On August 23, 2013, the Federal Court of Appeal released
its decision in Cheder Chabad v. Minister of National Revenue. Cheder Chabad is a registered charity operating a religious school in the
Toronto area, teaching secular and religious studies. The charity was audited
by Canada Revenue Agency (“CRA”) for the fiscal periods of July 2007 to June
2009. As a result of the audit, CRA issued a notice of intention to revoke the
charitable status of Cheder Chabad on July 5, 2013. In this regard, the charity
sought an order prohibiting CRA from publishing a copy of the notice of
intention to revoke in the Canada Gazette, which would make the
revocation of charitable status effective.
Generally, charities have been unsuccessful at the Federal
Court of Appeal in obtaining a stay or delay of revocation of their charitable
status. This is because charities have thus far been unable to convince the
court that they would suffer “irreparable harm” as a result of the revocation. In
this decision, however, Cheder Chabad was able to obtain a delay in the
publication of the notice of intention to revoke due to the Federal Court of
Appeal’s consideration of the impact that the revocation would have on a third party,
i.e., the students of the school.
This Charity Law Bulletin will review the decision
and provide comments concerning the potential impact that the decision may have
for the charitable sector.
B. BACKGROUND FACTS
CRA alleged that Cheder Chabad was unable to substantiate
the existence of various gifts-in-kind amounting to over $10 million for which
the charity issued receipts. On July 31, 2013, the charity filed an objection to
the notice of intention to revoke under subsection 168(4) of the Income Tax
Act (Canada). While CRA will generally delay the publication of the notice
of intention to revoke when a charity files an appeal, in circumstances
involving allegations of serious non-compliance with the Act CRA moves forward
with publication of the notice at its earliest opportunity. In this case, CRA
indicated that it was not willing to allow the charity to exhaust its right to
an appeal before proceeding with publication of the notice of intention to
revoke in the Canada Gazette.
Consequently, Cheder Chabad brought an application on
August 15, 2013 for judicial review of the refusal by CRA to delay the
publication, together with a motion seeking the same relief.
1. Application of RJR-MacDonald Test
As discussed in previous Charity Law
Bulletins, the test applied by the Federal Court of Appeal when charities are seeking
a stay of their revocation is the test set out in RJR-Macdonald Inc. v.
Canada (Attorney General), that is: that (1) there is a serious issue to be
tried; (2) it will suffer irreparable harm if the order is not granted; and (3)
the balance of convenience favours granting the order.
a) Serious Issue
Both sides in this case agreed that there was a serious issue to be tried.
b) Irreparable Harm
Cheder Chabad argued that the revocation
would result in the cancellation of the school year for all of the students and
the dismissal of the teaching staff. In addition, since 80% of the students
receive subsidized tuition, loss of charitable status
would also mean the costs of tuition will prevent some students from attending
the school since the charity would no longer be able to provide tax receipts
for that portion of the tuition fees that qualifies for a charitable receipt.
CRA argued that the 2012 T3010
information for the charity established that it had over $10 million in assets,
i.e., that it should have more than enough resources to continue operating the
school for another year. As well, counsel for CRA argued that the charity could
use these assets to compensate the parents through additional subsidies
for student tuition.
However, Cheder Chabad sought an extension of 6 months to
delay publication of the revocation in order to liquidate these assets, as none
of them were readily available for the charity to convert into funds in order to
continue operating the school.
The Federal Court of Appeal considered
the matter analogous to applications brought under the Canada Charter of
Rights and Freedoms, where damages are not generally available as a remedy.
The court also noted that the “peculiarities of the charitable activities
sector and of charitable organizations, generally, which are not based on
profit or gain, must also be taken into account.”
Taking these factors into account, the
court concluded that Cheder Chabad had demonstrated the revocation of its
status would cause it to suffer irreparable harm, since the revocation would
prevent the school from carrying on the next school year given the short-fall
in funds the school would face without being able to liquidate assets, and since
the impact that revocation would have on the parents who would not be able to
send their children to the school but for the subsidies provided to students
through tax-receiptable gifts.
c) Balance of Convenience
The Federal Court of Appeal was tasked
with balancing the public interest in seeing the charitable sector regulated by CRA and the interests of the students who would not be
able to attend school in fall. It is worth noting that when the decision was
heard, the beginning of the school year was mere days away.
The court stated that “had the only harm
inflicted on the applicant been that identified in the above discussion
concerning the irreparable harm component of the test, I would not have found
that the balance of convenience favoured the applicant.”
The court ultimately concluded that the
balance of convenience weighed in favour of the interests of the 180 students,
since their parents would not likely be able to place them in another school
within such a short timeframe, and the specific nature of religious instruction
available at the school which would not generally be available elsewhere in the
2. Conclusion of the Court
Ultimately, the court ordered that the publication of the
notice of intention to revoke be delayed until December 31, 2013. The delay
permitted Cheder Chabad time to liquidate its assets so that they could be used
for operating funds, together with time to plan how the charity would operate
the school after the revocation became effective. The court also ordered that
the charity was responsible for notifying the parents that it would lose its
charitable status as of December 31, 2013 in order to permit them to secure
alternate schooling arrangements for their children should they wish to do so.
The decision has now provided a helpful standard for the
charitable sector, as the Federal Court of Appeal took into consideration the
impact that the revocation would have on third parties, i.e., the beneficiaries
of the charity. While the recently reported decision in Gateway City Church
v. Minister of National Revenue clarified that while assertions of harm that could be caused by the loss
of receipting privileges will not persuade the court, where the revocation
will have a material impact upon other parties, particularly vulnerable
beneficiaries like children, there appears to now be a precedent for a delay in
revocation, albeit of a short duration in this case. As such, the decision may
impact CRA’s decisions in the future to proceed with giving notice of
intention to revoke in the Canada Gazette before the charity has
exhausted all avenues of appeal where the decision to proceed with revocation
may impact third parties particularly vulnerable beneficiaries.