Canada Not-for-Profit Corporations Act Proclaimed in Force

Andrew Valentine, Toronto

The new Canada Not-for-Profit Corporations Act will come into force on October 17, 2011.  All federally incorporated non-share capital corporations will be required to transition under the new legislation within three years of the in-force date, that is, by October 17, 2014. We have previously reported on the new Act, and the requirement to transition, in the January 2011 edition of this Newsletter.

It is important that all federally incorporated non-profit corporations take note of this deadline, as failure to transition under the new Act within the three-year deadline will result in the dissolution of the corporation.

Corporations considering federal incorporation under the current federal Canada Corporations Act should also note the in-force date of the new legislation. As set out on Industry Canada’s website, the last day for submitting an application for incorporation under the CCA is October 16, 2011. Like all corporations incorporated under the CCA, newly incorporated CCA corporations will be required to transition under the new Act within three years of the in-force date of the new Act. Corporations contemplating federal incorporation may therefore wish to wait until the new Act is in force so that they can incorporate under the new legislation and avoid the need to transition later.

As previously reported, federal Special Act corporations will automatically be subject to certain provisions of the new Act and will have the option of transitioning under the CNCA so that the whole of the new legislation applies.

Industry Canada’s website contains information on incorporation and corporate maintenance under the new Act, as well as on the transition process for corporations continuing under the new legislation. That information is available here.

Miller Thomson’s Charities and Not-for-Profit lawyers can assist organizations in transitioning under the new Act.

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Deadline Approaching to Block Use of Trademarks by .XXX websites

Eve C. Munro, Vancouver

Organizations that do not wish their name to be associated with a .XXX domain name should consider steps that can be taken to prevent this. In particular, a time-limited opportunity is available to enable organizations to block the use of registered trade-marks by websites with a .XXX domain name.

The .XXX domain is a top-level domain designed specifically for the adult entertainment industry.  Registrations of .XXX domain names will be commencing shortly. This raises the possibility that an organization’s name and trade-marks will be used in connection with .XXX websites. For many charities and non-profit organizations, the prospect of having one’s name or marks associated with an adult website would be detrimental to the organization’s brand. Where an organization has a registered trade-mark, however, there are several options available to prevent the use of the trade-mark by a .XXX website.

Generally, the only way for a trade-mark owner to prevent their trade-mark from appearing on a top level domain is to register those domain names themselves. If they do not and they object to the usage made of their trade-mark in a domain name, a domain name dispute resolution process is available.

With the implementation of the .XXX domain, another option is being made available. Holders of registered trade-marks outside the adult entertainment industry who do not wish to register .XXX names, but who want to block and protect their trade-marks from being registered by others in this domain may pursue a process which is called “Sunrise B”. Under the Sunrise B procedure a trade-mark owner does not apply for a .XXX registration for itself. It is simply applying to block others from using the trade-mark in the .XXX domain through a reservation process. The deadline to apply for this protection is October 28, 2011.

There are a number of requirements for this process:

1. As noted, the Sunrise B procedure is a pre-launch protection mechanism for trade-mark owners and therefore has a limited period. This period ends on October 28, 2011.
2. Only registered owners, licensees or assignees of trade-marks will be eligible as Sunrise B applicants.  Trade-mark owners will need to supply the following information when submitting their Sunrise B online pre-registration application:
   
   (a) registered trade-mark and number
   (b) registration country
   (c) application date
   (d) application and registration dates
   (e) applicant capacity (applicant, licensee or assignee)
   (f) registration class
3. The Sunrise B application is made through a domain name registrar and the cost varies per registrar.  A list of accredited registrars is available here. There will be a register of blocked or “reserved” domain names for which publicly available registry information will state the registry and not any particular Sunrise B applicant.

There is also a Sunrise period for trade-mark and domain name owners that wish to apply for .XXX domain names.  That period also expires on October 28, 2011. The “Sunrise A” procedure is aimed at applicants from the adult entertainment community (the “Sponsored Community”). If both a Sunrise A and Sunrise B applicant apply for the same domain name, priority will be given to the Sunrise A applicant to register the domain name with no refund of fees paid. 

Following the Sunrise periods there will be a “Landrush” period which will permit members of the Sponsored Community to compete for names by way of a closed auction. General availability commences on December 6, 2011 with the remaining .XXX domain names allocated on a first come, first served basis. For those who are non-members of the Sponsored Community, accredited registrars will accept applications for non-resolving .XXX domain names. This will permit protection of rights in names and words that do not have qualifying rights under Sunrise A or Sunrise B.

Organizations that wish to avail themselves of Sunrise B protection should move quickly in light of the impending deadline. Miller Thomson’s lawyers can assist organizations in applying for this protection.

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Internships

Stuart E. Rudner, Markham

Every jurisdiction in Canada has legislation that governs employment relationships. Generally speaking, individuals who are working pursuant to an internship program are exempt from those regulations. However, there is wide-spread confusion regarding who qualifies as an intern. Some charities and not-for-profit organizations may have individuals that are treated as interns but would not qualify under the applicable law. As a result, those organizations expose themselves to legal action and liability.

In Ontario and elsewhere, the employment standards legislation is designed to set out the rules and regulations for “employees”. True interns are not considered to be employees. The difficulty, however, is that there are not really any definitions of what constitutes an intern in the applicable legislation. A few months ago, several media outlets published stories about internships in Ontario, suggesting that some organizations were abusing the concept and, essentially, taking advantage of people by calling them “interns” and subverting the applicable employment standards legislation. 

In response to this media coverage, the Ontario Ministry of Labour released a fact sheet titled “Internships in Ontario:  What you need to know”. According to this fact sheet, “employees” do not include “a trainee who is receiving training from an employer in the skills used by the employer’s employees,” if all of the conditions below are met: 

1. the training is similar to that which is given in a vocational school; 
2. the training is for the benefit of the individual;
3. the person providing the training derives little, if any, benefit from the activity of the individual while he or she is being trained;
4. the individual does not displace employees or the person providing the training;
5. the individual is not accorded a right to become an employee of the person providing the training;
6. the individual is advised that he or she will receive no remuneration for the time he or she spends in training.

The recent media coverage clearly suggests that organizations, including some charities and not-for-profits, were essentially using the concept of internships in order to obtain free labour. The requirement set out by the Ministry of Labour reinforces the notion that a true internship is designed to benefit the intern, and not the organization.

Organizations that run afoul of employment standards legislation face significant liability. This can include claims for wages for time worked, vacation pay, overtime pay, holiday pay, and, if the relationship is terminated, wrongful dismissal. The potential damages can be substantial, and the reality is that even if an organization successfully defends such a claim, doing so can be costly.

In order to protect themselves, organizations should review their practices and clearly delineate individuals that will be employees, interns, and volunteers. Although the latter two are not paid, it is beneficial to keep them separate.  Their roles are quite distinct, and this should not be difficult.

With respect to interns, it is important to have clear agreements and policies/procedures which set out the role of the intern, the nature of the relationship, and the expectations of the parties. By doing so, an organization can ensure that the intern does not simply become an unpaid employee. A lawyer that specializes in employment law can assist organizations in establishing such documentation and practices in order to minimize potential liability.

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Gifts of Cultural Property

Kate Lazier, Toronto

Donors can get special tax benefits when they make a gift of cultural property.

A gift of cultural property is a gift of property that meets two criteria:

• the property is of “outstanding significance by reason of its close association with Canadian history or national life, its aesthetic qualities, or its value in the study of the arts or sciences”; and
• the property has “such a degree of national importance that its loss to Canada would significantly diminish the National Heritage”.

The Cultural Property Export Review Board decides whether to certify the property as cultural property and, if certified, will then determine value of the gift for the purpose of the charitable tax receipt.

Not all charities can accept gifts of cultural property. Gifts of cultural property can only be accepted by a designated institution under Section 32 of the Cultural Property Export and Import Act. A list of designated institutions is available here. However, a charity can apply to become a designated institution, either on an ongoing basis or for the purposes of receiving a one-time gift.

Tax Treatment

There are a few special benefits of making a gift of cultural property. First, there is no capital gain inclusion in the donor’s income if the capital gain arose upon gifting cultural property to a charity. Therefore, a donor can avoid capital gains tax. Similarly, were the gift is made by an artist who created the cultural property, the Income Tax Act deems the artist to receive proceeds of disposition equal to the artist’s cost of creating the cultural property. Thus, the artist does not have an income inclusion when it makes the gift.

While the donor does not have to pay tax on the disposition of the cultural property, the donor can still get a receipt for its fair market value. This receipt can be used to offset the 100% of the donor’s taxable income for the year.   For gifts that are not certified as cultural property, the charitable tax receipt can be used by the donor to eliminate only up to 75% of the donor’s income for the year. For all gifts, any unused portion of a charitable tax receipt can be carried forward to apply against the donor’s income for five years.

With these benefits comes a restriction. If within ten years of receiving the gift of cultural property, a charity transfers the gift to an institution that is not designated under the Cultural Property Export and Import Act, then the charity must pay a tax on the gift’s value.

Lawyers in Miller Thomson LLP’s charity and not-for-profit specialty group can assist donors and charities in navigating the cultural property rules.

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CRA Releases Guidance on Charitable Trust Requirements

Amanda J. Stacey, Toronto

On August 15, 2011, the CRA released Guidance CG-009 concerning the requirements of a charitable trust.  Registered charities (charitable organizations, public and private foundations) can be established as corporations, unincorporated associations and charitable trusts. While a trust can be used to establish any one of the three types of charities, it is most commonly used to establish a private foundation. 

As compared to establishing a charity as a corporation, trusts are not subject to the annual provincial filings and fees applicable to corporations and societies and are generally less expensive to establish. However, both charitable corporations and charitable trusts are subject to annual filing requirements with the CRA. While annual meetings of the trustees are not required by statute (as is the case with members and directors of non-share capital corporations) it is highly recommended that trustees meet regularly to ensure that they are meeting their duties as trustees and managing the charity effectively.

The CRA sets out the elements that it requires in a trust document for a registered charity established as a trust.  These elements are:

• the name of the trust
• the name of the settlor(s) or the name of the person(s) making the declaration of trust
• the names of the original trustees
• the charitable purposes of the trust
• the rules governing how the trustees will administer all property (including money) received
• an acknowledgement that the initial trust property (including money) has been transferred to and received by the trustee
• a provision in which the trustees give assurance that all property (including money) received will be applied only for the purposes outlined in the trust document
• a provision detailing how the trustees will be replaced
• the effective date of the document
• the signatures of the trustees

A trust is established when the settlor transfers property to one or more trustees and sets out the conditions, usually in a written document, for how that property must be used and for whom. It is worth noting that although the list above refers to “trustees”, a charitable trust can be established with a single trustee.  That person can also be the settlor of the trust.

Trusts are complex vehicles that are subject to sophisticated tax rules and the common law and it is our recommendation that they not be established without advice from expert counsel. It is our view that the above-mentioned requirements represent the minimum requirements that should be included in a deed of trust.  Consideration should also be given to including provisions regarding trustee indemnification, the termination of the trust, trustee powers and regulations and permissible amendments.

The CRA recommends that applicants submit a draft trust document for review by the CRA because once a trust is established, it may be impossible to amend the trust without a court order. We would recommend that a charitable trust include an amendment clause that allows the Trustees to amend the trust if need be. This will avoid the need to go to court should future amendments be necessary. Applicants for charitable status will want to consider whether to limit amendments to the administrative provisions of the trust or whether the charitable objects of the trust are open to amendment as well.  In our experience, if charitable objects are subject to amendment, the amendment clause must provide that at no time can an amendment be made that will render the objects of the trust non-charitable.

We also recommend that the trust document set out where property is to be transferred on a wind-up of the trust.  This type of provision must at least limit potential recipients to qualified donees, and if the charity is established in Ontario, to other charitable organizations.

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The English Approach to Payments Made to a Foreign Charity - A Cause for Jealousy?

Robert B. Hayhoe, Toronto

Canadian charities that spend money outside Canada will be well aware of the restrictive nature of the Canadian rules on foreign charitable expenditure. Interestingly, HMRC, the English tax authority, has just released its new and slightly more restrictive policy on the same issue.  The sensible English policy is an interesting contrast with the Canadian policy.

A Canadian registered charity may only spend its money on grants to qualified donees (essentially other Canadian registered charities) or on its own charitable activities. A Canadian registered charity that makes a grant to a foreign charity (for example its English or US sister organization) can have its charitable registration revoked and all of its assets seized by the Canadian government for making that grant, even if it is entirely uncontroversial that the funds were all spent on charitable activities by the recipient. While it is possible for a Canadian charity to fund an activity of a foreign charity by entering into an agreement whereby it adopts some activities of the foreign charity, this approach is relatively complex and results in many opportunities for non-substantive non-compliance that may nonetheless be attacked by the Canada Revenue Agency (for more detail on the CRA’s approach, see its policy CG-02 Canadian Registered Charities Carrying Out Activities Outside Canada).

Of course, the Canada Revenue Agency has a role to play in ensuring that tax exempt registered charities are not able to send money out of Canada for activities that are clearly not charitable. Our objection is to the form-over-substance means – i.e., the “own activities” requirement described above - by which it accomplishes this goal.

The approach of HMRC is surprisingly practical.  As described in its policy:

When a payment is made or is to be made to a body outside the UK, this will only be considered charitable expenditure if:

• the payment is made to a foreign supplier of goods or services in the ordinary course of the charity’s activities; or
• the charity takes steps that the Commissioners for HMRC consider are reasonable in the circumstances to ensure that the payment is applied for charitable purposes, including where the payment is made to an overseas branch or office of the charity to be applied for charitable purposes.”

The HMRC policy goes on to provide considerable guidance on the types of steps that a domestic English charity must take in order to be behaving reasonably in paying amounts to a foreign charity. While the details are not relevant to Canadian charities, HMRC will consider various factors in assessing reasonableness, such as:

• the charity’s knowledge of the overseas body
• previous relations with the overseas body
• past history of the overseas body
• the amounts given in both absolute and relative terms

The examples given by HMRC make clear that it is only in the case of a large and complex project that it will require the degree of reporting and oversight that the CRA requires of all payments of any size. It is a pity that the CRA believes that it cannot take this approach with Canadian charities.

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What's Happening at Miller Thomson

Robert Hayhoe and Brenda Taylor held an interactive double workshop presentation on the “Canada Not-for-Profit Corporations Act” at the CCCC Leadership and Stewardship Annual Conference on September 27, 2011.

Susan Manwaring participated at the Canadian Council of Christian Charities in Mississauga at the CCCC Conference 2011, speaking on “Charities Earning Business Income” September 27-29, 2011.

Susan Manwaring was a panel participant for The Philanthropic Foundation – “The Changing Face of Philanthropy” held on October 3 and 4, 2011.

Miller Thomson’s Charities & Not-for-Profit Group held a seminar October 4, 2011 “Review of the Budget 2011” with Susan Manwaring, Robert Hayhoe, Kate Lazier and Andrew Valentine speaking.

Rachel Blumenfeld spoke for Canaccord advisors and their clients on “Charitable Giving” on October 4, 2011.

Kate Lazier presented the “Law of Special Events” as a guest lecturer at Humber College on October 6, 2011.

Susan Manwaring and Robert Hayhoe were panel participants at Osgoode Hall Law School’s “Roundtable: Looking Ahead to 2012 & Beyond” held on October 6, 2011.

Amanda Stacey and Andrew Valentine will present “Registering and Running a Charity” as guest lecturers at Humber College on October 20, 2011.

Gail Black and Kate Lazier are speaking at the Miller Thomson Charities & Not-for-Profit seminar to be held on October 25, 2011 in Calgary.

Sheldon Wood, Carol VandenHoek, Amanda Stacey and Andrew Valentine will speak to the Fellowship of Evangelical Baptist Churches on October 27, 2011, on risk management and liability issues.

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