Budget 2011 – Update

Robert B. Hayhoe, Toronto

As described in detail in our March issue, the 2011 Budget included a number of charity tax changes.  However, the government was then defeated and an election called.  Despite these events, we suggest that prudent charities behave generally as if the budget changes will be coming back with their originally proposed effective dates.

The charities changes in the Budget were not policy changes driven by the Minister of Finance but were rather technical changes driven by Finance bureaucrats.  None of the changes have become election issues.  As a result, our expectation is that the Budget changes will come back after the election, regardless of election outcome.  Furthermore, the likely effective dates of the changes will be as proposed originally.  In 1980, the new Liberal government brought back the technical tax changes from the December 1979 defeated Progressive Conservative budget with December 1979 effective dates.  While there is no guarantee that the same will happen this cycle (and Finance staff are not prepared to discuss the issue), we do so expect.

Charities should therefore begin to consider compliance with the 2011 Budget changes.

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Update on Canada Not-for-Profit Corporations Act

Before the defeat of the government following the tabling of Budget 2011, it was expected that the new federal legislation governing non-profit corporations, the Canada Not-for-profit Corporations Act, would be in force by the end of Spring 2011.  The defeat of the government will delay this anticipated in-force date.  Our expectation is that the in-force date will be delayed by at least three months, and will not likely occur until the end of Summer or early Autumn 2011.

Industry Canada advises that it cannot provide details on the new expected in-force date of the legislation until after an election is held and a new government takes office.  We will continue to provide updates on the progress of this legislation.

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Christchurch Earthquake Appeal Trust Now a Qualified Donee

Donors seeking to support earthquake relief efforts in New Zealand can now make direct donations to the Christchurch Earthquake Appeal Trust, located in New Zealand, and receive tax recognition in Canada for such gifts.  The Income Tax Act provides that charitable organizations outside Canada to which the federal government has made a gift in the current or immediately preceding year will meet the definition of “qualified donee” under the Act.  This allows Canadian donors to receive the same tax recognition in respect of gifts to these organizations as to registered Canadian charities.

The CRA maintains a list of the organizations to which the federal Crown has made gifts.  It recently updated the list to include the Christchurch Earthquake Appeal Trust, which received a gift from the federal Crown on March 14, 2011. 

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Ontario Government Releases Report on the Partnership Project

Amanda J. Stacey, Toronto

In the June 2010 issue of this Newsletter, we reported on an initiative of the Ontario government that sought to begin a constructive conversation with the not-for-profit sector in Ontario.  This project – referred to as the Partnership Project – was designed to seek advice and ideas on ways to renew, streamline, and modernize the relationship between the Ontario government and Ontario’s not-for-profit sector. 

The Ontario government has released its report on The Partnership Project.  It is described as a statement of the importance of the not-for-profit sector, its impact on Ontarians and Ontario’s communities and the significant role the sector plays in the Ontario economy. 

Given that there is no registry in Ontario of not-for-profit organizations as such, the report points out that the actual number of not-for-profits in Ontario is unknown.  There are more than 46,000 such organizations if we count incorporated not-for-profits and registered charities in Ontario (based on a 2003 Imagine Canada survey).  The number of unincorporated organizations operating in Ontario has never been counted.  It is estimated that the section employs approximately 1 million people and that 5 million people volunteer in the sector.  It is estimated that the total economic impact of the sector is nearly $50 billion.

The Partnership Project focused on collaboration between government and not-for-profits, policy and legislative frameworks, funding mechanisms and new approaches to financing, and more effective methods for coordinating policy, research, communication, and practice.  The Partnership Project hosted in-person regional and sub-sector roundtables around the province to solicit the views of a cross-section of Ontarians, provided an opportunity for online engagement through its website and brought together sector experts through a research advisory group.

In its report, the Partnership Project makes the following recommendations to the Ontario government:

• Promote Respect and Recognition – the report recommends the appointment of a Minister responsible for and accountable to the sector.
• Foster Coordination and Collaboration – the report recommends the creation of a coordinating body within the government to act as a central point of contact for the sector.
• Build Sector Capacity – the report makes recommendations to address funding challenges and to support new ways to reinvigorate Ontario’s tradition of volunteerism.
• Modernize, Standardize and Streamline – the report makes general recommendations regarding leveraging technology and a specific recommendation to establish an online portal which will act as a one-stop shop for information on new laws, new programs, sources of funding, and consultation opportunities.
• Invest in Social Innovation – the report encourages working with the Federal Government and Canadian financial institutions to address regulatory and legal barriers to social innovation (for instance, the limitations of charity law when applied to social businesses) and make a range of social financing tools available to the sector.

We look forward to the Ontario government’s response to these recommendations, and hope that these recommendations, as well as further feedback from and discussion with the sector, will lead to the implementation of these and other positive changes over the next few years.

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Major Asset Transfers Between Charities: Corporate Law Considerations

Jason Rosen, Toronto

From time to time registered charities may find themselves in situations, often driven by economic considerations, where they are considering whether to cease carrying on certain elements of their operations. While a straightforward wind-down may be possible in some circumstances, often a charity will look to sell the assets, property or business (referred to collectively as the “assets”) in question and realize whatever it can from a financial perspective from the sale. A charity might also decide to transfer the asset(s) to another charity by way of a gift rather than by sale, particularly if the recipient charity is in a position to continue to carry on the operations associated with those assets.

For example, a charitable organization that operates a school or summer camp might decide, for any number of reasons, to cease operating the program and to gift it to another charity with similar operations so as to ensure the continued operation of the school or summer camp.

In a traditional for-profit transaction scenario where an asset, property or business is being sold by a charity, the selling charity and the buyer (which need not be a charity) would look to negotiate a purchase and sale agreement which would typically contain provisions on such matters as:

• the purchase price to be paid by the buyer
• the terms of payment for the purchase price (e.g., cash on closing vs. payments over time)
• representations and warranties of the selling charity regarding the assets, property or business being sold (e.g., details regarding the condition of the assets)
• covenants of the buyer and selling charity regarding a variety of matters (e.g., who will be responsible for liabilities associated with the assets)
• indemnification by the selling charity to the buyer in the case of any breach of representations and warranties (e.g., circumstances in which a party can look to the other party in the event there is a lawsuit related to the ownership or use of the assets)

When an asset, property or business is gifted by one charity to another, many of the matters that would normally be dealt with in a for-profit transaction are either inapplicable (e.g. purchase price) or need to be reconsidered in light of the lack of exchange of financial consideration (e.g., representations, warranties and indemnifications). That said, for the protection of both parties, a formal written legal agreement documenting the terms and conditions upon which the asset, property or business is being gifted by the transferring charity to the recipient charity is still required.

There are numerous considerations both a transferring and recipient charity will want to see addressed in the transfer agreement, including:

• What exactly is being gifted and what is excluded from the gift?
• What obligations and liabilities will be assumed by the recipient charity and are there any obligations and liabilities that will be excluded from the transfer and remain with the transferring charity?
• If there are employees connected with the operation, how will their continued employment be handled? Will the recipient charity offer employment to all or some of the transferring charities employees? Who will be responsible for severance obligations to employees no longer required after the transfer?
• How will transitional issues be dealt with? A clear process needs to be set-out detailing how the parties will handle matters such as employees, (payroll, benefits, pension), supplier contracts, ‘customer’ agreements etc.
• What approvals are needed in order to complete the transfer? Are contracts being transferred where a third party’s consent to the transfer is required? How will this impact the timeline to complete the transfer?
• Is any donor information related to the operation being transferred?  If so, what is the process for the transfer of the donor information?
• Are bequests, restricted funds, gifts and donations being gifted as part of the transfer? Are there restrictions on the transfer that need to be adhered to?

While such an asset transfer agreement will closely resemble a purchase and sale agreement that would be used in a for-profit transaction, there are some elements that will be different.  Most notably perhaps is the manner in which disclosure regarding the assets is handled in the asset transfer agreement. Many transferring charities take the position that since they are giving away their assets for no consideration (despite the fact that they may have significant value) they are not prepared to provide any (or perhaps minimal) representations or warranties regarding the condition of the assets, and instead will often take the position that the transfer should be structured on an ‘as is where is’ basis – in other words the recipient charity will simply step into the shoes of the transferring charity with regards to the assets, for better or worse.

If the recipient charity is uncomfortable with this approach, one option is to not accept the gift from the transferring charity. Of course, as the recipient charity generally wants to conclude a transfer and ultimately receive a valuable asset, the recipient charity will want to work very hard to find a way to be comfortable with the fact that it will not get the benefit of full disclosure from the transferring charity.

The starting point for the recipient charity is to have a solid dialogue with the transferring charity and to conduct appropriate due diligence on the assets being gifted so as to be in the best position possible in terms of knowing what liabilities a recipient charity will be taking on in connection with the transfer. That said, where a recipient charity’s due diligence provides inadequate results or where due diligence will simply not reveal a complete and accurate picture, a recipient charity should attempt to negotiate representations and warranties regarding the state of affairs of the assets from the transferring charity.  This is so that the recipient charity can obtain sufficient disclosure to know what it is getting into as well as some ability to perhaps seek some recourse as against the gifting charity in the event that any of the major representations and warranties turn out to be false or inaccurate.

In many cases, the dollar value that the transferring charity would realize on the sale of the assets could be significant, making the transfer for no consideration all the more charitable.  Thus, in situations where the transferring charity and recipient charity are truly committed to ensuring that the asset, property or business finds a home for its continued operation, an appropriate balance can usually be found to ensure that a transferring charity can walk away without worries once the transfer is complete and that the recipient charity’s needs are met in order to enable it to receive the asset(s) and continue the operations associated with them.

Charities, both transferring and recipient, are cautioned to take sufficient time to review their respective objectives when it comes to a major asset transfer and to make sure that any concerns they may have are properly addressed in a transfer agreement that has had the benefit of input from a their respective accounting, operational and legal advisors.

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Federal Court Of Appeal Upholds Decision Denying Charitable Credits

Andrew Valentine, Toronto

In the April 2010 issue of this Newsletter, we reported on the decision of the Tax Court of Canada in Coleman v. M.N.R., in which the Tax Court denied charitable donation credits claimed by various donors to a structured scholarship fundraising program.  The Federal Court of Appeal has recently released a decision upholding the previous ruling.  The case provides insight into the breadth of circumstances in which courts will find that donors have received benefits in respect of charitable gifts.

As previously reported, the 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 that could be receipted.

The donations in question pre-dated the split-receipting regime under the Act, and were therefore analyzed under the common law definition of “gift”.  That definition requires, among other things, that no benefit accrue to the donor in respect of the donation.  The Tax Court had analyzed the links between the donations and the benefits received by the donors (in the form of scholarships or bursaries received by their children) and held that the link was sufficiently strong that the donations did not meet the definition of gift.  Donation credits claimed by these donors to the program were accordingly denied.

On appeal, several taxpayers made arguments as to why their donations to the program should be accepted as gifts.  First, it was argued that because the parents and grandparents who made donations and whose children/grandchildren received bursaries were not legally obliged to pay for their post-secondary education, the provision of a bursary to these children should not count as a donor benefit.  The Court rejected this argument, calling it too narrow a definition of “benefit”.

The taxpayers also argued that there was some uncertainty as to whether their children would receive a bursary through the program and that therefore they cannot have made the gifts with the expectation of receiving a benefit.  The Court also rejected this argument, stating first that the taxpayers in question knew that their children met the requirements to receive a bursary under the program and would most likely do so, and second that the existence of an element of uncertainty would not necessarily prevent a finding that the taxpayers made their gifts with the expectation of receiving a benefit.

The Court made other statements that confirmed the breadth of the concept of “benefit” that will be applied by the courts.  The Court stated:

• that “reciprocal” donations by family friends would count as a benefit.  In other words, where a donation by the parent of student A solicited by student B was matched by a donation by the parent of student B solicited by student A, the provision of bursaries to these students would qualify as a benefit to the donors.
• where donations to the program were made by a corporation controlled by an individual whose child(ren) receives a bursary through the program, the corporation will be considered to have received a benefit.

The Federal Court of Appeal ultimately dismissed the taxpayers’ appeals in this case.  The decision confirms that courts will take a broad view of what constitutes a donor benefit.  Courts will also likely apply a similarly broad analysis when determining whether an advantage has been received in respect of a gift under the split-receipting rules.  Charities and donors should be cautious and seek legal advice when issuing or claiming receipts where there is uncertainty as to whether a benefit has been received in respect of the gift.

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Canada’s New Anti-Spam Legislation

Roxanne Chow, Toronto

In the December 2009 issue of the Miller Thomson Charities newsletter, we reported  about Bill C-27 which had been introduced by Parliament to address the issue of spam proliferation and the use of malware. That bill was re-introduced by Parliament after the last election as Bill C-28, also known as the “Fighting Internet and Wireless Spam Act” (FISA), and received Royal Assent at the end of last year. Although the appearance of yet another election has delayed FISA from coming into force, Canada now has a framework for regulating spam and malware.  Below are some of the issues that will affect charities and not-for-profit organizations, and some recommendations on how you can prepare your organization for FISA.

FISA regulates a broad range of activities, including altering the transmission of data, use of spyware, and the sending of commercial electronic messages. The focus of this article is on the latter.

“Commercial Electronic Message”

The anti-spam portion of FISA prohibits a sender from transmitting a commercial electronic message to an electronic address, unless the receiver of the message consents to receiving it, and the message is sent in accordance with a prescribed form. The anti-spam provisions affect a wide variety of “electronic messages”, including a message sent by email, text, instant messenger, telephone or any other similar means of telecommunication.

In addition, what constitutes a “commercial” message is broad. The term “commercial” refers to anything that “encourages participation in commercial activity”, including an offer to purchase goods or services, to provide a business, investment or gaming opportunity, and the advertising or promotion of these activities or a person who does any of these activities. Thus, an email containing a request for donations or promotion of a fundraising activity may be considered a “commercial electronic message”.

“Consent”

Commercial electronic messages can be sent if the sender has the recipient’s express or implied consent to receiving such messages. Express consent is evidenced by the receipt of a response to a sender’s request for consent, which sets out what the recipient has consented to.

Implied consent is based on the relationship between the sender and recipient. For instance, consent will be implied where there is an “existing non-business relationship” between the recipient and a sender that is a registered charity, club, association, voluntary organization, political party or political candidate. An existing non-business relationship would exist if, in the last two years prior to the sending of the commercial electronic message, the recipient had made a donation or gift to the sender, had worked as its volunteer, was its member, or had attended one of its meetings. FISA contains a transitional provision where implied consent is presumed until the sender is otherwise notified, or until three years after FISA has come into force.

“Prescribed Form”

If there is consent, a commercial electronic message can be sent if it is in a “prescribed form”. The government has not yet set out the full list of requirements for the prescribed form, but FISA indicates that the message must at least make available the sender’s identity or identity of the person on whose behalf the message is sent, and the contact information of the sender must remain valid for at least sixty days from the date the message was sent. The message must also give the recipient a method to opt out or unsubscribe from receiving messages.

The means to unsubscribe must be effective for sixty days, and each opt-out request must be put into effect by the sender within ten business days after the request was submitted. In addition, the unsubscribe mechanism must be free to the recipient.

Exceptions

There are a number of exceptions that would not be prohibited by FISA as spam, such as messages sent by individuals to a recipient with whom he or she has a personal or family relationship, and interactive two-way voice communications between individuals.

Penalties

FISA sets out some significant penalties. Individuals may be fined up to $1 million and corporations may be fined up to $10 million for a breach of the anti-spam provisions.  FISA also allows for a right of action by individuals who receive commercial electronic messages from a sender who did not have the appropriate consents to seek statutory damages to a maximum of $1,000,000, or $200 for each electronic message sent per day in contravention of the anti-spam provisions.

Recommendations

Many organizations have already developed consent mechanisms for their electronic communications. However, before FISA comes into force, we recommend that you and your organization review your policies and procedures for electronic communications, and ensure that you have a mechanism in place for recipients to opt-out of receiving electronic communications from you, and that this unsubscribe mechanism can be effected within ten days of the request. For example, an unsubscribe mechanism can be an electronic address or hyperlink by which the recipient’s opt-out request can be submitted. In addition, we recommend that organizations update their email or communications lists on a regular basis, to ensure that those who have submitted an opt-out request, and those whose two-year period of implied consent have expired, are removed from the lists.

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What's Happening at Miller Thomson

Adrienne Campbell wrote "20 Questions Directors of Non-Profit Organizations Should Ask About Human Resources", published by the Canadian Institute of Chartered Accountants in April 2011.  A copy of this publication is found here.

Kate Lazier co-presented with Melodie Bissell on "Customizing Polices" at the Winning Kids Lunch n' Learns on March 29, 2011.

Rachel Blumenfeld spoke on “Technical Skills To Leverage A Better Gift” at Canadian Association of Gift Planners (CAGP) National Conference - Toronto Roundtable on April 7, 2011.

Susan Manwaring taught students of the Schulich School of Business at York University on governance issues on April 7, 2011.

Susan Manwaring spoke at Canadian Association of Gift Planners (CAGP) National Conference on April 15, 2011 on the topic “Social Enterprises & Its Impact on Gift Planning” and co-presented with Neil Cochrane on the topic “What CAGP-ACPDP’s Government Relations Committee is Doing for You”.

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