Robert B. Hayhoe, Toronto
On July 8, 2010 CRA released an important new Guidance document: "Canadian Registered Charities Carrying Out Activities Outside Canada" (available at http://www.cra.gc.ca/tx/chrts/plcy/cgd/tsd-cnd-eng.html). This new Guidance replaces CRA Guide RC4106. It had been the subject of an extensive consultation process in which Miller Thomson charity lawyers had participated both directly in our own consultation submission and in preparing and commenting on submissions of individual clients and of other sectoral organizations.
The new Guidance is much more detailed and helpful than RC4106. It also provides more nuance and flexibility on how a Canadian charity can carry out foreign activities. However, it remains stuck in the paradigm (which the CRA believes is mandated by the Income Tax Act) of only permitting Canadian charities to carry out their own foreign activities. It remains our view that it would be more appropriate from a policy perspective if a Canadian charity could make cash grants to a foreign charity if the foreign charity was able to provide appropriate assurances that the funds granted would be spent in a charitable manner (as is the rule in virtually all other developed countries). Previous calls for this change have not resulted in the Department of Finance recommending or Parliament passing the changes that CRA believes would be required in order to permit appropriate foreign charitable grantmaking.
The New Guidance continues to contemplate that a Canadian charity may carry out foreign activities through the use of staff or volunteers, agents, joint venture arrangements, cooperative partnerships or service contracts. It acknowledges that some Canadian charities receive value from other sister or parent charities outside of Canada and contemplates payment in these circumstances. The new guidance also contemplates the continued application of the charitable goods policy whereby a Canadian charity may send goods to an appropriate intermediary where the nature of the goods limits their use to a charitable purpose. Finally, the new Guidance provides helpful clarification to the situations in which a Canadian charity may fund the purchase of land and buildings for use by a foreign charity.
The new Guidance should be reviewed by charities that carry out substantial foreign activities. It provides clarification, consistent with our experience, on designing and implementing structures for funding charitable activities, and should therefore provide comfort to charities that are engaged in foreign activities. At the same time, we confirm that we are engaged in representing a number of charities where CRA is seeking to revoke charitable registration in part because the CRA disagrees with how they have carried out and documented foreign activities. It is therefore important that charities continue to be careful in this area.
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Andrew Valentine, Toronto
Mahsa Pezeshki, Corporate Law Clerk
Miller Thomson Markham
mpezeshki@millerthomson.com
905.415.6473
Industry Canada has recently released a schedule of fees related to various applications and corporate procedures under the new Not-For-Profit Corporations Act (“NFPCA”). While the NFPCA is not yet in force, federally incorporated charities will want to be aware of the costs which will apply to these various procedures once the new legislation comes into effect.
Industry Canada advises that these fees were set after considering the processing costs for similar applications under other corporate statutes, such as the Canada Business Corporations Act (CBCA), with additional considerations given to the special not-for-profit environment in which corporations will operate under th NFPCA.
A full chart summarizing the fees applicable to each service is available at: http://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs02683.html#fees.
Miller Thomson’s Charities and Not-for-Profit lawyers can assist with all processes related to the governance and maintenance of non-share and non-profit corporations.
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Richard Fontaine, Montréal
A CRA technical interpretation released earlier this year addresses several issues related to the tax treatment of non-profit organizations (NPO). In the document, CRA reviews the treatment of the income of an NPO upon the loss of NPO status, the treatment of capital gains of an NPO, and the tax treatment of members who receive distributions from the NPO upon liquidation.
Loss of NPO status
CRA notes that the Income Tax Act (Canada) provides that the taxable income of an association is exempt from income tax for a period throughout which the association complies with all of the following conditions: (a) it is not a charity; (b) it is organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit; (c) it is in fact operated exclusively for the same purpose for which is was organized or for any of the other purposes mentioned in (b); and (d) it does not distribute or otherwise make available for the personal benefit of a member any of its income. Whether an NPO meets all of the above conditions and qualifies as a tax-exempt NPO is a question of fact that can only be determined after a review of the purposes and activities of the association for the year in question. This review should be conducted at the end of the year, not at the beginning of or during the year.
Where an NPO ceases to meet these criteria, it becomes subject to the rule in section 149(10) of the Act, which provides that where, at a particular time, a corporation ceases to qualify for a tax exemption as an NPO, a new taxation year is considered to start at the particular time. The corporation’s properties are deemed to have been disposed of at fair market value and reacquired at the particular time for the same amount, and the income earned after the particular time will become taxable.
Tax treatment of capital gains
The CRA document notes that when an NPO disposes of a capital asset, the taxable capital gain will be included in the NPO’s income but will be exempt from tax. However, if the main purpose of an association is to provide dining, recreational or sporting facilities for its members, special rules will apply. The Act will deem an inter vivos trust to have been created to hold the property of the association, and tax will be payable by the trust on any taxable capital gains from disposition of property. However, capital gains from the disposition of property used exclusively for and directly in the course of providing the dining, recreational or sporting facilities to the NPO’s members will be excluded from the income of the deemed trust.
Tax consequences on liquidation
Tax consequences related to the liquidation of an association will vary depending on the legal status of the association. If the association is a corporation with share capital, the Act may deem the corporation to have paid a dividend on the shares for the benefit of the shareholders where funds or property have been distributed or otherwise appropriated by the shareholders. If the association is without share capital, any funds or property distributed to a member may constitute the disposition of his or her interest in the association and be non-taxable. To the extent that the value of such interest exceeds its adjusted cost base (which is calculated according to the fees paid by the members for membership), the members may be subject to capital gains tax on the distribution.
Miller Thomson’s Charities and Not-for-Profit lawyers can advise on all aspects of NPO taxation.
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Kate Lazier, Toronto
Recently, a working group of the Uniform Law Conference of Canada released a consultation paper on a Uniform Informal Public Appeals Act (the “Act”). The Uniform Law Conference of Canada considers areas in which provincial and territorial laws would benefit from harmonization and develops "uniform statutes", which it recommends for enactment by all relevant governments in Canada.
The Act would govern appeals to the public for donations by individuals or groups other than appeals by registered charities or corporations. The Act would provide rules to govern the use of the funds, and surplus funds where the appeal lacks its own governing documents on the subject.
The consultation states:
Appeals to the public for donations are a feature of everyday life. Appeals that occur on a regular basis are usually conducted by registered charities and other organizations having the benefit of experienced fundraisers and professional advice. But spontaneous appeals occur frequently as well, especially after a disaster like a fire or a flood. They may follow publication of a news item about a family or individual in some sort of distress. Campaigns on behalf of individual children requiring specialized medical treatment elsewhere have also become familiar examples of this kind of fundraising.
Unlike the regular campaigns of established fundraising organizations, spontaneous appeals are often begun by a single person or a small group. Rarely is an organization or foundation created at the beginning to manage the fund. The fundraisers simply issue a message asking for donations and, possibly, open a bank account to hold the fund. The help of the press and the electronic media may be enlisted to publicize the appeal. The emergency that gives rise to the appeal may have substantial emotional impact, and the generosity of the public's response is sometimes astonishing. The amount donated may go well beyond what is required to meet the original need. Sometimes the appeal turns out to have been unnecessary, because the need is met through governmental or other sources. Substantial amounts may already have been collected, however. Occasionally the opposite situation arises. Too little may be raised to be of any use at all.
In either case, the fundraisers may be left with money on their hands. This does not cause any difficulty if the terms of the appeal indicate clearly how any surplus or unused funds will be handled, and if donations are made with that understanding. But in the heat of the moment, the fundraisers may not have thought of the possibility of a surplus or unusable donations.
The Act is well drafted and solves several issues regarding surplus in a cost effective manner. For example, the Act provides that where a surplus is less than $10,000, the trustees may distribute it to listed entities rather than applying to court to approve the scheme. Since court fees could eliminate a surplus of this size, this provision is a sensible solution. The Act also eliminates the common-law requirement to demonstrate that donors had a general charitable intent before surplus can be used for another purpose. Instead, in order to receive a refund of a donation, a donor must request a refund in the event of surplus at the time the donations made. This provision eliminates the onerous requirements to track down donors and notify them of surplus. When donors receive a refund, the Act returns a pro rata share of the surplus and thus eliminates any dispute over the amount to return based on an analysis of whether a particular donor’s funds were spent on the project.
This Act would provide a sensible framework to govern these public appeals. While outside the scope of this consultation, some of these provisions in respect of surplus donations would also simplify charity law and should be considered for incorporation in legislation applicable to charities.
The consultation paper can be viewed at: http:/ulcc.weebly.com
Currently, the working group is seeking comments on the consultation paper until September 7, 2010.
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Sarah Lowy, Toronto
A glance at the website of any major corporation, big bank or industry player will show a page (if not many) dedicated to setting out that company’s commitment to community involvement and, often, highlighting its various corporate donations. The recent trend towards corporate social responsibility and the focus on corporate giving seems to present a win-win situation: charities and community initiatives get the benefit of large donations, while companies benefit from the positive press and a boost to their public image. While it would appear that corporate donations are a positive thing - minority shareholders may not always think so.
A recent case in the United States has brought to light an interesting issue in respect of corporate donations. When the minority shareholders of American Assets Inc. learned of the $60 million donation that majority shareholder CEO and President, Ernest Rady, had committed to the San Diego Rady Children’s Hospital, they launched a suit asking the court to block the $21 million promised by American Assets (a total of $60 million was donated - $33 million in total by American Assets, though the shareholders were not seeking return of the $12 million already delivered by the company). The minority shareholders claimed they were not willing to support this gift with American Assets’ money. While it is important to point out that, in this case, the minority shareholders also happened to be Rady’s nieces and nephews (thus raising the question whether the shareholders’ objection stems from a family issue), the question remains – are there limits on corporate giving? After all, the corporate assets of a company ultimately belong to the shareholders, so an argument can be made that the money is not management’s to give.
While shareholders do have a vote in certain major decisions involving the corporation, the general day to day business decisions are usually left to management. Under corporate law, the directors of a corporation owe a fiduciary duty to the shareholders to “act honestly and in good faith with a view to the best interests of the corporation”, and decisions made by the board are expected to maximize share value. In this context, it could be easily argued that charitable donations improve the public image of a corporation, and thus improve the profitability as well. So then, what if donations are made without the support of all of the shareholders?
The Federal statue governing corporate law (the Canada Business Corporations Act), includes provisions to protect shareholders in the form of various remedies, the most powerful of which is the oppression remedy. Originally introduced to address difficulties faced by minority shareholders in a ‘majority rules’ environment, the oppression remedy gives the Court broad discretion to rectify matters where it finds conduct that qualifies as oppressive. However, practically speaking, Courts are reluctant to second guess management, particularly where the alleged breach of duty of care relates to business decisions (rather than failing to detect and address wrongdoing). On the one hand, a minority shareholder must be protected from unfair treatment. However, on the other hand, it is generally held that the Court should not assume the function of the board of directors in managing the company, nor should it usurp the legitimate exercise of control by the majority. Thus, it is rare that a Court would interfere simply because a decision is unpopular with the minority. Where business decisions are made by directors acting honestly and in good faith, it is unlikely that the Court will intervene.
It is important to note that it is always open to the shareholders to use a shareholder’s agreement to limit the discretion of directors, or to require shareholder approval for certain matters such as the spending of company funds. However, short of such an agreement and assuming that the directors are acting within their rights, minority shareholders have little say with respect to the use of corporate funds.
Miller Thomson LLP’s lawyers in the Corporate group and Charities and Not-for-Profit group can assist with corporate donation issues.
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Kate Lazier, Toronto
Natalia Iamundo, Toronto
The Canada Revenue Agency (“CRA”) recently finalized its proposed guidance on the protection of human rights and charitable registration. We discussed the proposed guidance in detail in the Miller Thomson LLP Charity and Not-For-Profit May 2009 newsletter. In the Guidance the CRA officially recognizes upholding human rights can be a charitable purpose in and of itself in Canada. Therefore, CRA will register as charities organizations that seek to encourage, support, and defend human rights to the extent that these rights have been secured by domestic or international law.
While the final Guidance on Human Rights and Charitable Registration does not de-emphasize the focus on existing legal regimes, it does recognize certain charitable activities that do not require an existing local legal regime. CRA recognizes relieving suffering of victims and providing education on human rights as charitable activities. Similarly, CRA acknowledges that increasing public awareness of human rights issues is a charitable purpose. Such charitable activities include:
- Facilitating debate and discussion through workshops and presentations on human rights;
- Distributing material that increases the public’s knowledge about human rights issues and abuses; and
- Creating awareness campaigns for both individuals and organizations in the private sector, encouraging the former to respect each other’s human rights, the latter to implement ethical codes of conduct.
The Guidance on Human Rights and Charitable Registration is an improvement from the proposed version. The Guidance on Human Rights now appreciates that a charity that has the advancement of religion as its purpose does not have to add an explicit human rights object in order to protect human rights. The Guidance clarifies that it is sufficient that a religious charity make evident in its application for registered status the connection between the religious doctrines that support human rights and the purposes of the organization.
The Guidance also features the addition of an appendix of generic questions and answers, and identifies what charities need to be aware of with respect to Canada’s anti-terrorism measures. Attached is a link to the final Guidance. Please click here to view.
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Andrew Valentine, Toronto
The Ontario Superior Court of Justice recently awarded approximately $45,000 to two individuals who sued their accountant for advising them to participate in a donation tax shelter arrangement and for taking secret commissions in respect of the scheme. The donors were reassessed by CRA and successfully sued their accountant for the losses they incurred as a result of their participation.
In Lemberg v. Perris, the plaintiffs were a retired couple who had relied on the defendant, a chartered accountant, for many years to provide tax advice concerning both their personal taxes and those of a small business of which they were the sole shareholders. In 1998 and 1999, the accountant advised the plaintiffs about a donation arrangement offered by a promoter whereby the donors would purchase in bulk certain limited edition artwork (at a substantial discount) which would then be sold for many times the purchase price to educational institutions in the U.S. The donors would receive a tax credit on the market value of the property.
According to the decision, the accountant strongly encouraged the plaintiffs to participate. In 1998, the plaintiff husband agreed and paid $31,000 for artwork which was then donated to a U.S. University (a Canadian qualified donee). The University recorded a donation of $136,500, and the plaintiff claimed a tax credit in that amount. Both plaintiffs participated in 1999, this time purchasing artwork for $47,500 and subsequently donating it for a tax credit well in excess of this amount.
In 2001, the plaintiffs were reassessed by CRA, with their tax credits ultimately being limited to the amount actually paid for the artwork. CRA waived penalties, although interest was charged on the tax debt. The Court noted that, in the final analysis, the plaintiffs ended up paying $78,500 for artwork which they would never have purchased had they not participated in the program. Subtracting the tax credits legitimately claimed, the plaintiffs were worse off by $39,795 as a result of their participation in the program. In addition, however, they also paid approximately $75,000 in interest on their tax underpayments, and were required to borrow money to pay back the taxes, which incurred an additional $29,000 in interest on the borrowed funds. It was also learned that the accountant had received an undisclosed commission on the transactions, amounting to approximately $7,500. The plaintiffs sued for the total of these losses, $151,500.
The Court found that in the circumstances of the case, the accountant was in a fiduciary relationship with the plaintiffs due to the long-standing nature of their business relationship and the mutual trust which had developed. The Court stated that it had no doubt that the accountant had breached his fiduciary obligations. The most fundamental breach of his fiduciary obligations occurred when the accountant took secret commissions on the sale of artwork from the promoter of the tax shelter arrangement. The Court also noted that the accountant paid scant attention to the warning signs that should have alerted him to the risks he was suggesting his clients undertake. As a seasoned tax practitioner, the accountant was expected to have understood that the legal opinions provided were not guaranteeing the consequences of the transactions but were based on particular facts.
The Court held that the plaintiffs were entitled to their basic loss of $39,795. They were also entitled to $7,500 to disgorge the secret commissions earned by the accountant. The Court held that because the plaintiffs had access to their funds until they were required to repay it, they were not entitled to interest.
This case serves as a cautionary tale to individuals considering participation in a donation tax shelter arrangement and advisors suggesting such participation to their clients. Certainly advisors should never accept fees without first fully disclosing they are doing so. As we have stated in previous editions of this Newsletter, CRA has said it will audit all donation tax shelter arrangements with a view both to reassessing donors and, in many cases, to revoking the charitable registration of charities that may have participated. The case also indicates the breadth of liability which flows from tax shelter arrangements determined by CRA and the Courts to be abusive. The importance of independent legal advice before participating in such arrangements, or before advising others to participate, cannot be overstated.
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Dernières nouvelles
Susan Manwaring is the new editor of “What’s the Law” column in the Philanthropist.
Arthur Drache wrote “C-470 Hearings in the Fall”, “Another Annual Fundraiser Abandoned”, “Oxymoron”, “Sherman Reports on Finance Comfort Letters”, “Transparency Works Both Ways”, “Copyright Bill Shows Rifts Between Creators and Users”, "Upholding Human Rights”, “Do Not Call Follow Up” and “Briefly noted in June” in the July 2010 issue of The Canadian Not-For-Profit News.
Hugh Kelly presented “Canadian Constitutional Law Issues” and “Law Respecting Education in Ontario” on July 15 and 16, 2010 as part of the Supervisory Officers Qualifications Program.
Dalton Albrecht’s article “HST and Charities/NPO’s: What You Don’t Know Can Hurt You” was republished in the CharityVillage’s July 19, 2010 newsletter.
David Chodikoff was quoted in Jamie Golombek's article "Art-Flip Tax Scheme Busted" in the July 24, 2010 Financial Post.
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