On March 21, 2024, the Federal Court of Appeal (“FCA”) released its decision concerning Sigma Chi Canadian Foundation v Canada (National Revenue). The fraternal organization (the “Appellant”), a registered charity, appealed to the court from a decision of the Minister of National Revenue (the “Minister”) to revoke the organization’s charitable status.
The Canada Revenue Agency (“CRA”) audited the Appellant’s operations in 2010 and 2011, finding a number of areas of non-compliance, including failure to devote its resources to charitable activities and the provision of personal benefits to its members. The Appellant entered into a compliance agreement with CRA.
A further audit in 2017 found that the Appellant was still non-compliant with the aforementioned issues, in addition to new areas of non-compliance, including making gifts to non-qualified donees and transferring funds to an American organization without direction and control. The Minister issued a notice of intention to revoke. While the Appellant filed an objection, the Minister confirmed the notice of intent to revoke. The Appellant appealed the revocation to the FCA and argued that the Minister breached her duty of procedural fairness and that her conduct raised a reasonable apprehension of bias.
The FCA applied the standard of review of the highly deferential standard of palpable and overriding error. The court found there was no palpable and overriding error in the Minister’s finding that the Appellant provided private benefits to its membership through scholarships which were not available to the public. Though the organization argued that the scholarships were “open to all male university students eligible to apply for Sigma Chi membership,” they were only awarded to recipients who joined the organization. Further, upon registration, the Appellant’s stated purpose of funding education initiatives made no mention of restrictions to those within the organization, but as of May 2023, its website indicated that these funds were “primarily for the benefit of Active Chapters and Active brothers.”
The court also found no reviewable error in the Minister’s finding that the Appellant provided funds to non-qualified donees by way of making loans to Sigma Chi fraternity housing corporations, which exist to provide housing to members of the organization. The Appellant also breached the compliance agreement by failing to obtain security for loans to London Sigma Chi Properties and by making a further advance to London Sigma Chi Properties.
As well, there was also no reviewable error in the Minister’s finding that the Appellant failed to maintain direction and control over a scholarship program which it partially funded but was administered in the United States. The organization did not have direction and control over the funds it contributed given, among other things, that the Appellant only had one of the eight seats on the governing board, and only two of sixteen seats on the selection committee.
Finally, there was no reasonable apprehension of bias or deprivation of procedural fairness in the decision of the Minister. The Appellant alleged that the Minister’s actions suggested bias because she treated the Appellant differently from other organizations with similar scholarship practices, citing examples from the University of Toronto which limited eligibility to particular colleges at that institution, but precedent indicates that the benefit others receive from an exemption is not pertinent, and the evidence presented did not sufficiently support meaningful comparisons.
The Appellant further argued that the Minister’s refusal to consider their offers to implement corrective measures had raised a reasonable apprehension of bias. However, the Minister had pointed out that the Appellant had been given three formal chances to address the issues raised, which were taken seriously and thoroughly reviewed, leading to the conclusion that the Appellant was not entitled to continue negotiating further corrective measures, particularly due to its failure to fulfill obligations under the compliance agreement.
This case serves as a reminder that registered charities that have entered into a compliance agreement need to be very careful to ensure they are compliant, as CRA is likely to conduct a follow-up audit. As well, given the highly deferential standard of review granted to decisions of the Minister by the FCA, registered charities face a high bar in convincing the court that CRA has made a palpable and overriding error in relation to audit decisions. As such, registered charities should be cautious in complying with the statutory requirements of the ITA to avoid having to appeal decisions made by CRA to the FCA where they are likely to lose.
Ryan M. Prendergast is a partner and Urshita Grover is an associate with Carters.