NSFRE

CONGRESS 2000

Changes to the Competition Act and the Income Tax Act Affecting Fundraising Including the Internet:

The Pitfalls and the Perils

Carter & Associates

Barristers, Solicitors & Trade Mark Agents

211 Broadway

Orangeville, Ontario

L9W 1K4

(519) 942-0001

E-Mail: tcarter@charitylaw.ca

Web Site:www.charitylaw.ca

A. DECEPTIVE TELEMARKETING & FALSE OR

MISLEADING MISREPRESENTATION UNDER the Federal Competion Act

On March 11^th, 1999, Bill C-20, An Act to Amend the Competition Act received Royal Assent. On March 18^th, 1999, the provisions relating to deceptive telemarketing and false or misleading representation were proclaimed in force. These provisions have important application to charities in relation to telemarketing and internet fundraising, as well as door to door and other forms of fundraising solicitation. In particular, the amendments to the Competitions Act contained in Bill C-20 creates a serious source of liability for both fundraisers as well as charities, their board of directors and their officers if the fundraising activities of a charity violate the new provisions of the Competitions Act.

The amendments contained in Bill C-20 that have direct impact upon fundraising practices are summarized below as follows:

• The definition of "business" under Section 2(1) (b) of the Competition Act now specifically includes "the raising of funds for charitable or other non-profit purposes".
  
  
  

• The inclusion of more restrictive telemarketing provisions were made in response to the public perception that there is a growing problem of deceptive telephone sales and contracts that target vulnerable groups in society, like the elderly. As a result, the definition of telemarketing has been expanded under Section 52.(1) of the Competitions Act to now mean:
  
  
  

  "...the practice of using interactive telephone communications for the purpose of promoting, directly or indirectly, the supply or use of a product or for the purpose of promoting directly or indirectly, any business interest [Emphasis added]

  
  
  

• Draft Guidelines issued by the Competition Bureau of Industry Canada on the 7^th day of July 1998 in anticipation of Bill C-20 defined "interactive telephone communications" as follows:
  
  
  

  "Interactive telephone communications will be interpretive as live voice communications between two or more persons. The Director will not consider "interactive telephone communications" to have occurred with regard to:

  
  
  

  - fax communications,

  - internet communications, or

  - a customers interaction with automated prerecorded messages." ⁽¹⁾

  
  
  

  The exclusion of internet communications from the telemarketing provisions is an important and welcome concession, since more and more fundraising is being conducted on the internet. However, the telemarketing provision will apply to telephone follow up calls resulting from initial contact via the internet.

  
  
  

• Section 52.1(2) prohibits anyone from being involved in telemarketing unless there has been disclosure;
  
  
  

  ...in a fair and reasonable manner at the beginning of each telephone communication, of the identity of the person on behalf of whom the communication is made, the nature of the product or business interest being promoted and the purposes of that communication... [as well as] disclosure in a fair, reasonable and timely manner of the price of any product whose supply or use is being promoted and any material restrictions, terms or conditions applicable to its delivery...

  
  
  

• A violation of the telemarketing provisions in the Competitions Act constitutes a criminal offence with punishment that may include fines at the discretion of the court, and/or imprisonment for up to five years.
  
  
  

• Section 52.1(6) provides for a due diligence defense for corporations or individuals with respect to alleged violations of the telemarketing provision where the person is able to establish that there was appropriate due diligence taken to prevent the commission of an offence. However, under Section 52.1(7), a corporation may be convicted of the offence if it is shown that an employee or agent committed the offence, whether or not the employee or agent had been identified, unless due diligence has been established. ⁽²⁾

• Of more concern, though, is the potential for personal liability of directors and officers in relation to telemarketing. In this regard, Section 52.1(8) of Bill 20 states that:
  
  
  

  Where a corporation commits an offence... any officer or director of the corporation who is in a position to direct or influence the policies of the corporation in respect of conduct prohibited by the Section is a party to and guilty of the offence and is liable to punishment... whether or not the corporation has been prosecuted or convicted, unless the officer or director establishes that the officer or director exercised due diligence to prevent the commission of the offence. [Emphasis added]

  
  
  

  The possibility that directors and officers of a charity may become personally liable for criminal prosecution from deceptive telemarketing will necessitate that the board of a charity, as well its officers and senior management, become actively involved in reviewing and approving procedures involved in telemarketing and thereafter to regularly ensure that those procedures are being carefully followed through with.

  
  
  

• Bill C-20, amending the Competition Act also amends the description of what constitutes "false or misleading representation involving a "business interest." The new provision will now have a direct impact on charitable fundraising because of the expanded definition of "business interest". In this regard, Section 52.(1) of the Competitions Act now provides for the following offence:
  
  
  

  52.(1) No person shall, for the purpose of promoting, directly or indirectly, the supply or use of a product or for the purpose of promoting, directly or indirectly, any business interest, by any means whatsoever, knowingly or recklessly make a representation to the public that is false or misleading in a material respect. [Emphasis added]

• 52.(2) states that a representation referred to in Section 52.(1) is deemed to have been made to the public where it is:
  
  
  

  (a) - expressed in an article offered or displayed for sale or on its wrap or containers,

  (b) - expressed in anything attached to, inserted in or accompanied an article offered or displayed for sale, its wrapper or container, or anything on which the article is mounted for display or sale,

  (c) expressed on an in-store or other point-of purchase display,

  (d) made in a course of in-store, door-to-door or telephone selling to a person as ultimate user, or

  (e) contained in or on anything that is sold, sent, delivered, transmitted, or made available in any other manner to a member of the public,.. [Emphasis added]

  
  
  

  The false or misleading representation provisions therefore apply not only to telemarketing but also to door-to-door solicitation and with regard to any materials accompanying items that are offered for sale by the charity, such as a candy-donation box that are often placed by charities on the counters of retail stores.

  
  
  

• A disconcerting aspect of the new provisions dealing with false or misleading representation is that Section 52.(1.1) states that to establish a false or misleading representation, it is "not necessary to prove that any person was deceived or mislead". This means that if the solicitation complained of was made in a reckless manner that was false or misleading in a material respect, whether or not anyone was actually mislead or deceived, then the charity and the fundraisers would be guilty of an offence.
  
  
  

• Where there has been a violation of either the new deceptive telemarketing provisions or the false or misleading representation provisions, individuals can receive penalties up to $50,000.00 for a first offence and $100,000.00 for each subsequent offence. A charity itself can be subject to penalties of up to $100,000.00 for a first time offence and up to $2000,000.00 for subsequent offences.
  
  
  

  In light of the increased exposure to liability for both charities and individuals under the new provisions of the Competitions Act, it is essential that preventative steps be implemented to reduce the exposure to liability as much as possible. In this regard, Section 74 (5) of the Competitions Act states that if the offending organization can demonstrate a history of compliance with the Competitions Act and that it has formal fundraising policies in place and follows them, penalties may be reduced or waived altogether. As a result, it is essential for charities to adopt fundraising practices to guard against improper telemarketing and misrepresentation in fundraising, such as those contained in the recommendations made by the Canadian Centre for Philanthropy. ⁽³⁾ A summary of those recommendations are set out below:

  
  
  

• Ensure that the fundraising materials (including scripts) accurately describe the charity, its activities, and the purposes for which those donations will be used.
  
  
  

• Consider providing written instructions to telephone solicitors, as well as door to door canvassers advising them that any misrepresentation could result in a severe penalty for them personally and for the charity that they are acting on behalf of.
  
  
  

• Ensure that the telephone fundraising scripts used by employees, volunteers and contract fundraisers disclose at the outset both the identity of the organization and the purpose for the call.
  
  
  

• Ensure that the contract with telephone solicitors includes a provision requiring adherence to the disclosure and misrepresentation provisions of the Competitions Act.
  
  
  

• Ensure that any promotional materials concerning lotteries, etc., includes the required disclosures, ie, the number and value of the prizes, and any available information that materially effects that chances of "winning". Winners should be chosen either randomly or on the basis of their skill and then ensure that the prizes are distributed properly.
  
  
  

• Advise the governing board of the charity concerning the measures that have been taken and the procedures that are in place to ensure compliance with the new provisions of the Competition Act.
  
  
  

• Finally, have the board of a charity adopt a policy committing the organization, its directors, officers employees, and volunteers to, at all times, avoid making "false or misleading representations" on behalf of the charity. Then ensure that such policy is provided to everyone in the charity, including volunteers as well as employees.
  
  
  

  In consideration of the heightened public anxiety that has resulted from numerous publicized telemarketing scams, it is probable that the Competitions Bureau will be under pressure to be very diligent in enforcing compliance with the new provisions under the Competitions Act. In this regard, it should be noted that the Competition Bureau is now able to apply for judicial authorization to intercept private communications without consent (ie, a wire tap) to investigate more serious cases. ⁽⁴⁾

  
  
  

  Bill C-20 amending the Competition Act constitutes a substantive change in the law with regard to fundraising across Canada and will need to be carefully studied by charities and their legal counsel given the substantive penalties that may result and the possibility of criminal charges being laid.

  B. CIVIL PENALTIES FOR MISREPRESENTATIONS OF

  TAX MATTERS BY THIRD PARTIES UNDER THE Income Tax Act

  
  
  

  In accordance with the Federal Budget of February 1999, the Federal Government introduced subsection 163.2 to the Income Tax Act to provide civil penalties for misrepresentation of tax matters by third parties. The amendment has been the subject matter of much debate amongst tax professionals ⁽⁵⁾. Subsection 163.2 now applies to any statement made after June 29^th, 2000.

  
  
  

  Even though subsection 163.2 of the Income Tax Act imposing penalties on tax advisors who become involved in making false statements or submissions in relation to tax matters has been softened somewhat by replacing a "gross negligence" standard with a more moderate "culpable conduct test", the extent of the resulting liability is not limited to tax professionals or tax advisors only. It also encompasses professional fundraisers as well as any individuals who are involved directly or indirectly in giving tax advice. This would include individuals who advise on the tax implication of giving a donation to a charity, which in many situations will include fundraisers. It could also include volunteers of a charity who may have suggested that there is a tax advantage involved in a particular type of gift by a donor when there is not.

  
  
  

  Subsection 163.2 also applies to advice given on the internet through the website of a charity, whether the advice is in a "static" written form or involves an exchange back and forth between a representative of the charity and the donor, whether the representative is a professional fundraiser, employee of the charity, or a volunteer of the charity. As a result, Subsection 163.2 of the Income Tax Act will need to be carefully studied by fundraisers, charities, and their board of directors to ensure that there is compliance with this recent change to the Income Tax Act.

  
  
  
  
  
  
  
  
  
  
  
  
  

  DISCLAIMER: This summary of "Changes to the Competition Act and the Income Tax Act Affecting Fundraising Including the Internet: The Pitfalls and the Perils" is distributed with the understanding that it does not constitute legal advice or establishing the solicitor/client relationship by way of any information contained herein. The contents are intended for general information purposes only and under no circumstances can be relied upon for legal decision making without first consulting with a lawyer and obtaining a written opinion concerning the specifics of your particular situation.

  
  
  

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  By Terrance S. Carter, B.A., LL.B. Trade Mark Agent©

  E-Mail: tcarter@charitylaw.ca

  Web Site: www.charitylaw.ca

  Carter & Associates

  Barristers, Solicitors & Trade Mark Agents

  211 Broadway

  Orangeville, Ontario L9W 1K4

  (519) 942-0001

  E-Mail: tcarter@charitylaw.ca

  Web Site:www.charitylaw.ca

  
  
  

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  1. 1 Proposed Guidelines by Industry Canada, Competition Bureau, Strategis, July 7^th , 1998 (http:\\stratagis.ic.gc.ca\SSG\c101180e.html)

  2. 2 H. James Blake, "New Developments in Corporate law" Operation Update (Continuing Legal Education of the Canadian Bar Association, Toronto, 1999) at 9. See also James B. Mausgrove, "Sorry Wrong Number: The New Criminal Telemarketing Provisions of the Competitions Act" (Business Law Section of the Canadian Bar Association, Toronto, May 26^th, 1999).

  3. 3 Len Wolstenholne, "Charities now to be Covered by the Competitions Act" (1999) 9:7 Canadian Fundraiser at 1.

  4. 4 W. Laird Hunter, "Can I Take a Few Minutes of Your Time?" Not-For-Profit News (April, 1999) 26 at 27.

  5. 5 For a detailed discussion of problems inherent in the proposed new s. 163.2, reference should be made to (Sept. 23) Tax Topics #1437 (CCH Canadian Ltd., 1999) and (Sept. 30) Tax Topics #1438 (CCH Canadian Ltd., 1999).