Articles
A shift in CRA administrative policies relating to not-for-profits
By M.E. Hoffstein
A review of CRA’s recently released Technical Interpretations on non-profit tax exempt status.
Bringing the provinces back in: Creating a federated Canadian charities Council
By Adam Aptowitzer
A summary of the author’s paper for the CD Howe Institute.
Banyan Tree class action receives certification
By Karen J. Cooper
The Ontario Superior Court has certified a class proceeding brought on behalf of individuals who participated in the Banyan Tree Foundation Gift Program.
Church property ownership debate sparked by dispute over doctrine of the Anglican Church
By Iain T. Benson
A case summary of the B.C. Supreme Court’s decision in Bentley v. Diocese of New Westminster B.C.
B.C. Society Act review — Government consultation process
By Kenneth Burnett
B.C.’s Ministry of Finance has announced that it is now officially reviewing the province’s Society Act.
Message from the Chair
By Terrance Carter
An overview of current work by the Section.
Section notes
Disbursement quota requirements: Reforms announced
CBA advocacy success for Canadian charities
Reforms to disbursement quota requirements in the 2010 federal budget give charitable organizations greater flexibility in meeting their worthy goals.
Invitation to annual meeting
Section members are invited to the National Charities and Not-for-Profit Law Section dinner meeting to be held on April 29, the evening before our PD conference. This is a wonderful opportunity to meet the executive and to learn about Section activities and how to get involved. To RSVP and for more information, please contact Corinna Robitaille.
Professional development
2010 National Charity Law Symposium - Friday, April 30, 2010
A joint program of the CBA’s and the OBA’s Charity and Not-For-Profit Law Sections, this event will bring together leading experts Canada to speak about the latest developments in this rapidly changing area. Visit the CBA website for the conference brochure and to register.
Online PD replay: The New Canada Not-For-Profit Corporations Law: What will it mean to Your Practice? November 2009
Authors: Wayne D. Gray, David P. Stevens
Purchase the archive webconference presentation.
A shift in CRA administrative policies relating to not-for-profits
By M. E. Hoffstein
Fasken Martineau DuMoulin LLP
There are many organizations that "do good" which do not operate as registered charities but which nevertheless are exempt from income tax. The rules relating to such entities are not as detailed or as stringent as the rules for registered charities and therefore many organizations prefer to be considered non-profit rather than charities, particularly if they do not want or need to issue charitable receipts. It is, however, important to carefully review the activities of an organization both upon creation and on an on-going basis in order to preserve its tax exempt status.
A number of recently released "Technical interpretations" have raised concerns that the CRA may be changing its administrative policy with respect to the operations of such entities.
Paragraph 149(1)(l) of the Income Tax Act (the "Act") is one of the operative sections and it provides that an organization is exempt from tax if it is:
a club, society or association that, in the opinion of the minister was not a charity within the meaning assigned by subsection 149.1(1) and that was organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, no part of the income of which was payable to, or was otherwise available for the personal benefit of a proprietor, member or shareholder thereof unless the proprietor, member or shareholder thereof was a club society or association, the primary purpose and function of which was the promotion of amateur athletics in Canada. (emphasis added)
In Technical Interpretation 2009-0337311E5 dated Nov 5, 2009, CRA responded to a number of questions summarized as follows:
Can an organization that qualifies of exemption from tax under paragraph 149(1)(l) compete against taxable entities?
CRA response: Yes. The Act does not restrict an organization from undertaking any particular type of activity including commercial activity. However it cannot have a for profit purpose as this would disqualify the organization from being tax exempt.
Can an organization earn a profit and continue to be tax exempt? Can it intentionally earn a profit as long as that profit is used solely for the purpose of supporting its objectives?
CRA response: Paragraph 149 ( 1)(l) requires that an organization be organized and operated exclusively for any other purpose except profit. Thus while an organization may have many purposes it cannot intentionally earn a profit as this would cause it to be offside even if it expects to use or actually uses that profit to support its not-for-profit objectives. It appears therefore that it is not the fact that it earns a profit that is the issue, but the intentionality of earning a profit that would cause the organization to be considered taxable.
It was also noted that there are instances when a not-for-profit entity may have funds on hand in excess of its immediate operating requirements. The fact that the entity retains excess funds may be evidence that it is operating with a profit purpose, but it will not in and of itself result in the entity failing to qualify as a not-for-profit unless the excess funds were collected for the purpose of earning investment income rather than for the purpose of funding a specific capital project.
Is it possible for an organization to incorporate under Part III of the Ontario Corporations Act but not qualify for the exemption from tax provided under paragraph 149(1)(l) of the Act?
CRA response: Yes. The criteria contained in the provincial legislation are not the same as the criteria required to qualify for tax exempt status under the Act. In particular, provincial statutes and the federal statute generally require only that any profits or other accretions be used in promoting the objects and activities of the corporation. This suggests that the corporation can operate with a profit purpose as long as the profit is used to support the corporation's objectives. The Act requires that the entity be operated exclusively for a purpose other than profit.
Does the CRA maintain a list of organizations that qualify as non-profit organizations for purposes of provincial legislation but do not qualify for tax exemption under paragraph 149(1)(l) of the Act?
CRA response: No. Unlike charities such entities are not required by the Act to register with the CRA.
The recent Tax Court of Canada decision, BBM Canada v. The Queen, 2008 DTC 4129 ("BBM") concludes that an entity described in paragraph 149(1)(l) of the Act may conduct commercial activity but must conduct this activity at cost. If the non-profit corporation provided a commercial procurement contract to an organization and that organization generated a profit from this activity would the organization qualify for exemption under paragraph 149(1)(l) of the Act?
CRA Response: It is a question of fact as to whether such an organization qualifies for the tax exemption. If the profit was incidental and unanticipated then the organization may still qualify as a non-profit. However, if the organization planned to earn a profit when it entered into the contract, for example, if the contract specifically contemplated a mark up the organization would not qualify for non-profit status.
In the later Technical Interpretation 2009-0348621E5 dated December 15, 2009, CRA was asked the following questions:
Can a condominium corporation enter into a rental agreement through which it expects to earn a profit and remain an entity exempt from tax under paragraph 149(1)(l)?
Can such a corporation remain exempt if it uses such profits to lower the fees of its members?
The CRA noted that a condominium can only offer services on a cost recovery basis. A condominium corporation that intentionally rents out a suite for an amount higher than the expected cost of maintaining and operating that suite does not qualify for non-profit status. This position applies to all activities such a corporation might choose to undertake such as the operation of a parking lot, laundry facilities or a fitness/health centre.
CRA went on to note that where members' fees are reduced as a consequence of intentionally charging rent in excess of expected costs, this would generally be considered to be making the income of the condominium corporation available for the personal benefit of its members, which is also contrary to the provisions of paragraph 149(1)(l).
These Technical Interpretations raise questions as to whether CRA is changing its administrative policy with respect to non-profit organizations. One would hope not. There are many organizations that operate on a non-profit basis which engage in an activity which generates income that is used to fund another activity of the organization. Overall, such an organization may operate on a cost recovery basis. Why should this be problematic? It would seem that this would be a fiscally prudent and responsible manner of operations.
In addition if such organizations operate in a fiscally responsible manner, it may well be that member fees do not go up and may even be reduced. It seems unfortunate to come to the conclusion that an organization is offside because there may be a resultant benefit for the members.
Causing a corporation to expend all its revenues even if it is not necessary to expend them would not seem to be fiscally prudent and the Technical Interpretations appear to be contrary to the position stated in IT 496R that a non-profit can accumulate a reasonable amount of excess income.
It remains to be seen whether these technical interpretations herald a move toward greater restrictions and controls over the activities of non-profit organizations by CRA.
M.E. Hoffstein
Email: ehoffstein@fasken.com
416 865 4388.
Bringing the provinces back in: Creating a federated Canadian charities council
By Adam Aptowitzer
Drache LLP
Most charities accept the fact that regulation is necessary to ensure that the sector operates in a reasonably acceptable manner. That this regulation should be undertaken by the CRA has basically become unquestioned by the vast majority of Canadians. However, the CRA’s involvement in this role is actually more a product of necessity rather than a deliberate act in accordance with Canada’s constitution. A paper written by the author, and published by the CD Howe Institute earlier this year, describes these issues and proposes a new way forward for the sector.
When the federal government gave preferential tax treatment to charities in the 1930’s there was considerable incentive for the proliferation of groups which called themselves charities. In response, and to protect the integrity of the tax base, the Minister of National Revenue (as the CRA then was) began the process of registering charities. Then, as it became clear that the provinces were not going to exercise the constitutional authority that was theirs alone to regulate charities, the federal government began legislating requirements for registration which were really of a regulatory nature. As the CRA was responsible for registering charities (itself as a consequence of its role to manage the tax base), the additional ‘registration requirements’ naturally fell within its purview. In this way, the CRA gradually became the national charities regulator.
Fundamentally, because the federal government does not have the necessary jurisdiction to regulate charities it is forced to use the registration system to try and enforce regulations more generally. As a result, we have a system where the rules in place do not necessarily punish the appropriate parties. For example, a charity is subject to revocation for bestowing an ‘undue benefit’ on the directors – even if it is the directors causing the charity to bestow the benefit in the first place. Another major problem is that regulatory laws often contain nuanced and complicated rules that are meant to apply policy in specific areas. On the other hand, a registration system uses rules which are far broader and intended to apply to all situations regardless of the more minute details.
There are other problems with the current regulatory system as well, but fundamentally most of these can be traced to the general structure (or lack thereof) of the regulatory structure in Canada. The most comprehensive way to fix the system is to involve the provinces in charity regulation. This could be done through a joint federal–provincial charity council. Each province would be entitled to appoint a representative to the council, as would the federal government. A representative of the sector generally may also be appointed. The council would be responsible for registering new charities, regulating them and being a first level adjudicator for disputes in either of those two areas. Moreover, registration under the Income Tax Act would be automatic but contingent upon registration by the council. Thus, provincial participation on the council would be required to ensure that charities in that province get the benefit of the federal donation tax credit.
While these changes are extensive, they are also compelling in that Canada’s third sector accounts for hundreds of billions of dollars, a massive number of employees and huge portion of the country’s collective consciousness. We need proper regulation in order to promote the health of the sector and ensure that our charities will continue to serve the public and Canada’s image abroad in an effective and responsible manner.
Adam Aptowitzer
aaptowitzer@drache.com
233-2675 ex. 17
Banyan Tree class action receives certification
By Karen J. Cooper
Carters Professional Corporation
The Ontario Superior Court of Justice has certified a class proceeding brought on behalf of individuals who participated in the Banyan Tree Foundation Gift Program against the promoters of the program and a law firm.
Read the full article 
First published in Carters’ Charity Law Bulletin and reproduced here with permission.
Karen Cooper
Email: kcooper@carters.ca
Orangeville Office
Tel: (519) 942-0001
Mississauga Office
Tel: (905) 306-2791
Church property ownership debate sparked by dispute over doctrine of the Anglican Church
By Iain T. Benson
Miller Thomson LLP
In Bentley v. Diocese of New Westminster B.C., former Labour Relations Board Chairman Stephen Kelleher, now justice of the B.C. Supreme Court, combined two actions for trial that concerned disputes over church property within several parishes of the Anglican Church of Canada (ACC).
In the first, there were 22 plaintiffs. They were Anglican clergy and lay leaders from four incorporated parishes geographically situated in the Diocese of New Westminster (the “diocese”). The plaintiffs were also trustees of their respective parish corporations, and also brought proceedings in that capacity.
The defendants were the Anglican Synod of the Diocese of New Westminster (the “diocesan synod”) and Michael Ingham, the current bishop of the diocese.
These proceedings arose indirectly from Bishop Ingham’s decision in June 2002 to accept the recommendation of the diocesan synod that he authorize a rite for the blessing of same-sex unions. The plaintiffs viewed this as an abandonment of Christian scripture, and their respective congregations had left the diocese as a consequence. They contended that church properties in their four parishes were held pursuant to a trust for “historical, orthodox, Anglican doctrine and practice”, and that the blessing of same-sex unions was inconsistent with such doctrine and practice. Accordingly, the plaintiffs sought to have the church properties turned over to their congregations pursuant to the exercise of this court’s inherent jurisdiction over trusts and charities.
Certain parishes voted overwhelmingly to leave the local diocese and that raised the issue of the status of their ministers and buildings. The local bishop issued a "presumption to abandon ministry" notice and then demanded “the orderly handing over of control of buildings and assets” from the dissenting congregations and ordered the removal of the elected trustees of two of the congregations.
The defendants counterclaimed for a declaration that the plaintiffs were not entitled to possession or control of the properties in question, and other ancillary relief.
The plaintiffs said that in these circumstances of broken communion, there is a supervening impracticability wherein the court should exercise its inherent jurisdiction to rescue the trust.
The plaintiffs argued that granting the counterclaim would cast the largest congregation within the ACC out of its building because it stands against innovations in doctrine and practice which are, at the least, controversial. The same outcome would similarly befall the largest congregation in the Fraser Valley and almost the entirety of the Chinese Anglican community in the diocese. This outcome should be avoided in order to minimize the existing conflict within the Christian community.
With respect to the form of order, the plaintiffs said that the cy-près order need go no further than that the plaintiff trustees be continued in each parish under the oversight of another bishop.
The defendants submitted that the plaintiffs’ case failed even on the legal framework upon which they rely. They said that the jurisprudence on religious purpose trusts contained three principles that are determinative of the present dispute.
First, it is only the “fundamental principles” or “defined doctrines” of a religious organization that can be the subject of a trust and there is no such fundamental principle of that sort in this case because the non-sanctity of same-sex relationships is not fundamental to the ACC. Second, the principle that the property of a religious organization is held on trust for the original purposes of the organization is subject to any mechanisms within the organization that allow for change. If a religious organization’s structure allows for doctrinal changes, then any such changes cannot be a breach of an implied trust. Third, the defendants submitted that a substantial body of authority confirms that where a religious organization is hierarchical and has officers or tribunals to determine correct doctrine, civil courts ought to defer on religious matters to the determination of those officers or tribunals.
Kelleher J. noted that the plaintiffs’ submissions started from the premise that church property is presumed to be held on a religious purpose trust. In contrast, the defendants’ contended that the issues in dispute could be resolved by reference to statutes and canon law, and that it is unnecessary to turn to trust principles.
The court examined and appeared to accept the American approach of “neutral legal principles” in which property disputes in a religious context should be resolved with respect to neutral legal principles not doctrinal matters. Where the interpretation of the documents would require the courts to resolve a religious controversy, then the courts are to defer to the resolution of the doctrinal issue by the authoritative ecclesiastical body.
Kelleher J. noted that: “the notion of civil courts deferring to ecclesiastical authority on questions of doctrine has deep provenance in Canada.” Further, he reviewed founding documents and determined that within the ACC a parish does not have authority to unilaterally leave the diocese, and it is consequently ultra vires for it to pass a resolution purporting to do so. Additionally, while parish corporations may hold title to real property that property effectively remains within the diocese unless the executive committee and bishop agree to mortgage, sell or otherwise dispose of it which had not happened in this case.
Kelleher J. noted that “historic” and “orthodox” are uncertain and subjective terms that cannot form the basis of an enforceable trust and trusts that freeze doctrinal development at a point in time would be inconsistent with the history of change and evolution in Anglicanism. Significantly, the ACC has concluded that the blessing of same-sex unions does not engage core Anglican doctrine. This clearly implies that such blessings are not contrary to the Anglican Church’s founding documents. It is only a departure from the core tenets or fundamental doctrine of a church that can breach a religious purpose trust.
On the other hand, Kelleher J. found that Bishop Ingham had acted outside his authority in removing the Trustees that had been validly elected by their vestries and ordered them reinstated provided that they exercise their authority in relation to the parish properties in accordance with the Act, as well as the constitution, canons, rules and regulations of the diocese and, in particular, that “...they do not have authority to use those properties outside of the diocese; this includes using them for purposes related to [the organization of dissenting parishes].”
Because the plaintiffs were not successful in the main part of their action, it become necessary for the judge to consider a discrete dispute over a bequest by an individual who had attended one of the dissenting parishes: was the bequest for the benefit of the parish, the dissenting church or the wider diocese? The judge found, on this aspect of the case, that the best interpretation of the testator’s wishes was that she left the money for the building fund of a particular Chinese church and that required that the money go to the dissenters as there was little likelihood of there being many other Chinese Anglicans in the diocese (most, being conservative in belief, had left the diocese).
Kelleher J. noted, somewhat wryly that “ ... it may be that in light of the other conclusions I have reached, the trustees will no longer wish to remain as such. I do not know. For now, I will leave it to the parties to arrive at a workable resolution. In the event it becomes necessary, they may return to court for further orders in this regard.”
In sum, the judge found for the bishop with respect to the buildings and assets, with the trustees in terms of them keeping their offices and with the dissenting Chinese Anglicans in terms of the monies (over 2 million dollars) left to them by a deceased parishioner. The dissenting parishes have appealed on the property ownership issue. The defendants have cross appealed, only on the issue of the bequest.
Iain Benson
Email: ibenson@millerthomson.com
416.595.8638
First published in Miller Thomson LLP's Charities and Not-for-Profit Newsletter (January 2010) and reprinted here with permission.
B.C. Society Act Review — Government consultation process
By Kenneth Burnett
Miller Thomson LLP
British Columbia’s Finance Ministry has announced that it is now officially reviewing the province’s Society Act, the statute that provides rules for the registration and corporate governance of not-for-profit entities in B.C.
The purpose of the review is to identify and address any legislative obstacles that may prevent societies from functioning fully and efficiently, and ensure that the public interest is being protected. The government is seeking input from the public on any problems, gaps, inconsistencies or ambiguities in the Society Act and any reforms that the public would like considered. The government has had the benefit of an extensive review of the Society Act by the B.C. Law Institute in a 2008 report recommending a new Society Act.
For example, the Government has identified two fundamental structural issues regarding the Society Act which are:
- The nature of the corporate model most appropriate for societies and whether a sophisticated business law framework should be adopted; and
- The extent to which the Society Act should contain regulatory provisions or other rules that constrain the operation of societies.
The Society Act review will likely consist of a number of consultation phases. In the first phase, its goal is to identify issues, priorities and objectives, and to explore possible structural frameworks.
The public is invited and encouraged to participate by commenting on the issues raised above or other problems there may be with the current legislation. It is the intention of the government to solicit as much input as possible.
The deadline for feedback is April 1, 2010.
Comments may be submitted via the following methods:
Email:
fcsp@gov.bc.ca
Mail:
Financial and Corporate Sector Policy Branch
Ministry of Finance
P.O. Box 9418, Stn Prov Govt
Victoria, BC V8W 9V1
More detailed information
Kenneth Burnett
Email: kburnett@millerthomson.com
604.643.1203
First published in Miller Thomson LLP's Charities and Not-for-Profit Newsletter (January 2010) and reprinted here with permission.
Message from the Chair
By Terrance Carter
Carters Professional Corporation
The executive committee of the Charities and Not-for-Profit Law Section has been very active over the past few months. Specifically, the executive has formed a number of Working Committees, which now include working committees on Fundraising Guidance Review, Not-for-Profit Law Issues, New Canada Not-for-Profit Corporation Act Issues, GST/HST Reform, T3010B Review, and Related Business Review. The formation of these working committees is in addition to the existing working Committee that was formed in the fall of 2009 to prepare a submission to CRA on CRA’s new draft Guidance for Charities Operating Outside of Canada. More details will follow in future newsletters concerning the work of these working committees.
In addition, our co-editors Elena Hoffstein and Kate Lazier, have been busy in putting together an excellent newsletter that includes topics of interest to practitioners across Canada. As well, two of our executive committee members have agreed to take on the job of monitoring and upgrading our Section website. Finally, we have a number of Professional Development opportunities coming up this year. The first is the annual National Charity Law Symposium which is being held on April 30, 2010, at the Toronto Marriott. We have a great line up of speakers and if you have not already registered, I would encourage you to do so. Particulars of the conference are available at the CBA website. In addition, there will be a PD program at the CBA Canadian Legal Conference and Expo to be held August 15-17, 2010, in Niagara, Ont. The program is titled “A Comparison of Jurisdictions for Charitable Organizations.”
Finally, there will be a combined PD program with the American Bar Association at the ABA conference in Toronto later in September. The program will involve a joint panel made up of practitioners from both the ABA and CBA discussing comparative approaches towards carrying on foreign activities. More details will be provided in the future.
In the event that you would like to become more involved in our Section, please feel free to contact me at tcarter@carters.ca, as our Section executive always welcome participation on Section activities.
Regards, Terry Carter
Email: tcarter@carters.ca
Orangeville Office
Tel: (519) 942-0001 x222
CBA advocacy success for Canadian charities
In the 2010 federal budget, Finance Minister Flaherty announced reforms to disbursement quota requirements, giving charitable organizations greater flexibility in meeting their worthy goals. It is a noteworthy development for lawyers who act for charities, as well as for those who serve on charitable boards.
The announcement is a major success for CBA advocacy. CBA President Kevin Carroll congratulated the CBA Charities and Not for Profit Law Section: “This is an excellent example of the legal profession informing public policy to improve the law.”
- CBA President's Letter to Minister Flaherty. "On behalf of the Canadian Bar Association, I wish to thank you for reforming the disbursement quota requirements for charities in the 2010 Budget..." Read more.
- Concept Paper on Reform of the Disbursement Quota Regime, developed by the National Charities Law Section DQ working group. "I wish to thank you for reforming the disbursement quota requirements for charities in the 2010 Budget..." Read more.
The Chair of the working group was M. Elena Hoffstein. Its members included:
David Stevens
Susan Manwaring
Terrance Carter
Karen J. Cooper
James Parks
Theresa Douma
Teresa Man
Patty Rubin
Sam Helfenbaum
Adam Parachin
Jill McAlpine
Josh Douma
Brenda Wyatt
Paul Broder
Bruce Harris
Brenda Lee Kennedy
- Pre-Budget Consultations 2009. The CBA Section believes that the following measures are needed to ensure prosperity and a sustainable future for Canadian charities and not-for-profit organizations and would contribute to stimulating this important sector of the economy... Read more.
- CBA President's letter to members of the Charities and Not-for-Profit Law Section. I read with great pride in the 2010 budget that Finance Minister Flaherty reformed the disbursement quota requirements for Canadian charities.... Read more.
- CBA National Charities and Not-for-Profit Law Section website.
Invitation to annual meeting
Section members are invited to the National Charities and Not-for-Profit Law Section dinner meeting to be held on April 29, the evening before our PD conference. This is a wonderful opportunity to meet the executive and to learn about Section activities and how to get involved.
To RSVP and for more information, please contact Corinna Robitaille.
Professional development
2010 National Charity Law Symposium - Friday, April 30, 2010
Toronto Marriott Downtown Eaton Centre Hotel
The annual National Charity Law Symposium will be back again in the spring of 2010. This joint program of the Canadian Bar Association's and the Ontario Bar Association's Charity and Not-For-Profit Law Sections will bring together leading experts from across Canada to speak about the latest developments in this rapidly changing area. Refreshers on key issues affecting charities in Canada will also be addressed
Get the latest information on the new Canada Not-For-Profit Corporations Act. Learn about new and unusual gifts. Explore strategies for audits and appeals. Discuss considerations involved with the return of a gift. Listen to new thoughts on administrative and cy-prés judicial scheme-making. Delve into environmental issues under the fourth head of charity. Follow up on Canada Revenue Agency’s Guidance on Activities Outside of Canada. Plus, get an exclusive update direct from the Canada Revenue Agency on current issues impacting your clients!
Who should attend?
Charities and not-for-profit law practitioners, taxation law practitioners, wills, estates and trusts law practitioners, gift planners, directors, officers and senior staff of charities and not-for-profits, accountants and fundraisers.
Visit the CBA website for the conference brochure and to register.
November 2009 Online PD - The New Canada Not-For-Profit Corporations Law: What will it mean to Your Practice?
Authors: Wayne D. Gray, David P. Stevens
Purchase the archive webconference presentation
|
