A. INTRODUCTION
During 2012,
Canada’s charitable sector experienced a number of important regulatory and
common law developments at the federal and provincial level that will
significantly impact how charities operating in Canada and abroad. The purpose of this Charity Law Bulletin is to provide a brief overview of some of the more important developments in
the last year, including changes to the Income Tax Act (“ITA”), new
publications from the
Charities Directorate of the Canada Revenue Agency (“CRA”), corporate updates under the Canada Not-for-Profit Corporations Act and the
Ontario Not-for-Profit Corporations Act, and
court decisions.
B. HIGHLIGHTS OF THE FEDERAL BUDGET 2012
Budget 2012 was introduced on March 29,
2012. Bill C-38, An Act to Implement Certain
Provisions of the Budget Tabled in Parliament on March 29, 2012 and Other
Measures (“Budget 2012”) received Royal Assent on June 29, 2012. Budget 2012 does not include any new tax incentives to encourage
charitable donations, such as the charitable donation tax credit proposed by
Imagine Canada. Instead,
Budget 2012 focuses on the perceived lack of transparency and accountability
concerning charities that engage in political activities, as well as a number
of other ad hoc charity issues, including gifts to foreign charitable
organizations.
1. New Rules and Sanctions Involving
Political Activities
With the recent spotlight by the federal government on
foreign funding of political activities by Canadian charities in the 2012
Budget, registered charities may be reluctant to become or stay involved in
political activities. While Budget 2012 does somewhat affect the rules
regarding political activity, the basic regime for political activities by
charities remains largely unchanged. In this regard, Budget
2012 revises the definition of “political activity” in the ITA, creates new sanctions, increases
disclosure requirements concerning political activities and enhances enforcement
measures. The remaining rules, and therefore current CRA policy, related
to the conduct of political activities by registered charities remain the same.
Registered charities should not
necessarily let the changes arising from Budget 2012 deter them from engaging
in political activities if they wish to. Charities may become involved in or
continue to be involved in political activities as long as they carefully study
and follow the applicable rules, as well as carefully document all of their involvement
in political activities in order to be able to effectively respond to an audit
by CRA.
a) Revised Definition of Political Activity
Budget 2012 amends the ITA by revising
the definition of “political activity” under subsection 149.1(1) as follows:
“…includes the making of a gift to a qualified donee if it can reasonably be
considered that a purpose of the gift is to support the political
activities of the qualified donee”. The focus of this change to the definition of political activities is on the
intent of the donor charity as opposed to that of the recipient qualified
donee. The amendment will result in a double counting within the allowable
limit on resources for political activities, once by the donor charity if the
amendment applies and once by the recipient qualified donee when the funds
received are eventually expended on permitted political activities. During her
speech to the CBA/OBA National Charity Law Symposium, the Director General of
the Charities Directorate, Cathy Hawara emphasized that the allowable limit on non-partisan political
activities of 10% of resources remains unchanged. However, in light of
the proposed changes to the definition of “political activity,” a charity that
funds another qualified donee for the purpose of enabling political activities
will be required to count that donation against its own 10% limit.
Without further details, the meaning of the phrase “can
reasonably be considered” in the proposed definition of political activity is
ambiguous. As such, it is likely best for a charity making a gift to a
qualified donee to designate in writing that the gift is not to be used for
political activities. As well, it is likely prudent for charities to avoid
multi-purpose gifts, because Budget 2012 refers to “a purpose” as opposed to
“the purpose.” The lack of any details exposes charities to the risk that any
political purpose for any part of the gift could possibly taint the whole gift.
b) New Intermediate Sanctions
Budget 2012 introduces new intermediate
sanctions for excessive or unreported political activities. Where a registered
charity exceeds the limits in the ITA for political activities (generally 10%
of its total resources a year), CRA can impose a one year suspension of tax
receipting privileges (in addition to revocation). As well, if a
registered charity fails to report any information (not just information on
political activities) that is required to be included on a T3010 annual return,
CRA can suspend its tax receipting privileges until CRA notifies the charity that
it has received the required information. Presently, the only sanction provided by the ITA for non-compliance in the
context of political activities is revocation. According to the Director
General, these proposed intermediate sanctions will provide the Charities
Directorate with an additional tool to encourage compliance with existing legal
requirements.
c) Increased Disclosure Obligations
Budget 2012 states that more disclosure
will be required concerning political activities. This requirement is reflected
in the new T3010 E (13) Annual Information Return (including funding from
foreign donors) for charities with fiscal periods ending on or after
January 1, 2013..
d) Increased Enforcement Measures
Budget 2012 will affect charities and
registered Canadian amateur athletic associations through increased enforcement
measures. In Budget 2012, $8 million was committed to enforcement by the CRA,
which includes audits and educational initiatives. In her speech, the Director
General outlined CRA’s enforcement plans. The existing compliance continuum of
education and outreach, monitoring, and verification and audit activities,
which has traditionally been used by CRA in respect of all enforcement
activities, will be applied to the issue of political activities. Simple and
practical self-assessment tools will be developed by CRA to assist charities in
better understanding the rules relating to political activities. More proactive
monitoring of charities' political activities will occur, and where such
monitoring raises concerns, CRA will use its existing enforcement tools. In
addition, CRA will be conducting more restricted books and records audits.
2. Gifts to Foreign Charitable Organizations
Prior to Budget 2012, the ITA recognized as qualified
donees certain registered foreign charitable organizations outside Canada that
had received a gift from Her Majesty in right of Canada. However, Budget 2012 modified the rules for the registration of foreign
charitable organizations that have received gifts from the Government of
Canada, by replacing charitable organizations outside of Canada that have
received a gift from Her Majesty in right of Canada with designated foreign
organizations. In this regard, Budget 2012 changes the rules such that foreign
charitable organizations that receive a gift from the Government of Canada may
apply for qualified donee status if they pursue activities:
· related to disaster relief or urgent humanitarian aid; or
· in the national interest of Canada.
In addition, the Minister of National Revenue will have
the discretionary power, after consultation with the Minister of Finance, to
grant qualified donee status to foreign charitable organizations that meet the
above criteria. CRA has released on its website some questions and answers on
these measures. These measures apply to applications made by foreign charitable organizations
on or after January 1, 2013.
C. OTHER RECENT FEDERAL AND PROVINCIAL INITIATIVES
1. Notice of Ways and Means Motion to Amend ITA Released
On October 24, 2012, the Department of Finance released
draft legislative proposals to implement outstanding income tax technical
measures. The news release indicates that the release of these amendments is intended to
clear the backlog of outstanding amendments to the ITA and related
legislation. Included are proposed changes that will substantially impact the
operations of registered charities in Canada, including changes to the
definition of “gift,” split-receipting, designation of charitable organizations
and public foundations, revocation of charitable registrations, etc. These
proposed changes were first introduced by Finance on December 20, 2002, which
then underwent various incarnations over the years. Although these proposed
changes have yet to be enacted into law, the split-receipting rules have
already been implemented by CRA in their administrative policies.
2. B.C. Introduces Bill to Create Community
Contribution Companies
On May 15, 2012, the British Columbia’s Bill 23, Finance
Statutes Amendment Act, 2012 received Royal Assent. The Act amends, among
other things, the B.C. Business Corporations Act to provide for a new
type of company called a “community contribution company” (“CCC”). According to
the Honourable Kevin Falcon, who introduced the Bill, CCCs are a hybrid vehicle
intended to promote social enterprise by allowing the for-profit sector to tap
into the emerging demand for socially focused investment options. CCCs combine
socially beneficial purposes with a restricted ability to distribute profits to
shareholders. CCCs permit an alternative business model that is not available
through for-profit companies.
With regard to the creation and operation of these
companies, CCCs are incorporated with the same flexibility and certainty
accorded to for-profit companies, but the governing legislation ensures that
they primarily benefit the community. Measures in this regard include
restrictions on corporate reorganizations to avoid the circumvention of payout
restrictions and an “asset lock” that caps dividends on company shares to ensure
that profits are retained by the company or directed to the community benefit.
These companies are subject to a higher degree of accountability than an
ordinary company and are required to publish an annual report detailing their
social spending.
3. Nova Scotia Passes Community Interest
Companies Act
On December 6, 2012, Nova Scotia’s Community Interest
Companies Act, Bill No. 153
received Royal Assent, allowing businesses to seek designation as a “community
interest company” (“CIC”). This legislation is aimed at supporting social
entrepreneurism initiatives. According to John MacDonell, Minister of Service
Nova Scotia and Municipal Relations, CICs will “benefit the economy and create
employment, while contributing to a social good”. Nova Scotia follows British Columbia, which passed similar legislation in
April, 2012.
To qualify for the CIC designation, a company must have a
“community purpose,” which the Act defines as “a purpose beneficial to society
at large, or a segment of society that is broader than the group of persons who
are related to the community interest company”. A CIC must have at least three
directors, all of whom must act in accordance with the company’s community
purpose when exercising their powers and performing their functions. CICs are
restricted in their ability to pay dividends and distribute assets on
dissolution or otherwise and they must file a community interest report each
year. The legislation does not change the ITA, so CICs must either comply with
the rules for not-for-profit organizations or pay tax as a for-profit
corporation.
D. HIGHLIGHTS OF RECENT CRA PUBLICATIONS
1. Revised Fundraising Guidance
CRA released its much anticipated new Fundraising by Registered Charities Guidance: CG-013 (“Revised Guidance”) on April 20, 2012. While the Revised Guidance is much more
readable and practical than the previous guidance, it remains a complex
document that will require careful reading.
CRA has advised that the Revised Guidance does not
represent a new policy position of CRA, but rather provides information on the
current treatment of fundraising under the ITA and the common law. As such, the
Revised Guidance will have a significant impact on current CRA audits, not just
future audits. As well, the Revised Guidance applies to both receipted and
non-receipted fundraising.
The Revised Guidance is intended to provide general
advice for charities to follow and is based on the legal principle, established
by case law, that fundraising must be seen as a necessary means-to-an-end for a
charitable purpose, rather than an end-in-itself. In this regard, it is
possible for a charity to engage in fundraising activities, provided that the
fundraising is ancillary and incidental to the primary purpose of achieving the
charity’s purposes.
In addition to complying with the Revised Guidance,
charities must continue to meet all other requirements of the ITA, including
the 3.5% disbursement quota. The fundraising ratio referenced in the Revised
Guidance results from data that is included in a charity’s T3010 which is made
available to the public on CRA’s website. As such, it will be important for the
board to review and approve the charity’s T3010 before it is filed with CRA,
given that the information contained in it can later be scrutinized by donors,
and the press, as well as members of the public.
2. New Guidance on Community Economic Development
On July 26, 2012, CRA released Guidance CG-014, Community
Economic Development Activities and Charitable Registration (“New
Guidance”). The New Guidance provides parameters in which registered charities may conduct
“community economic development” (“CED”) activities that “improv[e] economic
opportunities and social conditions of an identified community.” The New
Guidance is a welcome improvement over the Former Guidance, expanding the types
of CED activities that charities may engage in, especially in the area of
program-related investments.
The New Guidance points out that the law in Canada does
not recognize CED in and of itself to be a charitable purpose. Therefore, in
order to be considered “charitable”, CED activities must directly further a
charitable purpose. In this regard, the New Guidance states that CED activities may potentially
further the following heads of charitable purposes, namely relief of poverty,
advancement of education and benefit the community in other ways the law
regards as charitable. It would therefore imply (although not explicitly stated in the New Guidance) a
CED activity cannot be conducted for the advancement of religion. Therefore, religious
charities that want to engage in social programs must carefully review whether
those programs are within the parameters of practical manifestation of their
faith. Also, to be charitable, the New Guidance states that CED activities must
meet the “public benefit test”, which includes not providing any private
benefit that is more than incidental. This means any private benefit must be
necessary, reasonable, and not disproportionate to the public benefit.
The New Guidance states that CED activities “generally”
fall into the following five categories: activities that relieve unemployment;
grants and loans; program-related investments; social businesses for
individuals with disabilities; and community land trusts. The New Guidance also sets out parameters for CED activities that promote
commerce or industry or improve socio-economic conditions for the public
benefit in an area of social and economic deprivation.
One of the most significant expansions of CRA’s policy
set out in the New Guidance is the broader context in which registered
charities may engage in program-related investments (PRIs). A PRI is not an
investment in the conventional financial sense because while PRIs may generate
a financial return, they are not made for that reason. As such, a PRI is not
required to generate a return, or potential return, of capital (funds or
property) for the charity, or to yield additional revenue (such as interest)
for the charity at or above market rate. Under the New Guidance, CRA accepts that charities can engage in PRIs that
involve loans, loan guarantees, share purchase and leases of land or buildings
involving non-qualified donees.
The New Guidance stipulates that, when making a PRI in a
non-qualified donee, the PRI must be used for a program over which the investor
charity maintains ongoing direction and control, so that the program is the
investor charity’s own activity (i.e., this is the same as the “own
activity” test that must be met when charities conduct activities through third
party intermediaries).
3. CRA Guidance on Arts Activities and Charitable Registration
Released
On December 14, 2012, the Canada Revenue Agency released
the Arts Activities and Charitable Registration Guidance CG-018 (“New Guidance”), which replaced Summary Policy CSP-A08, Arts, and
Summary Policy CSP-A24, Artists. The New Guidance is similar in
substance to the draft Guidance on Arts Organizations and Charitable
Registration, which was released on November 1, 2011 for public
consultation. The New Guidance explains CRA’s interpretation of the relevant common law and
the ITA, describing the factors CRA uses to determine whether an organization
is furthering a charitable purpose through arts activities and thus potentially
eligible for registration as a charity under the Act.
E. CORPORATE UPDATE
1. New Canada Not-for-profit Corporations Act
As is generally known, the Canada Not-for-profit
Corporations Act (“CNCA”) was proclaimed into force on October 17, 2011, succeeding the Canada
Corporations Act (“CCA”) as the legislation governing Canadian charitable and
not-for-profit corporations that are federally incorporated. Existing CCA
corporations have until October 17, 2014 to continue under the CNCA or face
dissolution. As part of the continuance process under the CNCA, existing CCA
corporations will need to bring their bylaws up to date to meet the
requirements of the CNCA. As well, charities must obtain CRA’s approval if they
are planning to make any change to their charitable objects.
Corporations with multiple membership classes, including
non-voting members, may want to consider whether they want to continue with a multi-class
structure. This is because, under the CNCA, members of all classes, including
non-voting members, will have a right of veto over certain fundamental changes,
including continuance. Corporations may therefore wish to change their
membership structure in advance of continuing under the CNCA so that there is
only one class of members. In this regard, one option is to restructure
secondary membership classes into “supporters”, “associates”, “fellows” or
other similar terminology in order to avoid classifying them as members.
2. New Ontario Not-for-Profit Corporations Act 2010
The Ontario Not-for-Profit Corporations Act (“ONCA”) received Royal Assent on October 25, 2010 and is expected to be
proclaimed on July 1, 2013.
Once the ONCA is proclaimed into force, it will
automatically apply to all non-share capital corporations incorporated under
Part III of the Ontario Corporations Act[29] (“OCA”). As such, OCA corporations do not need to take any specific action in
order to come under the ONCA. However, if there are any provisions in a
corporation’s letters patent, supplementary letters patent, by-laws or special
resolution that are inconsistent with the provisions in the ONCA, these
documents will be deemed, at the end of three years after proclamation, to be
amended to comply with the ONCA. The problem that will occur is that it will become difficult to determine what
provisions are deemed to be amended and in what way.
In order to avoid such uncertainty from arising, the ONCA
permits Part III OCA corporations to “transition” into the ONCA during the
three-year period by amending, by articles of amendment, any
provision in its letters patent, supplementary letters patent, by-laws or
special resolution that are not consistent with the requirements of the ONCA.
F. RECENT CASE LAW
1. Robinson v. Rochester Financial Limited
In Robinson v. Rochester Financial Limited, Ontario Superior court approved an $11 million settlement on February 7, 2012
of the class action relating to the “Banyan Tree” tax shelter. The scheme
involved small donations purportedly increased through a “loan” to the donor.
The complex schemes often left little money in the recipient registered charity
or amateur athletic association compared with the fees paid to the promoters,
lawyers and others involved. CRA disallowed the donors’ tax credits because the
“donations” were not gifts. The defendant was a law firm which provided a legal
opinion that the tax shelter complied with applicable tax legislation and that
the tax receipts issued by the tax shelter should be recognized by CRA.
2. Adams v. Association of Professional Engineer
In Adams v. Association of Professional Engineer ,
a member of Council for the Association of Professional Engineers of Ontario
("PEO") submitted a resignation by email to the other Council members
indicating that he had resigned. The following day he sent a further email to
the Council of PEO indicating that his resignation would be effective at the
next annual general meeting of PEO. Ten days after sending this resignation the
Council member sent a further email indicating that he was revoking his
resignation. However, the remaining Council members subsequently voted to
accept the resignation.
The court was left to decide when the resignation of a
director of a non-share capital corporation becomes effective and whether or
not it can be withdrawn by the director without the consent of the remaining
directors. PEO was created by an act of legislature under the Professional
Engineers Act and was therefore governed by that act, its regulations, the Canada
Corporations Act, and PEO’s own by-laws. The by-laws of PEO did not address
the resignation of a director. The court examined the Canada Corporations
Act and determined that the statute was also silent on the matter of a
director's resignation. However, the court consulted the Ontario Business
Corporations Act, as well as the Canada Not-for-profit Corporations Act (“CNCA”),
which provide that a resignation is effective at the time the resignation is
received by the corporation or at the time specified in the resignation,
whichever is later.
Adams argued that directors of non-share capital
corporations should not be subject to the standards of for-profit corporations
under the Ontario Business Corporations Act. The court, however, found
that there was no principled reason to treat directors of non-share capital
corporations differently from other directors. In this regard, the court noted
that the rational that directors of for-profit corporations should be able to
effectively resign without having their resignation accepted applied equally to
directors of non-share capital corporations. The court adopted the rationale of
not requiring the acceptance of a director’s resignation by the remaining
directors concerning for-profit corporations, and stated as follows:
First, to create certainty for the director as to when
any liability he or she has might end and second, because absent some special
contractual arrangement or special provision in the articles of incorporation,
the corporation is not in a position to refuse the director’s resignation and
force him or her to stay on. Similarly, if effective resignations could be
delivered and then revoked at will by the director, this could create
uncertainty and confusion for the corporation and its remaining directors.
Having found that the resignation was unequivocal, the
court found that the resigning director could not thereafter revoke his resignation
without the consent of the other directors.
3. Guindon v. The Queen
On October 2, 2012, the Tax Court of Canada (TCC)
released its decision in Guindon. The case dealt with
whether the third party penalties provided under section 163.2 of the ITA could
be assessed against the appellant. The basic purpose of s. 163.2 is to provide
for monetary penalties assessable against third parties who knowingly, or in
circumstances amounting to gross negligence, participate in, promote, or assist
conduct that results in another taxpayer making a false statement or omission
in a tax return.
In a decision that bodes enormous implications for the
future of s. 163.2, Justice Bédard concluded that the provision creates a
criminal sanction that can only be prosecuted in provincial court in accordance
with criminal procedure and Charter protections. This Charity Law
Bulletin reviews the decision and its implications for charities.
G. CONCLUSION
The complexity and variety of topics
discussed in this article underscores the importance of keeping abreast of
developments in the law as they affect registered charities in Canada.