such zones to be created in Canada nor forbids courts to hear all disputes brought before them.  Rather, it is fundamental to the common law that courts cannot decline jurisdiction or defer to some body, other than a sovereign parliament, within the Anglo-Canadian political system.  Whether Canadian courts wish to do so or not, they are obliged to deal with church property disputes, including their doctrinal aspects.

The Court of Appeal concluded that the church properties and assets were held on implied trusts and that those trusts may be described as for “the purpose of Anglican ministry”.  For that reason, some analysis of the doctrinal matters (including with respect to how religious doctrines can and have changed over time) was necessary. While addressing the appellant’s arguments as “commendably creative”, the Court held that there is little authority to support the notion that internal disagreement on a doctrinal issue can support a cy-près claim (allowing the court to potentially vary the terms of the trust to permit the dissident parishes to hold and control the parish properties as against the claims of the Bishop and his supporters).  The Court was also clearly uncomfortable with the potential difficulties that could arise were it to get involved on a cy-près basis.

In its concluding words, the Court of Appeal held that it is antithetical to the nature of Anglicanism to contemplate “Anglican ministry” in a parish that has withdrawn from the authority of its diocese and bishop.”  It stated that the parishes could not remove themselves from their bishop’s oversight and the diocesan structure while still retaining the right to use properties that are held for purposes of Anglican ministry in Canada.

The Court also noted that it would not likely grant a remedy that imports more uncertainty, may cause more turmoil and conflict than already exists and that might involve the Court too far inside the religious beliefs of religious believers and their communities.  The Court stated:

In this instance, it is almost impossible to anticipate all the consequences that would be set into motion on an institutional level by a cy-près order.  The concept of having four parishes located within the Diocese (which is a geographical unit) but not belonging to the Diocese, and receiving episcopal oversight from a bishop in South America, would insert the Court into the internal affairs of the ACC in a manner that has no precedent.  Even an order restricted to the more mundane aspects of how the properties of the four parishes may be used would trench onto the practical operation of the Diocese and parish corporations in a way that cannot be entirely foreseen.  Many questions would arise that would likely necessitate further litigation and judicial involvement.

This decision is noteworthy in part for its comments about the proper role of the courts in deciding matters of religious doctrine, and for the Court’s apparent support for the proposition that courts may have no choice but to address matters of church doctrine when deciding property disputes between religious organizations. It should be noted, however, that the passage quoted by the Court in support of this proposition pre-dates later comments by the Supreme Court of Canada (notably in 2004 in Syndicat Northcrest v. Anselem) which have cautioned against "judicial determinations of theological or religious disputes, or of contentious matters or religious doctrine, which may unjustifiably entangle the court in the affairs of religion."  There thus exists a tension with respect to the role of the courts in religious disputes which may require resolution in future cases. 

We understand that no decision has been made yet whether the appellants in Bentley will seek leave to appeal to the Supreme Court of Canada.

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New Prescribed Donee Named

Arthur B.C. Drache, Toronto

The Department of Finance has used an administrative power under the Income Tax Act to allow an American charity, the American Friends of Canadian Land Trusts, “prescribed donee” status. This designation allows U.S. residents to get domestic tax relief when donating Canadian land to a U.S. charity without being subject to Canadian capital gains taxation.

One way to eliminate capital gains tax on a transfer of land or other property to a Canadian charity is to make an election under the Income Tax Act (the "Act") to value the land at its adjusted cost base when making the gift.  While a U.S. resident can make such an election, there is a problem, which the Department of Finance summarized as follows in a backgrounder to its announcement that the American Friends of Canadian Land Trusts is now a prescribed donee:

[Under the Canadian-U.S. Tax Treaty], if a U.S. resident makes a donation of any kind directly to a Canadian charity, the deduction available to that person under U.S. tax law and the Canada-U.S. Tax Treaty is limited to their Canadian-source income. This creates an impediment for a U.S. resident if the donated property is taxable Canadian property, such as real property in Canada, because the U.S. resident would have to pay capital gains tax in Canada (which would otherwise be offset by the Canadian charitable donations tax credit, if the donation were made to a Canadian charity) in order to obtain tax relief in the U.S.

This dilemma can be resolved if the gift is real property in Canada that is donated to a U.S. charity that is a prescribed donee. In this case, the U.S. resident is permitted to make the election to reduce the capital gain that would otherwise be taxable in Canada, while still retaining the right under U.S. tax law for charitable donations tax relief. The Canadian tax treatment places the U.S. resident in the same position for Canadian tax purposes as if the donation had been made to a Canadian registered charity or other qualified donee in Canada.

The election under the Act to reduce the value for Canadian tax purposes applies only if the gift is real property in Canada and the prescribed donee undertakes that the property will be held for use in the public interest. 

The American Friends of Canadian Land Trusts intends to satisfy this undertaking by facilitating the acquisition, by Canadian land trusts and conservation organizations, of Canadian lands and interests or rights (for example, easements) in Canadian lands. Its purposes include the preservation of Canadian lands. 

U.S. residents considering charitable donations of Canadian land should keep in mind the option of donating to a prescribed donee.

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What's Happening at Miller Thomson

Robert Hayhoe spoke on October 26, 2010 at CTF Ontario on "Charities and Not-for-Profits: An Update".

Robert Hayhoe spoke November 2, 2010 for the Canadian Society of Club Managers on "Overview of the Taxation of Non-Profit Organizations".

Susan Manwaring spoke November 19, 2010 at Grant Thornton Annual Seminar for NPO & Charitable Organizations Presentation:  “CRA suspects your NPO is making profits: war stories from recent CRA NPO audits”.

Susan Manwaring, Blair Botsford, Kristina Shaw and Kate Lazier spoke on November 25, 2010 at a Miller Thomson Charities Seminar in Cambridge, Ontario, entitled "Tips and Traps for Charities and Non Profits - what's new in 2010?".

Robert Hayhoe and Amanda Stacey spoke at the Canadian Tax Foundation's 62^nd Annual Tax Conference on "Update on Tax Issues for Charities and Not-for-Profits" on November 29, 2010.

Amanda Stacey wrote "Part I - Charitable Giving - Vehicles that Work" in the November 2010 issue of It's Personal.

Susan Manwaring and Andrew Valentine wrote “Canadian Structural Options for Social Enterprise” in The Philanthropist (2010) Vol. 23(3).

Arthur B.C. Drache wrote “Disbursement Quota Changes a Two-Edged Sword,” “Briefly Noted in November”, “Auditor General Lauds Charities Directorate Performance”, “Shining a Light on the Unknown: the New CNCA”, “New Qualified Donee Named”, and “Public Policy Revisited in the U.S.” in the December 2010 issue of Canadian Not-For-Profit News.

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