Charitable organizations and related business
By Paul Kennedy
A recent decision with respect to charitable organizations has confirmed a narrow interpretation of what constitutes a ‘related business’ under subsection 149.1(1) of the Income Tax Act (the “Act”). The term ‘related business’ is defined by subsection 149.1(1) of the Act to include a business unrelated to the objects of the charity if substantially all the employees in the business are unpaid. It now appears, however, that the statutory term does not encompass much more than that.
A busy year: CRA Consultations and Guidance documents for 2008-2009
By Mark Blumberg
The Charities Directorate has been extremely busy this year, publishing new consultations and guidance on a variety of topics including fundraising, sports, and the protection of human rights.
Notice to charitable organizations regarding 2009 disbursement quota
By Kate Lazier
Charitable organizations that were registered before March 23, 2004 should take note that their disbursement quota requirement for fiscal years commencing in 2009 will include the 3.5% capital amount. The 3.5% capital amount in the disbursement quota ensures that charities with investment assets over $25,000 will expend at least 3.5% of their investment assets on charitable programs in the year. The calculation of the capital amount is based on the average value of property owned by the charity in the 24 month period prior to the beginning of the fiscal period.
Court upholds CRA revocation of charity registered in error
By Andrew Valentine
In December 2008, the Federal Court of Appeal upheld a decision to revoke the charitable registration of Hostelling International Canada – Ontario East Region. The charity’s purpose was to advance education by providing affordable accommodation for young people seeking to gain greater exposure to other parts of the world. The decision is unfortunate in part because the Court permitted revocation (rather than annulment) of a charity’s registration which was made in error.
Federal government passes new legislation governing non-share capital corporations
Jacqueline M. Demczur
The federal government has passed Bill C-4, which replaces Parts II and III of the current Canada Corporations Act.
Charitable organizations and related business
By Paul Kennedy
Student-at-law, Benefic Lawyers
Vancouver
A recent decision with respect to charitable organizations has confirmed a narrow interpretation of what constitutes a ‘related business’ under subsection 149.1(1) of the Income Tax Act (the “Act”). The term ‘related business’ is defined by subsection 149.1(1) of the Act to include a business unrelated to the objects of the charity if substantially all the employees in the business are unpaid. It now appears, however, that the statutory term does not encompass much more than that.
Read the full article 
A busy year: CRA consultations and guidance documents for 2008-2009
By Mark Blumberg
Blumberg Segal LLP
Toronto
The Charities Directorate has been extremely busy this year, publishing new consultations and guidance on a variety of topics including fundraising, sports, and the protection of human rights.
Some of the consultations and guidance have very broad application while some may only be of interest to a segment of charities.
Published guidance
CRA recently published "Fundraising by Registered Charities." The fundraising guidance notes that while fundraising is important it is not charitable. The guidance covers certain prohibited fundraising conduct; conduct that is an indicator of concern; good practices in fundraising; ratios of fundraising revenue to expenditure; and allocation of fundraising expenditures. If you can only read one policy this year, then for most "Fundraising by Registered Charities" should be it.
Other policies include "Sports and Charitable Registration" CPS-027 published in
April 2009. The policy recognizes that the promotion of sport in itself is not a charitable purpose but that a charity may be involved with sports, so long as the charity can demonstrate how those activities are a reasonable way to carry out its charitable purposes.
In April 2009 CRA published "Research as a Charitable Activity." For research to be charitable it must: further the charity's charitable purpose; have educational value; be capable of being attained through research; use a method of research that can lead to the discovery or improvement of knowledge; be conducted primarily for the public benefit and not for self interest or private commercial consumption; and be made publicly available to others.
On May 1, 2008, CRA revised its Guidelines for the Registration of Umbrella Organizations and Title Holding Organizations, CPS – 026. This will affect registered charities that are established to support the charitable sector or the efficiency and/or effectiveness of other organizations.
Current and upcoming consultations
Recently CRA posted a draft Guidance on the Protection of Human Rights and Charitable Registration. The draft guidance acknowledges that charities can deal with human rights issues so long as charities respect the prohibition on political purposes and the limitations on political activities.
CRA will be posting a consultation shortly on Canadian charities and foreign activities to replace RC4106(E) - Registered Charities: Operating Outside Canada. It will discuss the relationship between charities and non-qualified donees whether in Canada or abroad and therefore will be relevant to most Canadian charities. Some of the key points contained in an earlier draft of the CRA materials on foreign activities are discussed here.
Notice to charitable organizations regarding 2009 disbursement quota
By Kate Lazier
Miller Thomson LLP
Toronto
Charitable organizations that were registered before March 23, 2004, should take note that their disbursement quota requirement for fiscal years commencing in 2009, will include the 3.5% capital amount. The 3.5% capital amount in the disbursement quota ensures that charities with investment assets over $25,000 will expend at least 3.5% of their investment assets on charitable programs in the year. The calculation of the capital amount is based on the average value of property owned by the charity in the 24 month period prior to the beginning of the fiscal period.
Traditionally this provision only applied to foundations; however, it was extended to charitable organization in the 2004 Federal Budget. As a transitional measure, charitable organizations registered before March 23, 2004 were given until 2009 for this measure to take effect. This transitional period is coming to an end and all registered charities will be subject to this requirement in the coming year.
Court upholds CRA revocation of charity registered in error
By Andrew Valentine
Miller Thomson LLP
Toronto
In December 2008, the Federal Court of Appeal upheld a decision to revoke the charitable registration of Hostelling International Canada – Ontario East Region (“Hostelling International”.) The charity’s purpose was to advance education by providing affordable accommodation for young people seeking to gain greater exposure to other parts of the world. The decision is unfortunate in part because the Court permitted revocation (rather than annulment) of a charity’s registration which was made in error.
The Income Tax Act (the “Act”) provides two basic means by which CRA may cause a charity to cease to be registered. One familiar approach is revocation of registration. This entails a loss of charitable status and the imposition of the revocation tax, which requires that the charity pay a tax equal to the value of all its property as of the date on which the charity receives notice of intent to revoke charitable registration. Alongside the intermediate sanctions, revocation is available as a penalty where a charity engages in serious, culpable non-compliance with the provisions of the Act.
The second approach is annulment. The Act provides CRA with the discretion to annul a charity’s registration where the charity has been registered in error, or has, solely as a result of a change in the law, ceased to comply with the Act. When a charity’s registration is annulled, theAct deems it never to have been registered in the first place. The significant difference between annulment and revocation is that annulment does not entail imposition of the revocation tax. Furthermore, all receipts issued prior to annulment are deemed valid. This approach is designed for cases in which a charity was properly registered by CRA and has committed no serious misconduct, but where as a result of a change in the law (usually relating to the definition of ‘charity’), the charity’s duly registered purposes and/or activities are no longer recognized as charitable.
This was arguably the case with HostellingInternational. The charity had been registered twice as an education charity and had been carrying out activities in accordance with its charitable objects. However, subsequent to the charity’s registration, CRA took the position (and the Federal Court of Appeal agreed) that the provision of affordable accommodation was not charitable, with the result that the charity was no longer devoting all resources to charitable activities. The charity argued that this should result only in annulment, rather than revocation. However, the Court simply stated that because CRA had proceeded by way of revocation, it was open to CRA to revoke.
This decision is unfortunate in that it suggests that CRA may disregard the annulment provision and seek revocation whenever it chooses, even if the charity has ceased to comply entirely as a result of factors beyond its control. Charities now risk being “trapped” into registration with objects that cease to be charitable, resulting in the revocation tax being imposed on those charities. It may be hoped that future cases will set out rules which will limit CRA’s discretion to revoke where the annulment provision would apply – for example, that the decision to revoke rather than annul cannot be exercised punitively and should be used only rarely (if ever) where annulment is available. We hope that CRA will not be aggressive in seeking revocation where annulment is appropriate, and that it will permit charities registered in error to be annulled, or to amend their objects as necessary, without being subjected unfairly to sanctions.
Federal government passes new legislation governing non-share capital corporations
By Jacqueline M. Demczur
Carters Professional Corporation
Ottawa
The federal government has adopted new legislation governing non-share capital corporations (Bill C-4).
The Senate debate did not result in any changes to Bill C-4, which had previously been amended by the Standing Committee on Industry, Science and Technology in April 2009. The contents of the amended Bill C-4 are largely the same as the version of the Bill which received first reading in the House of Commons on Jan. 28, 2009. Some of the main differences include, but are not limited to: the addition of a defined term, “soliciting corporation”, in section 2(5.1); addition of an equivalency provision in section 7(3.1), which allows minimum by-law requirements to be met if such provisions are included in the letters patent; deletion of section 29 dealing with the ability of directors to issue debt obligations for consideration consisting of money or other property or past services; changes to section 161(2) related to the Director’s authority to authorize corporations to delay the calling of an annual meeting of members if the members will not be prejudiced; and clarification in section 210(a.1) of how to determine whether an amalgamated corporation is a soliciting corporation.
Bill C-4 replaces Parts II and III of the current Canada Corporations Act, a statute first enacted in 1917 but not substantively changed since that time, which Parts govern non-share capital corporations. Two earlier attempts by the Federal Government to reform the Canada Corporations Act – Bills C-62 (2008) introduced by the Conservatives and C-21 (2004) introduced by the Liberals – died on the order papers in the House of Commons when Parliament was dissolved for a general election. For the most part, the content of Bill C-4 is largely similar to what was contained in its predecessor, Bill C-62.
The provisions of this new legislation are not yet in force, and will only come into force on a day or days still to be fixed by order of the Governor in Council. Industry Canada has initially indicated that this could be anywhere from 12 to 24 months.
Not-for-profit corporations under part II of the former Canada Corporations Act will have three years to formally make the transition to the new Act once it comes into force. Any corporations that fail to complete this transition will be automatically dissolved.
For more information, see the amended Bill.
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