Speech by Director General of Charities Directorate Published Online

Andrew Valentine, Toronto

The text of a recent address given by the Director General of the CRA Charities Directorate, Cathy Hawara, at the Canadian Bar Association National Charity Law Symposium has been published on the CRA website.  Ms. Hawara addressed the changes that have been introduced in the 2011 and 2012 Budgets, and some of the steps that have been and are being taken at the Charities Directorate to implement and enforce these changes.  While Ms. Hawara noted that the Directorate is still in the process of developing policies and protocols to deal with many of these provisions, her comments provide valuable insights into how the Directorate may interpret these provisions going forward.

The following are some of the highlights from Ms. Hawara’s remarks.

Budget 2011

Budget 2011 extended many of the regulatory rules that apply to registered charities to other qualified donees.  Among other things, Ms. Hawara noted that several lists of “other qualified donees” have been made publicly available on the Charities Directorate’s website.  These include registered Canadian amateur athletic associations (RCAAAs), recognized Canadian municipalities, prescribed universities outside Canada, and foreign charitable organizations that have received a gift from the federal Crown.  We noted this development in the January issue of this Newsletter.  Ms. Hawara noted that lists of municipal or public bodies performing a function  of government and low-cost housing corporations for the aged are still being developed.  Donors should consult these lists to confirm that prospective gifts are being made to qualified donees eligible to issue donation receipts.

Ms. Hawara also noted that the Charities Directorate website has been updated to include additional information on the new regulatory rules that apply to RCAAAs.  RCAAAs should review this information carefully.  Ms. Hawara also confirmed that the application to register an RCAAA, Form T1189, has been updated and the revised version of the form is now available on the Charities Directorate website.  The annual information return for RCAAAs, the T2052, remains unchanged.

Ms. Hawara also commented on the new rules regarding “ineligible individuals”, which we have commented on in a past issue of this Newsletter.  These rules give the Charities Directorate the discretion to refuse registration or revoke the registration of an existing charity on the basis of past conduct of any of its directors or senior management.  Any director or senior officer will be considered “ineligible” if, among other things, he or she has been convicted of an offence related to financial dishonesty (or that is otherwise determined to be relevant to the operation of a charity), or was a director of an organization that was revoked in the past 5 years for serious and deliberate non-compliance committed while the individual was a director.

After summarizing the rules, Ms. Hawara commented on how the Charities Directorate would determine when an individual is ineligible.  She emphasized that the Directorate is proceeding cautiously and that its policies for dealing with the new provisions have not been finalized.  She noted that any past convictions for offences involving financial dishonesty would be considered relevant, and that any other past offences would be considered on a case-by-case basis with a view to whether the conduct, if repeated, could inflict harm on a charity or its beneficiaries.  She also noted with respect to individuals involved with an organization that had its status revoked for a serious breach, that the Directorate is primarily concerned with deliberate non-compliance.  She confirmed that charities are not required to conduct background checks on directors and senior management in order to demonstrate compliance with the new rules.  She did, however, note that to the extent that a charity has conducted background checks or otherwise been made aware of concerns about an individual, failure to take appropriate action could result in the Directorate applying the new provisions.

Budget 2012

Ms. Hawara also commented on changes introduced by Budget 2012, beginning with the new provisions added to the Act regarding political activities by registered charities and RCAAAs.  In particular, she commented on some of the additional reporting that would be required on the T3010 annual information return.  She indicated that the following changes were being made to the T3010, with the updated return hopefully being made available beginning in 2013:

• Charities that report having carried on any political activities will be required to complete a separate schedule. Charities will need to list the types of activities involved (e.g. media ads, demonstrations, social media campaigns) and explain the relationship between the political activities and the charity’s purposes.
• Charities will be required to disclose the amount received from foreign sources for political activities.  The information required to be disclosed will include the amount received, the political activities for which the donation was intended, and the country of origin.
• Charities will be required to include information about the total amounts gifted to qualified donees that were intended for political activities.  Charities will be required to indicate the dollar amount and to provide a description of the political activity.

Ms Hawara also noted that the 2012 Budget indicated that the Charities Directorate would be provided with additional resources with which to enhance education and compliance activities in the area of political activities.  This will likely include more educational resources available on the Directorate’s website as well as more information sessions and webinars to help charities understand the rules.  On the compliance side, Ms. Hawara noted that the Directorate would engage in more proactive monitoring, including the expanded use of books and records audits (as opposed to full field audits) to verify compliance with the rules regarding political activities.

Ms. Hawara concluded by summarizing the changes in the Budget regarding foreign charitable organizations to which the federal Crown has made a gift.  She noted that such organizations would need to apply for registration as a qualified donee and would need to meet additional criteria for registration, including the possible need to demonstrate that their activities are in the “national interest of Canada”.  Ms. Hawara stated that further guidance would be forthcoming, but cited an example of a hospital in Germany that treated Canadian soldiers wounded in Afghanistan as an example of a foreign charitable organization whose activities are in the national interest of Canada.

Conclusion

Although important questions remain about how the Charities Directorate will interpret and apply the changes in the 2011 and 2012 Budgets, Ms. Hawara’s remarks are helpful in updating the sector on the changes that have been made to date and on the expected steps that will be taken in the coming year.  Charities should continue to pay attention to developments and new materials on the Charities Directorate website, as these are a key resource to help charities to understand and comply with their obligations.  We will also continue to provide updates in this Newsletter as developments occur.

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Federal Court of Appeal Confirms Public Foundation must have Multiple Trustees/Directors

Amanda J. Stacey, Toronto

The Federal Court of Appeal recently released its decision in Sheldon Inwentash and Lynn Factor Charitable Foundation v. The Queen.  This case concerns the question of whether a charitable foundation with a single trustee can be designated as a public foundation.

The Income Tax Act recognizes two broad categories of registered charities:  charitable organizations and charitable foundations. Within the charitable foundations category, there are two sub-categories: public and private foundations.  Because private foundations are subject to more restrictive rules than public foundations under the Act, it is often more desirable to be registered as a public foundation.  The Act sets out a definition of both private foundation and public foundation.  A private foundation is defined as “a charitable foundation that is not a public foundation”.  The definition of public foundation is currently in a state of flux.  Back in 2006 the Minister of Finance proposed amendments to the definition of public foundation that have yet to be enacted into law. Notwithstanding this, on July 11, 2007 the Canada Revenue Agency issued a news release announcing that it was going to give effect to the proposed change to the definition of public foundation. The proposed definition essentially requires that 50% or more of directors, trustees or like officials of a public foundation must deal with each other at arm’s length and the public foundation cannot receive a majority of its funding from a person or a group of persons that control the foundation in any way or make up more than 50% of the directors, trustees or like officials of the foundation.

The issue in this case was whether a foundation with a single trustee can meet the arm’s-length requirement for a public foundation. We should note, as did the Federal Court of Appeal, that the Act is silent on the question of whether a public foundation can be established with a single trustee.  The Court examined the particular language of the definition of public foundation and noted that the requirement that more than 50% of the trustees must be “at arm’s length” signals an intention that there must be more than one trustee of a public foundation.  The use of the phrase “with each other” also indicates that more than one trustee is contemplated. The Court held that the language used by Parliament has “precisely and unequivocally evidenced its intent that public foundations must have more than one trustee (or director, officer or like official)”.

The Court also reviewed the statutory context and purpose of the definition of a public foundation and the differences between private and public foundations.  The Court noted the differences between the two definitions and the overarching concern for potential abuse in self-dealing, particularly with respect to the establishment of private foundations by private individuals, and noted the various rules applicable to private foundations, including the prohibition against carrying on business activities, the excess business holdings rules and the non-qualifying securities rules, as reasons to support the interpretation that a public foundation must have more than one trustee.  The Court noted that by increasing the number of arm’s-length trustees, the risk of a public foundation self-dealing with its donors is reduced.

The appellant in this case had relied upon the fact that the CRA has taken contradictory administrative positions on whether a public foundation requires two or three trustees.  In a news release dated March 19, 2009, the CRA confirmed its position that a public foundation requires at least three trustees; however, the court noted that in internal documents the CRA seems to have accepted that two trustees would be sufficient.  At the end of the day, the Court declined to say more on this subject and stated that CRA’s administrative policy is not determinative of the meaning of a provision of the Act.

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Practical Considerations When Making a Charitable Gift by Will

Karen L. Weslowski, Vancouver

A legacy can be created by leaving all or a portion of a person’s estate to charity.  Such a gift can reflect a testator’s personal values and beliefs while making a difference in the lives of others.  However, in order to ensure that the charitable gift is realized, there are some things for a testator to consider before leaving an estate gift to charity.  Once that gift is made, charities may wish to know what steps they must take to protect that gift. 

The Requirement for a Proper Will

Without a proper Will, a person’s estate will pass on intestacy to their next of kin.  However, before a person can make an estate gift to charity, their Will must make some provision for their dependants, if any.  In British Columbia, dependants include a testator’s spouse, minor children and, in most instances, adult children, even if they are financially independent.  In most other Canadian provinces, the category of dependants is not as broad and includes spouses, minor children and adult children only if incapable.  If a testator’s Will does not make adequate provision for these people, there is legislation in most provinces which permits dependants to commence litigation challenging the Will. 

Litigation often results when family members are not informed about a testator’s intention to leave a charitable bequest.  Testators should tell their family about their wish to leave an estate gift to charity.  Although the charity has a duty to protect the gift, charities may be reluctant to engage in acrimonious and expensive litigation to do so. 

The Will needs to be very specific about which charity the testators wish to benefit.  For example, if the Will simply provides a bequest to the “diabetes society”, it may be challenged on the basis that the identity of the charity is unclear.  This is due to the fact that there are several charities associated with diabetes.  Even if the Will is not challenged, a court application may still be required to figure out which charity the testator intended to benefit.  This will cost the testator’s estate money that could otherwise go to the charity and the estate beneficiaries. 

The Charities’ Duty to Protect a Charitable Gift

Charities may become involved in estate litigation by virtue of being a beneficiary of an estate.  Common issues that involve a charity are challenges to the Will, applications for interpretation of the Will and passing of the executor’s accounts. 

Charities are not always sure what role, if any, they may have in estate litigation.  As a beneficiary of an estate, a charity is entitled to notice of any estate proceedings which may affect its entitlement or require its consent.  Charities are also entitled (or, in some instances, may be required) to fully participate in the litigation, including settlement of the proceedings.

Charities must ensure that their interests are protected under a Will and by the person administering the estate.  Charities must take reasonable steps to ensure that a testator’s gift is realized.  This includes monitoring the administration of the estate and making inquiries of the estate solicitor or executor as to the status of the estate.  If necessary, it may also include taking active steps in any litigation to protect their interest in the estate. 

The need to defend a donor’s charitable gift by becoming involved in litigation can affect the charity’s image.  In a fight with disinherited family members, the charity may be perceived as “greedy”.  Charities generally want to maintain a positive public image.  This consideration may affect how a charity conducts itself in litigation and cause it to be less assertive in defending a testator’s gift.  Although charities have an obligation to defend the donor’s charitable gift, it may not be practical to do so where the amount of the gift is small relative to the cost of litigation.  Charities may choose to decline a bequest where the public relations issues resulting from litigation would adversely affect the charity disproportionately to the value of the bequest. 

Conclusion

Testators should strive for open communication with their dependants as to their intention to leave a gift to charity.  This can assist in ensuring that their intended gift is realized and reduce the potential for litigation after the testator’s death.  Charities must recognize their duty in protecting charitable gifts and take appropriate steps to that end.

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CRA Provides Additional Insights into NPO Tax Exemption

Rahul Sharma, Toronto

In a recent technical interpretation, the Canada Revenue Agency (CRA) addressed several questions relating to the tax exemption for non-profit organizations (NPOs) under paragraph 149(1)(l) of the Income Tax Act (Canada).  Specifically, CRA addressed various circumstances involving loans and other contributions from members, and considered whether any of these circumstances would jeopardize an NPO’s tax exempt status.

CRA’s comments provide additional clarity with respect to when member contributions and loans may place an NPO’s tax exempt status at risk.  CRA’s responses also provide additional insight into its position on NPOs engaged in leasing and fundraising activities.

Issues addressed

The NPO in question in the technical interpretation leased real property that was owned by two of its founders (which were also members of the NPO).  The NPO was in a loss position, with losses having accumulated over an unspecified number of years, and its members wanted to know the following:

1. whether a member could make a contribution to the NPO before its fiscal year-end to enable it to pay its outstanding liabilities, without the NPO being regarded as having a profit purpose;
2. if a member provides a loan to the NPO to cover its outstanding liabilities, will the repayment of the loan or the payment of interest by the NPO be regarded as making the income of the NPO available to its member?  Also, would generating income to repay the loan lead to the conclusion that the NPO had a profit purpose;
3. whether the NPO could assume the responsibilities of owning and leasing the property owned by the members and use net rental income to offset losses from other activities, without risking the loss of its tax-exempt status; and
4. whether the NPO could be viewed as having a profit purpose if it launched fundraising activities to raise funds to cover current year operating expenses, deficits or to purchase equipment.

The CRA’s Position

CRA confirmed the basic requirements for the NPO tax exemption, which include a requirement that the organization be operated exclusively for purposes other than profit, and a requirement that none of the income of the organization can be made available for the personal benefit of its members.  It then turned to address the questions posed.

1.  Member Contributions

With respect to member contributions, CRA stated that, in its view, requiring members to make higher contributions in a certain year to reduce losses incurred in prior years does not lead to the conclusion that the NPO is being carried on for a profit purpose.  CRA clarified that there is a difference between NPOs requiring higher member contributions in respect of a particular fiscal period to improve a loss position, and NPOs that accumulate amounts in excess of their needs for the purposes of generating investment income.  The former is acceptable practice whereas the latter could lead to the conclusion that an NPO has a profit purpose. 

2.  Member Loans to the NPO

With respect to a member making a loan to the NPO to cover its liabilities and deficits, the CRA stated that such a loan may be repaid by the NPO without being considered to be making its income available to the member.  CRA did note however that it is a question of fact whether the repayment is made to the member in his or her capacity as lender or as a member.  This implies that loan repayment could be offside if CRA considers the repayment to be a colourable attempt to provide income to a member.

CRA also clarified that an NPO may generate income for the purposes of covering the interest expense on a loan without being considered as having a profit purpose.  However, any repayment of principal on the loan, in CRA’s view, should be made from member contributions to the NPO, incidental profits or gift and/or grants.  CRA is of the opinion that generating “material” profits, particularly from third parties, to repay a loan, may indicate that the NPO is being operated for a profit purpose. 

CRA does not explain what it means by “material” in respect of generating profits.  CRA does note that generating profits from a particular activity to cover losses related to that activity would not generally indicate that the NPO is being run for a profit purpose.  However, where material profits from one activity are used to cover expenses related to another activity, this could be viewed as operating with a profit purpose. 

3.  NPOs Engaged in Leasing Activities

With respect to leasing activities, the CRA again commented that whether an NPO will be considered to be running a for-profit business in respect of leasing activities will depend on the individual facts of each case.  The CRA reiterated that it will depend on how material the profits actually are and how incidental the related business is to the NPO’s not-for-profit objectives. 

This response is consistent with the position that the CRA has taken in the past with respect to this issue.  As an example, the CRA referred to a community hockey arena that is operated as an NPO.  The operation of an otherwise for-profit canteen within the arena’s premises would be incidental to the arena’s not-for-profit focus and objective and would therefore not bring the NPO outside of the paragraph 149(1)(l) exemption.  Similarly, if the NPO in this case were to engage in leasing activities, it may remain within the ambit of the paragraph 149(1)(l) exemption, depending on the circumstances and how material the leasing activities and revenues were to the NPO’s overall operations. 

Fundraising Activities to Cover Losses

Consistent with its prior views and existing policies, the CRA stated that an NPO may engage in fundraising activities in order to raise money to fund its operations and to further its not-for-profit objectives.  Fundraising activities will not, in and of themselves, jeopardize an NPO’s tax exempt status or bring the NPO outside of the ambit of paragraph 149(1)(l).  Nonetheless, as with leasing activities, the CRA also commented that each case will turn on its facts.  If the NPO engaged in fundraising activities of a significant nature or scope, it may risk falling offside the paragraph 149(1)(l) exemption such that fundraising could be, or becomes, one of the organization’s purposes.

Conclusion

CRA’s comments in this technical interpretation are helpful in providing at least some clarity on how the NPO rules will apply to member loans and contributions, although CRA frequently notes that each case will turn on its own facts.  In cases of uncertainty, NPOs are advised to consult with and seek the opinion of counsel with respect to their proposed activities.  We would be pleased to assist and to advise NPOs on any issues related to the maintenance of their tax exempt status.

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Dernières nouvelles

Kate Lazier co-chaired the Canadian Bar Association National Charity Law Symposium on May 4, 2012.

Robert Hayhoe presented on “Essential Federal Budget Update 2011/2012” at the Canadian Bar Association National Charity Law Symposium on May 4, 2012.

Robert Hayhoe presented a “Charity Law Update” at the 2012 Habitat for Humanity National Conference on May 9, 2012.

Kate Lazier spoke on "Continuing from the Canada Corporations Act to the Canada Not-for-Profit  Corporations Act " at the 2nd Annual Business Law Summit (LSUC) on May 16, 2012.

Marty Rochwerg was presented with the 2012 Award of Excellence by the Jewish Foundation of Greater Toronto on May 23, 2012.

Amanda Stacey has been elected to the Board of Directors of the Canadian Association of Gift Planners.

Susan Manwaring and Andrew Valentine wrote “Risk Issues and Social Enterprise in Canada” in The Philanthropist, vol. 24, no. 3 (2012).

Susan Manwaring and Andrew Valentine wrote “Social Enterprise in Canada: Structural Options” as part of the MaRS White Paper Series for the Social Innovation Generation at the MaRS Discovery District.

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