Standing Committee on Finance Announces Study of Charitable Giving in Canada

The House of Commons Standing Committee on Finance issued a news release on December 15, 2011 announcing that a study of charitable giving in Canada will be launched when Parliament returns in 2012.

This study will be undertaken pursuant to a recommendation included in the 2011 Federal Budget that such a study be conducted on tax incentives for charitable giving.  The news release indicates that the study will examine, in respect of both individuals and corporations, current and proposed tax measures to encourage charitable giving. The examination will include the charitable tax credit amount and the possible extension of the capital gains exemption to donations of private company shares and real estate. The study will also focus on the feasibility and cost of changes to existing tax measures as well as the implementation of new tax incentives.

The Committee invites members of the public to submit briefs to the Committee on the topic of tax incentives for charitable giving.  Submissions must be received by January 17, 2012.  The Committee notes that submissions should be no more than five pages, and may be published on the Committee website.

Charities and advisors who work in the sector should consider making submissions to the Committee on this important topic.

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Turf Tussle Erupts in Charity Over Fiduciary Duty*

Robert B. Hayhoe, Toronto

The Ontario Superior Court of Justice has released its decision in Victoria Order of Nurses for Canada v. Greater Hamilton Wellness Foundation, a case in which a parallel foundation sought to expend its assets contrary to its objects by refusing to use them to support the organization for which it had been established.

As one would expect, the court refused to permit such an obvious breach of fiduciary duty.

The applicant, VON Canada, is a charity that carries out a healthcare mission across Canada. Until 2003, it operated through a structure of provincial organizations and local branches (all of which were separate charitable corporations). This proved to be unwieldy so the provincial organizations and local branches were consolidated into a limited number of regional VON charities in the early part of the current century.

In 1981, the Victorian Order of Nurses Hamilton Wentworth Foundation was formed as a parallel organization to support the work of the Hamilton branch. Both its object and its dissolution clauses limited it to the support of Ontario VON branches or their successors. In 2003 the foundation negotiated but did not sign a memorandum of intent whereby it would continue to support VON programming that would be carried out by VON Canada, with the Hamilton branch to be dissolved as a separate corporation. Even though unsigned, the memo of intent was implemented and abided by until 2008.

In 2008 VON Canada asked all foundations to sign an association agreement. The chair of the Hamilton Wentworth Foundation (who was also a VON Canada board member) objected vigorously to this agreement and began to take steps to renew the existence of a separate Hamilton branch. Although the chair did not acknowledge that her approach presented a conflict, she did eventually resign from the board of VON Canada.

In 2009 the Hamilton Wentworth Foundation decided that it wished to fund charitable activities not carried out by VON Canada and introduced stringent new requirements, resulting in some VON Canada funding requests being refused. The foundation also applied for supplementary letters patent permitting it to grant to any Ontario charity.

Faced with the above, VON Canada applied to the court and obtained an interim injunction preventing the Hamilton Wentworth Foundation from identifying itself as a VON related entity and freezing the foundation’s assets.

The court has now also given its final decision on the merits.  It confirmed that VON Canada clearly has status to complain, both at common law and under the Charities Accounting Act (Ontario) and that the Hamilton Wentworth Foundation’s directors are trustees. The court confirmed that the objects of the foundation, both on their words and in the totality of the circumstances, only permitted the foundation to support VON Hamilton and its successors.

The refusal of the foundation to support (financially and in various other ways) VON Hamilton’s successor was a breach of fiduciary duty on the part of the foundation (and by implication its directors). As a result, the court ordered the foundation to transfer all of its assets to the successor of VON Hamilton immediately.

The legal result is exactly as one would expect. What is perhaps more interesting is the factual background. The foundation’s extraordinary (on the face of the decision) tenaciousness might have been better devoted to supporting charitable works rather than litigation that ultimately resulted in a finding of fiduciary breach. It will be interesting to see what the costs consequences of this litigation are.

*This article was originally published in (2011) 31:29 Lawyers Weekly 10.

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The Meaning of “Public Benefit”: U.K. Tribunal Affirms Trustee Discretion in Meeting Public Benefit Test

Rahul Sharma, Toronto

Introduction

The Upper Tribunal of the United Kingdom Tax and Chancery Chamber recently released its decision in The Independent Schools Council v. The Charity Commission for England and Wales.  The decision ordered corrections to certain published policy directions issued by the Charity Commission for England and Wales (the “Commission”), particularly with respect to the Commission’s interpretation and test for “public benefit” in the context of charities that charge fees for their services.  Although the decision focussed on the definition of “public benefit” in the U.K. Charities Act 2006, the decision is nonetheless relevant to Canadian charities, particularly given that the statutory definition of “public benefit” in the U.K. is based largely on the common law.

Facts

The Independent Schools Council (the “ISC”) is an umbrella organization for 1,270 U.K. independent schools, 980 of which operate as charities.  The ISC sought an order to quash parts of the Commission’s Guidance on the interpretation of the public benefit requirement under the Charities Act (this Guidance would be similar to an Interpretation Bulletin or Information Circular issued by the Canada Revenue Agency).  The ISC argued that the Guidance included errors of law with respect to the public benefit requirement, particularly with respect to the requirements in the Guidance that:

1. where a benefit is to a section of the public, the opportunity to benefit must not be restricted by the ability to pay any fees charged; and
2. people in poverty must not be excluded from the opportunity to benefit. 

Following the release of the Guidance, the Commission assessed five independent schools.  Pursuant to its assessments, the Commission determined that the fees charged by these schools were unreasonably high and not in keeping with the public benefit test under the Charities Act and the Guidance.  It was the Commission’s view that the benefit of education was being restricted by the ability of the students to pay and by the fees that were charged by independent schools.  Accordingly, people in poverty were, effectively, excluded from the opportunity to benefit from these charities’ activities. 

The ISC argued that the prescriptive elements in the Guidance – and particularly those requiring minimal levels of provision for those who could not afford the fees – unreasonably interfered with trustees’ discretion to carry out a charity’s objects, and failed to distinguish between a charity’s objects and the activities carried out in pursuit of those objects.  It also argued that it was unclear as to what level of provisions (such as bursaries, for example) would satisfy the public benefit requirement under the Commission’s interpretation.

The Decision

The Tribunal extensively reviewed the U.K. common law regarding the concept of “public benefit”, noting that the definition of “public benefit” under the Charities Act 2006 essentially adopts the common law on this issue.  It stated that, at common law, a purpose will only be charitable if it meets two aspects of a public benefit test: the nature of the purpose itself must be such as to benefit the community (e.g., education), and the benefit must be conferred on a sufficiently large section of the public.  In the context of fee-charging schools, it was the second aspect of the public benefit definition on which the case focussed.

The Tribunal held that private schools that are run as charities cannot be exclusively restricted to those who are able to afford to pay full fees.  Adequate provisions need to be made for the poor (or those who cannot afford the fees) that are greater than de minimis.  However, the Tribunal held that it was entirely within the trustees’ discretion to determine what provisions should be made to ensure this.  In the context of private schools, these provisions do not need to be restricted to bursaries or scholarships to students otherwise unable to pay the fees.  The requirements could be met, for example, through the sharing of school resources or education facilities with other students. The Tribunal confirmed that the proper approach is a fact-specific analysis of what a trustee, acting in the interests of the community as a whole and the particular circumstances of the charity, should do to meet the public benefit requirement. 

The Tribunal noted that the nature of this approach made it impossible to be prescriptive about the nature of the benefits that must be provided to the poor or the extent of them.  It is up to the trustees to make these determinations.  The Tribunal specifically stated that there is no legal requirement that the trustees act in accordance with what the Commission or anyone else would consider “reasonable” but rather in accordance with their own considered assessment of the circumstances pertaining to the charity.

The Tribunal also confirmed that the provision of education to paying students is a public benefit, notwithstanding the fact that tuition fees were charged.  In this regard, the Tribunal held that “public benefit” was to be broadly interpreted.  Further, it held that it was not up to Tribunals to enter into political debates regarding the provision of private education to paying students versus public education to the general public.

Implications for Canadian Charities

The decision in Independent Schools Council is significant to Canadian charities in affirming the level of independence with which trustees and directors should be provided when it comes to running their charities.  While the decision is not directly applicable in Canada, its summary of the U.K. common law (from which Canadian charity law in part derives) is helpful in affirming the need for trustees to have discretion to determine what steps are appropriate for their charities to ensure that the public benefit requirement is met.

The decision does not suggest that charities have “carte blanche” to charge fees for services without remaining cognizant of and meeting the need to benefit a wider segment of the public than those individuals who can afford the fees.  The Tribunal was clear that “poor” does not exclusively mean “destitute” and that charities need to maintain a measured and balanced approach when charging fees in order to ensure that their activities remain within and continue to meet the “public benefit” test.  Although the Tribunal left it to trustees’ and directors’ discretion as to how a charity would balance and measure its activities in order to remain within the meaning of public benefit, the circumstances of every case will be different.

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Court Releases Decision on Certification of Donation Tax Shelter Class Action

Andrew Valentine, Toronto

In November 2011, the Ontario Superior Court of Justice released its decision on a motion for class action certification in Lipson v. Cassels Brock & Blackwell LLP.  The case arises out of a charitable donation tax shelter arrangement that was promoted and carried out between 2000 and 2003.  The tax shelter involved the donation of both cash and timeshares to registered Canadian amateur athletic associations in respect of which donors claimed donation tax credits.  CRA denied the majority of the tax credits claimed, and the participants sought to have a class action certified against a law firm that provided legal opinions suggesting that the tax credits would not be successfully denied.  Although the Court denied certification in this case, the decision has interesting implications for class actions against law firms opining on donation tax shelter arrangements.

The decision was not a final ruling on the merits of the case, but rather a decision as to whether the case would be permitted to proceed as a class action.  If a class action is certified, a representative plaintiff is permitted to pursue a claim on behalf of a class of plaintiffs with sufficiently similar claims against a common defendant.  The plaintiff in this case, Mr. Lipson, sought to be certified as a representative plaintiff on behalf of all participants in the donation arrangement, seeking damages against the law firm for negligence and negligent misrepresentation.  Often the crucial fight in class proceedings comes at the certification stage, where defendants argue that the claim should not proceed as a class action but should rather be pursued individually by the class members.

The Court considered two main issues: (i) whether the action met the legal criteria for certification as a class action, and (ii) whether the claims advanced were statute-barred due to being commenced outside the relevant limitation period.

Test for Certification

The Court first considered whether the action met the test for certification as a class proceeding.  Under the Class Proceedings Act, 1992 (Ontario), a class action can only be certified if the following conditions are met:

1. the pleadings disclose a cause of action;
2. there is an identifiable class of plaintiffs;
3. the claims raise common issues of fact or law;
4. a class proceeding would be the preferable procedure; and
5. there is a representative plaintiff who would adequately represent the interests of the class without conflict of interest, and who has produced a workable litigation plan.

The central issues in the case were criteria (c) and (d).  The common issues advanced by Mr. Lipson related primarily to whether the law firm owed the individual participants a duty of care in preparing the legal opinions on the arrangement, whether this duty was breached, and what damages are available to the participants for such a breach.  The defendant argued that these issues lacked commonality and that grouping them together as a class action would prevent the law firm from fully defending itself.  It argued that the court must consider the individual circumstances of each plaintiff, including whether each plaintiff had knowledge of the opinion letters, what representations were made to them by other advisors, what reliance was placed on the opinion letters, and the actual loss suffered by each.  These issues, the defendant argued, are inherently idiosyncratic and must therefore be addressed in separate trials.

The Court held that the questions of the duty owed by the law firm to the participants in the program, and whether this standard was breached, were appropriate common issues to be addressed as a class proceeding.  However, it held that the questions of whether individual participants relied on the legal opinions, whether these opinions caused the plaintiffs’ loss, and the quantification of damages, would need to be addressed via individual trials.  The Court held that a class proceeding would be a preferable procedure to resolve the common issues, with individual trials to follow to address the issues of reliance, causation and quantification of damages.

Accordingly, the Court held that but for the limitation issue addressed below, and subject to the need for individual trials to address reliance, causation and damages, Mr. Lipson’s action satisfied the criteria for certification as a class action.

Limitation Period

After indicating that the action would be appropriate for class action certification, the Court addressed whether the claim fell outside the relevant limitation period.  In this, the timing of the events in this matter was important.  As noted, the tax shelter program operated between 2000 and 2003.  In 2004, CRA issued letters to all participants in the program disallowing all tax credits claimed.  Following receipt of these CRA letters, Mr. Lipson and other participants in the program had sought advice from a tax litigation firm in 2004 and 2005 and commenced litigation against CRA in 2006 as test cases to determine the availability of tax credits for the donations.  The litigation settled in 2008, with CRA permitting the plaintiffs to receive a tax credit only for the cash portion of the donation, but denying the remaining credits.  Following settlement, Mr. Lipson commenced the proposed class action against the law firm in 2009.

Under the Limitations Act, 2002 (Ontario), a two-year limitation period commences from the date on which a claim is discovered by the plaintiff.  A claim is considered to be discovered when the plaintiff discovers or ought to have discovered the existence of facts that would support the claim.  The fact that the plaintiff may not appreciate the legal significance of these facts does not postpone the commencement of the limitation period.

The Court held that the plaintiffs discovered or should have discovered their tort claims against the law firm in 2004, when they began receiving letters from CRA denying the tax credits claimed.  Accordingly, it held that the claims were statute-barred and dismissed the action.  The Court rejected an argument that the limitation period should run only from when the settlement was reached with CRA.

Implications

This decision is interesting in its implications for future class proceedings of this nature.  It confirms that certain issues may proceed by way of a class proceeding, but that there are also certain issues that must by their nature be tried individually.  It also confirms that the limitation period to begin such a class action begins as soon as the participants in the tax shelter become aware that CRA is seeking to reassess or deny tax credits – it is not postponed until the ultimate tax liability of the participants is determined.

It is unclear whether this decision – and particularly its conclusions regarding the need for individual trials – will increase or decrease the attractiveness of class action litigation against the promoters of tax shelters and law or accounting firms that provide opinions in support of them.  Certainly, it underscores the increased rise of tort liability faced by such firms that provide opinions on tax shelter donation arrangements.  An appeal has been filed in this matter, and so a final determination of these questions will have to wait until the appeal has been decided.

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Gifts in Kind

Kate Lazier, Toronto

Gifts in kind (such as art, real estate and rare books) can cause issues for charities.  It is important for charities to have procedures in place to avoid potential pitfalls. 

When a gift is offered by a donor, a charity should consider whether it wants the gift.  Can the gift be used in the charity’s activities? Can the charity afford to repair and maintain the gifted property?  Can the item be easily sold?  Is the gift in any way connected to a tax shelter?

Assuming that the charity accepts the gift, the charity should consider whether it can receipt the gift and, if so, the proper value of the receipt. It is the responsibility of a charity to issue proper receipts. The September issue of the Charity and Not-for-Profit newsletter included an article on the information requirements for proper receipts. Failure to issue proper receipts can result in the charity facing penalties and revocation of charitable status.

The Three Year Rule

In 2002, the Federal government introduced legislation aimed at eliminating situations where a donor would acquire property at a low price and then gift it to a charity for a receipt with a higher value.  While this legislation has not been passed, it is drafted to be retroactive to 2002 and, therefore, it is recommended that charities follow it as though in force.

The proposed legislation provides that where a donor has owned the gifted property for less than three years (or less than ten years, if it is reasonable to conclude that the main reason the property was acquired was to gift it to a charity), then the charitable tax receipt can only be issued for the lesser of the donor’s cost of the gifted property and the fair market value of the property at the time of the gift.

There is an exception to this rule for gifts made as a consequence of the donor’s death (bequests), gifts of inventory, real property in Canada, cultural property, securities listed on a designated stock exchange, ecologically sensitive land or shares of a corporation if the corporation issued the shares to the donor as part of certain types of corporate re-organizations.

In order to comply with this rule, a charity should ask the donor when they acquired the property and whether it was acquired with the intent to gift it to charity.

Fair Market Value

Where the receipt can be issued for the fair market value of the property, the charity has a responsibility to ensure that the fair market value is properly determined.

Fair market value is often defined as the highest price, expressed as a dollar amount, that a property would bring in an open and unrestricted market, between a willing buyer and a willing seller who are knowledgeable, informed, and prudent, and who are acting independently of each other.

For some gifts, such as securities on a listed stock exchange, determining the fair market value can be straightforward and appraisals of the gift may not be necessary.  For other gifts, ascertaining the fair market value of the gift is more difficult.  CRA takes the position in Guide P113 “Gifts and Income Tax”, that where a gift is worth less than $1,000.00 a qualified representative of the charity might be able to appraise it.  However, if the gift is worth more than $1,000.00, it is usually advisable to have the property appraised by a qualified appraiser. 

Where a donor provides an appraisal of a gift, the charity should consider whether the appraisal is reasonable.  The charity should consider the qualifications of the appraiser, whether the appraiser was given the mandate to determine fair market value and what the date of the valuation is at the time of the gift. 

Where the fair market value of a gift cannot be determined, CRA suggested that the item cannot be receipted.  Similarly, where a charity is not comfortable with the appraisal, the charity can decline to receipt the gift.

Lawyers in Miller Thomson LLP’s Charity and Not-For-Profit group can assist charities with issues arising from proposed or completed gifts.

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Letter to the Editor – Gifts to Smaller Charities

Dear Editor,

In the November issue of this Newsletter, an article by Arthur Drache noted the value to smaller charities of programs to facilitate gifts of securities and to familiarize such charities with the opportunities that exist for gifts of this nature.  The article suggested that such programs did not exist.

At least one organization offers such a program to enable smaller charities and their donors to receive the benefit of gifts of securities, without the need for the charity to establish a brokerage account or address issues surrounding the valuation and sale of the securities.  CanadaHelps is a registered Canadian charity that provides, among other things, online fundraising support for registered charities in Canada.  Charities can establish accounts with CanadaHelps whereby CanadaHelps receives donations from the public on behalf of the charity – including gifts in kind of securities – and handles the processing, valuation and receipting of these gifts.  It then forwards the cash value of the gift to the charity.  This program enables donors to make gifts of securities – and to receive the tax benefits associated with such gifts – for the benefit of smaller charities that may not have the administrative capabilities to receive such gifts directly.  This expands both the options for giving on the part of donors, as well as the ability of smaller charities to benefit from a wider range of charitable donations.

Charities interested in this program should visit CanadaHelps’ website for more information.

Sincerely,

Owen Charters
CEO, CanadaHelps

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What's Happening at Miller Thomson

Iain Benson spoke on "Are we as Tolerant as we Think?"  at the Verity Women's Club in Toronto on November 7, 2011.

Iain Benson spoke on "Preparing Yourself for the Coming Paradigm Shift on Religion, Law and Society" at the Skills for Change "Diversity in the Workplace" Conference in Toronto on November 9, 2011.

Iain Benson gave the 10th Anniversary Keynote Lecture on "Diversity, Accommodation or Convergence" at the Canadian Catholic Bioethics Institute Gala at the University of Toronto on November 16, 2011.

Iain Benson appeared on "The Agenda" with Steve Paikin discussing the issue of euthanasia on November 24, 2011.

Robert Hayhoe and Rahul Sharma wrote "Bad Behaviour: The Punitive Charity Governance Rules Introduced into the Canadian Tax System"  in STEP Journal, Vol. 19, No. 10, December 2011/January 2012.

Kate Lazier and Amanda Stacey spoke on "Maintaining a Stellar Public Image" at the 2011 AFP Congress in Toronto on November 28, 2011.

Kate Lazier spoke on "Understanding Our Legal Requirements" at a Winning Kids Lunch ‘n Learn seminar in Markham on November 29, 2011.

Kate Lazier spoke on "Transitioning Your Not-For-Profit Corporation Under the New Legislation" at a CIBC Wood Gundy event on December 6, 2011.

Susan Manwaring participated in the Grant Thornton LLP Not-for-Profit Organizations and Charities seminar held on December 7, 2011 in Edmonton and spoke on the topic "Evolving CRA Views on Charities/Non-Profits Involved in “Business” Activities”.

Susan Manwaring participated in the MaRS District Discovery 2011 Social Finance Forum, “Investing in Good Deals,” held on December 13 and 14, 2011.

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