Ontario Court Reluctant to Intervene in Seminary Board Dispute

by Dev User | Nov 15, 2019 | Uncategorized

November 2019  Charity & NFP Law Update

The Ontario Superior Court of Justice released its decision on October 21, 2019 in Amin-Hussain v Yousuf, concerning a deadlock between four directors of the Madina Seminary (“Seminary”), a registered charity. The Applicants, two directors of the Seminary, sought to sell the Seminary’s property in Mississauga (the “Property”) to pay off significant debts owed by the Seminary, while the remaining two directors, the Respondents, would not provide consent. As the Seminary’s by-laws require the corporation to be managed by four directors, and require a majority of directors to conduct any business, including the sale of property, this resulted in a deadlock with two directors on each side. 

The Seminary purchased the Property in 2015 for $3,950,000, which was financed through a mortgage in the amount of $2,200,000, personally guaranteed by three of the directors. The Seminary had difficulties almost from the beginning in meeting its operating costs, paying its mortgage and repaying interest free loans. After many extensions, it defaulted on its mortgage and the mortgagee sought judgment and a writ of possession. The Seminary survived for a period on overdue interest-free loans with no plans to pay them back. In fact, one of the Applicants had, at times, mortgaged his own personal property to pay off Seminary loans. At a directors’ meeting on July 30, 2018, the directors discussed listing the Property, but the deadlock between them ultimately meant that the Property could not be sold. The Applicants therefore sought an order from the court to exercise its inherent jurisdiction and order that the Property be sold.

The court relied on the Supreme Court of Canada’s decision in Highwood Congregation of Jehovah’s Witnesses (Judicial Committee) v Wall (“Wall”), discussed in Church Law Bulletin No. 54, stating that “as a general rule, religious organizations cannot seek judicial review to solve disputes that may arise between them where there are concerns of procedural fairness.” Three exceptions to this rule outlined in Wall are (1) reviewing a state action; (2) reviewing matters of procedural fairness concerning a religious group’s adherence to its own procedures where legal rights are at stake; and (3) where the matter is justiciable. While the court noted that Wall concerned judicial review, and this case did not, it found that the principle from Wall that “interference in religious organizations and their decision-making process should be avoided” still applied in this case. In effect, the Applicants were asking the court to use its inherent jurisdiction to overturn the directors’ decision because of the unreasonableness of the Respondents’ position. The court refused to do so.

The court also found that it was inappropriate to intervene because the Seminary already had a governance structure in its by-laws and there was no procedural unfairness. Further, because the Applicants had asked the court to use its jurisdiction to force the Respondents to act according to the Applicants’ wishes, contrary to the Seminary’s by-laws, the court held that “such an order in and of itself may result in procedural unfairness.”

Finally, the court also stated that there was no reason to intervene when the Appellants had other “clear and well-established options” available, such as commencing an action with respect to the monies they had loaned to the Seminary; notifying the mortgagee that they had withdrawn their personal guarantee on the mortgage; campaigning to elect directors or members that would be supportive of the sale; or following the procedure in section 127.2 of the Corporations Act (Ontario) to remove directors not acting in the corporation’s best interests through a majority vote of the members. As such, the court dismissed the application, noting that the action commenced by the mortgagee, along with enforcement options available to other creditors, would likely compel the Respondents to either agree to the sale or find other ways to pay off the mortgage, loans, judgments, and other probable lawsuits.

This case is a reminder to all charities and not-for-profits, and not just religious organizations, of the importance of carefully crafted by-laws. As noted by the court, “[w]hen the by-laws of the Madina Seminary were drafted, perhaps it was not anticipated that the directors would ever disagree in the way they have. It is unfortunate that it was not thought prudent to allow for an uneven number of directors or set forth a procedure for when there is a tie vote.” As demonstrated in this case, where by-laws have been properly enacted, courts are reluctant to intervene in a charity’s internal matters, even where the result to the charity may be unfortunate.

Read the November 2019 Charity & NFP Law Update

The Court of Queen’s Bench of Alberta November 2019

by Dev User | Nov 13, 2019 | Uncategorized

November 2019 Charity & NFP Law Update

Alberta Court Finds Society’s By-law Invalid due to Inadequate Approval 

The Court of Queen’s Bench of Alberta released its decision in The Canadian Islamic Trust Foundation v The Muslim Community of Edmonton Mosque and Muslim House on November 13, 2019. The case involved a legal challenge to the valid adoption of the by-law for The Muslim Community of Edmonton Mosque and Muslim House (the “Society”), which was purported to have been adopted by the members at a membership meeting held on March 9, 2014 (“2014 By-law”). In this regard, the Canadian Islamic Trust Foundation (the “Foundation”), a founding organization of the Society with the right to approve amendments to the Society’s by-law (as set out in the Society’s prior existing by-law from 1997), together with individuals associated with the Society, sought a declaration from the court invalidating the 2014 By-law.

The Foundation alleged that there were irregularities in the process to obtain membership approval over the 2014 By-law, including invalid status of the members who had voted to approve the 2014 By-law, as well as alleged irregularities in the process used to call the membership meeting to approve the 2014 By-law. These arguments were unsuccessful, as the court found the Foundation had failed to introduce the necessary evidence to support those arguments. The Foundation also alleged that the 2014 By-law was invalid on the basis that the Foundation’s approval was not provided (as required by its previous by-law from 1997). In this regard, there was no dispute between the parties that the Society’s previous by-laws adopted in 1987 and 1997 were validly enacted.

In response, the Society argued that the Foundation’s approval had been provided by claiming that the Foundation’s approval was granted by an individual named Mr. G. Nabi Chaudhary, who had purported to provide written approval of the 2014 By-law on behalf of the Foundation and on behalf of another organization that had no approval rights of the Society’s by-law. However, the court found that the Society failed to introduce evidence confirming that Mr. Chaudhary had the valid authority to approve the Society’s 2014 By-law on behalf of the Foundation, as the Society failed to demonstrate that Mr. Chaudhary had an official position at the Foundation, and failed to provide information outlining the basis on which Mr. Chaudhary had the valid authority to act as the Foundation’s representative (e.g. that the Foundation had delegated its approval power to him). As a side comment, the court found that the written approval signed by Mr. Chaudhary approving the 2014 By-law lacked the wording confirming the Foundation’s approval over the substantive changes reflected in the 2014 By-law. Instead, the written approval contained wording purporting to approve the “processes” followed by the Society to approve the 2014 By-law, which were irrelevant insofar as the Foundation’s approval of the 2014 By-law was concerned. The court also noted earlier email correspondence was introduced into the evidence which demonstrated the Society’s own belief that the Foundation had not approved the 2014 By-law (contrary to the position taken by the Society before the court).

When adopting new by-laws and by-law amendments, it is essential that charities and not-for-profits fully comply with all requirements set out in their existing by-law, including the requirement to obtain the approval of an external organization over proposed by-law changes, where applicable. All steps taken to comply with the requirements to adopt a new by-law amendment should be carefully documented within the corporate records, in the event of future questions or legal challenge. Failure to comply with one aspect of the by-law approval requirements can invalidate the entire by-law on the basis that all appropriate requirements were not met, as occurred in this case.

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CRA Indicates Meals Supplied by Charities to Seniors Are Not Generally Taxable

by Dev User | Nov 13, 2019 | Uncategorized

Charity & NFP Law Update

On November 6, 2019, the CRA released a GST/HST Ruling in document 189695r concerning the application of the goods and services tax (“GST”) and harmonized sales tax (“HST”) to prepared meals supplied by a charity (“Charity”) to seniors in a seniors’ residence facility (the “Facility”). The Charity is a registered charity for income tax purposes, and is a charity for GST/HST purposes, though it is not registered for GST/HST purposes. The Charity leases and operates a cafe in the Facility where it “provides food security to marginalized individuals” by preparing and serving food almost exclusively to senior residents of the Facility for consideration.

The CRA found that the Charity made supplies of food and beverage to seniors at their place of residence, i.e. the Facility, and was doing so under a program for that purpose. Based on this, the CRA ruled that the Charity’s supplies of food and beverages to residents of the Facility would be exempt supplies pursuant to section 4 of Part V.1 of Schedule V to the Excise Tax Act (“ETA”) and that such supplies would not be subject to GST/HST. This section provides a GST/HST exemption for supplies of food or beverages that are made by charities to seniors, underprivileged individuals, or individuals with a disability, and which are made under a program established and operated to provide prepared food to these individuals in their places of residence. Given this provision, the CRA added that a supply of food and beverage to a guest of the Facility would be subject to GST/HST, unless the supply was to another senior, or to an underprivileged or disabled individual.
The CRA also added that no tax is payable in terms of the Charity’s taxable supplies, because the Charity is not registered for GST/HST, provided however that it is a small supplier for GST/HST purposes and is not required to be registered for the GST/HST.

Read the November 2019 Charity & NFP Law Update