Failure to Enforce Trademarks can Lead to a Loss of Trademark Rights

by | Feb 28, 2019 | Uncategorized

Feb 2019 Charity & NFP Law Update

A recent decision from the Federal Court of Appeal, Sadhu Singh Hamdard Trust v Navsun Holdings Ltd., provides charities and not-for-profits with a helpful reminder regarding the consequences of failing to enforce trademark rights in a timely manner. The case is regarding the distinctiveness of a trademark.

While the facts of the case and the issues between the parties were complicated by settlement agreements and a lengthy history of litigation, the message provided by the Federal Court of Appeal in this decision is clear. A trademark owner must maintain distinctiveness of its trademark. If a trademark owner fails to enforce its rights against infringers or allows ongoing infringement of its trademark for a number of years, the trademark owner is essentially passively consenting to the infringement which can have a detrimental impact on the validity of the trademark.

In the case, Sadhu Singh Hamdard Trust (the “Trust”) had filed for a trademark application for the trademark AJIT for use in association with newspapers and printed publications based on its use of the mark since 1968. Navsun Holdings Ltd. (“Navsun”) opposed the application claiming that the trademark was not distinctive of the Trust because Navsun had use of the trademark in Canada since 1993. Both the Trademark Opposition Board and the Federal Court held that the mark AJIT could not be registered because it was not distinctive of the Trust, that is, the hallmark of a trademark is the message that it sends to the public that the goods or services have one single source. Given the common use of the mark by multiple owners (i.e., Trust and Navsun), the mark no longer performed the essential trademark function of denoting one single source, and as a result, the trademark was not distinctive and there was no protectable right.

The Federal Court of Appeal upheld these decisions for the same reason, stating further that the fact that the Trust had prior use of the mark in Canada and that Navsun’s later use was infringing were of no consequence in cases such as this one where the parties had used the mark concurrently for over ten years, and Navsun had successfully and sufficiently acquired notoriety of the mark in Canada.

This case emphasizes the importance of maintaining the distinctiveness of a trademark. As held by the court, charities and not-for-profits should bear in mind that trademark use must occur in Canada in order to establish distinctiveness. A trademark’s reputation must therefore be built on the foundation of Canadian use. To ensure the distinctiveness of a trademark is not eroded, charities and not-for-profits must actively monitor and enforce all registered and unregistered trademarks that they own. Where trademarks are not enforced, the trademarks may lose distinctiveness and be unenforceable or invalidated.

​Read the February 2019 Charity & NFP Law Update

BC Court Releases Decision on Charities “Entrusting” Funds to Community Foundation

by | Feb 28, 2019 | Uncategorized

Feb 2019 Charity & NFP Law Update

On January 17, 2019, the Supreme Court of British Columbia released its decision in Doukhobor Heritage Retreat Society #1999 v Vancouver Foundation, which involved a dispute between two Canadian registered charities: Doukhobor Heritage Retreat Society #1999 (the “Society”) and the Vancouver Foundation (the “Foundation”), a community foundation and a corporation established by special act, being the Vancouver Foundation Act (the “VFA”).

The main issue in the dispute involved $175,000 donated in 2001 by Mr. Markin to the Society for the purpose of generating investment income for specific charitable programs involving the support of the Whatshan Lake Retreat and related camps and seminars of the Society (“Charitable Program”). The $175,000 gift from Mr. Markin was transferred by the Society to the Foundation by cheque to establish a “permanent open fund” known as the “Allan T. Markin Benevolent Fund” (the “Fund”). The letter enclosing the cheque (“Transfer Letter”) stipulated that the capital was to be “held permanently by Vancouver Foundation and invested in accordance with the provisions of the Vancouver Foundation Act.” The Transfer Letter also required that the income generated was to be disbursed on the Society’s Charitable Program. The dispute focused on whether the Fund could be returned to the Society in the context of the provisions of the VFA which governed the Foundation, notwithstanding the requirement that the Fund be “held permanently” by the Foundation as set out in the Transfer Letter.

The economic downturn that occurred several years after the transfer of the Fund to the Foundation resulted in the investment income becoming insufficient to support the Charitable Program the Fund was established to support. As a result, the Society requested the return of the Fund from the Foundation in order to use the funds in another matter that would better support the Charitable Program. The Foundation refused to return the Fund to the Society on the basis that it was unable to do so, given the Society’s earlier direction in the Transfer Letter that the Foundation was to hold the Funds “permanently.”

The Society argued that the Fund was a non-charitable purpose trust and was therefore voidable under the BC Perpetuity Act, which provides that a court may void the disposition of a non-charitable trust if, in the opinion of the court, doing so would be closer to the intention of the creator of the trust. The court disagreed with the Society and found that the Fund met the test to be considered a charitable purpose trust and, as such, the court held that the Fund was not voidable under the BC Perpetuity Act.

The Society also argued that the Foundation’s governing statute, the VFA, required the Foundation to carry out the directions of donors (in this case the Society) in accordance with subsection 11(1) of the VFA, which states, “For the purpose of giving effect to the objects of the foundation, the board must carry out the directions of donors if definite directions in writing are given” (emphasis added). In response, the Foundation counter-argued that the Society was only capable of giving direction provided at the time of the transfer of the Fund, i.e. before relinquishing its ownership completely over the Fund to the Foundation.

However, the court held that any subsequent directions provided by the Society, including the instruction to return the Funds, must also be followed by the Foundation under subsection 11(1) of the VFA. The court noted that the Fund was not a gift made to the Foundation, but instead was a transfer that reflected a situation described in section 17 of the VFA, which provides that a charity may “entrust” funds to the Foundation so that the Foundation may manage and invest the said charity’s funds. In addition, the court found that the meaning of the word “permanent” in the Transfer Letter was intended to ensure that the capital would never be encroached upon, but not that the Fund would remain with the Foundation “for all time.”

This decision is very fact specific and therefore is limited to its particular facts. However, the case does underscore the importance of reviewing and complying with applicable governing legislation and transfer documentation (in this case, the VFA, the private legislation which governed the Foundation, as well as the Transfer Letter) when a registered charity makes a gift or a transfer of charitable property to another charity such as a community foundation. Registered charities would also be prudent to clearly document the terms intended to apply to any transfers of charitable property in an appropriate agreement, in order to avoid potential misunderstandings and disputes between the parties, as had occurred in this case.

​Read the February 2019 Charity & NFP Law Update

Characteristics of Employee Duties Found not to be Managerial or Supervisory

by | Feb 28, 2019 | Uncategorized

Feb 2019 Charity & NFP Law Update

On October 15, 2018, the Ontario Labour Relations Board (the “Board”) released its decision in Merali v Designs G7 Inc, which dealt with the review of an Order to Pay that required the employer, Designs G7 Inc. G7 Designs, Inc./Worklio to pay overtime and vacation pay to a former employee, Anaar Merali. In upholding the Order to Pay issued by an Employment Standards Officer, and affirming that Ms. Merali was entitled to overtime pay pursuant to the Employment Standards Act, 2000 (the “ESA”), the Board looked at the characteristics of Ms. Merali’s employment to confirm that she had not been employed in a supervisory or managerial capacity. As discussed in this Bulletin, this decision is relevant to charities and not-for-profits with respect to the issue of properly classifying their managerial and supervisory Ontario employees, in that an incorrect classification may result in claims pursuant to the ESA alleging unpaid overtime pay.

For the balance of this Bulletin, please see Charity & NFP Law Bulletin No. 442.

​Read the February 2019 Charity & NFP Law Update

Charitable Status Revoked Due to Inadequate Books and Records

by | Feb 28, 2019 | Uncategorized

Feb 2019 Charity & NFP Law Updates

On January 30, 2019, the Federal Court of Appeal released its decision in Ark Angel Foundation v Canada (National Revenue), in which the Court dismissed an appeal, with costs, regarding a notice of intention to revoke (the “Revocation Proposal”) the charitable registration of the Ark Angel Foundation (the “Foundation”). Two issues were raised in the appeal: 1) whether the Minister had erred in issuing the Revocation Proposal, and 2) whether the administrative process behind issuing the Revocation Proposal had breached the rules of natural justice and procedural fairness.

Of particular note, the Foundation’s operations were managed by Mr. Michael O’Sullivan, a director of the Foundation who was also a director of the three other charities – Ark Angel Fund, Humane Society of Canada Foundation, and Humane Society of Canada for the Protection of Animals and the Environment. All three of these charities had also been audited, and Humane Society of Canada for the Protection of Animals and the Environment’s charitable status was revoked for improper disbursement of benefits to Mr. O’Sullivan as a director and officer, as reported in the July/August 2015 Charity & NFP Law Update.

In this case, the court found that the Minister had not erred in issuing the Revocation Proposal, which stemmed from the Minister’s conclusion that the Foundation had failed to keep adequate books and records under subsection 230(3) of the ITA and failed to devote all its resources to charitable purposes. In particular, the Minister concluded that the records of consultation fees paid to Mr. O’Sullivan, a director of the Foundation who managed the operations of the charity, “fail[ed] to demonstrate what Mr. Michael Sullivan was consulting upon or how it related to the charitable mandate of the [Foundation].” The court acknowledged that subsection 230(3) did not specify the types of books and records required and a mere technical failure to comply may not justify a revocation of charitable status. However, the court stated that in the case of the Foundation, “the failure was significant”:

[…] the Foundation failed to provide any records that demonstrated what consulting services Mr. O’Sullivan provided for the fees he received. Although one of the invoices appears to give some detailed information by listing names of consulting projects, the Foundation failed to provide any support that the named projects were bona fide. Needless to say, a bald reference to consulting projects in an invoice that cannot be corroborated with other evidence does not satisfy the records requirement of the Act.

The court also stated that “if a charity’s books and records are insufficient for the CRA to assess whether the charity is in compliance with its obligations under the [ITA], this may be sufficient ground upon which to revoke the charity’s charitable status.” Further, the Court commented that “[i]n order to avoid the imposition of a sanction, a charity ought to do more than provide non-responsive submissions or simply deny that their records are inadequate.”

In finding that it was reasonable for the Minister to conclude that the Foundation had failed to devote all its resources to charitable purposes, the court accepted the Minister’s conclusion that the lack of proper documentation regarding the consultation activity of Mr. O’Sullivan meant that the Foundation could not “demonstrate by any means that no personal or undue benefits were conferred to the directors.” The Court noted that the Foundation was “non-responsive” in its submissions to the Minister, so it was “not unreasonable” for the Minister to conclude that such fees were incurred for a non-charitable purpose. Further, the court stated that “[t]he problem is that the information that was provided did not address the fundamental concerns that the Minister had.” As such, the Foundation failed to demonstrate that the Minister’s decision to issue a Revocation Proposal was unreasonable.

The court rejected all of the Foundation’s allegations of a breach of natural justice and procedural fairness as “wholly without merit.” The court held that: 1) the failure of the appeals officer to read certain documents was not a breach of procedural fairness as there was no evidence indicating that the appeals officer had missed any relevant documents; 2) the CRA only needs to “consider the submissions” presented by the Foundation and the Foundation is not owed a “full opportunity to respond;” 3) the Foundation could not rely on an incomplete tribunal record to vacate the Revocation Proposal because it could have rectified any deficiencies; 4) the Foundation had been informed of the case it had to meet; and 5) the Foundation had “not come close to satisfying this test [of bias]” with respect to the Minister’s conduct.

Charities should ensure that their recordkeeping practices are detailed enough to justify any activities or expenses that are made by the charity, as failure to do so may result in direct violation of subsection 230(3), and also in other non-compliance issues, such as the inability to demonstrate that all charity resources are being used for a charitable purpose. Further, charities must be proactive in responding to inquiries by the Minister by providing fulsome responses and information that directly addresses the concerns of the Minister.

​Read the February 2019 Charity & NFP Law Update

Tax Court of Canada Finds Inflated Gift in Kind Values in Two Donation Programs

by | Feb 28, 2019 | Uncategorized

Feb 2019 Charity & NFP Law Update

In two recent decisions, the Tax Court of Canada considered claims from taxpayers who had participated in donation programs that involved inflated fair market values (“FMV”) for gifts in kind to charities. In Morrison v The Queen, released on November 23, 2018, the court considered a reassessment appeal by Mr. Morrison, a taxpayer who had participated in pharmaceutical donation programs (the “Pharma Programs”). Although the facts are complex, the Pharma Programs generally involved alleged pharmaceutical gifts in kind to a registered charity, with charitable receipts being issued to the donors which became the subject of a reassessment. In this regard, the court found that the values on the charitable receipts had greatly exceeded the FMV of the gifts in kind.

Mr. Morrison argued that he was unfamiliar with how the Pharma Programs worked and with “what went on behind the curtain.” He argued that, since he had no such knowledge, he should not be required to prove he was entitled to the donation credit he had claimed and, instead, that the burden should be on the CRA since it had made assumptions about how the Pharma Programs worked. However, the court held that Mr. Morrison had consciously chosen to participate in the Pharma Programs without much knowledge of how they worked, and that “by participating in the [Pharma] Programs without further inquiry, the Appellants accepted the risk that the facts behind the curtain were not what they expected them to be.” While the court found that Mr. Morrison had not made a gift in kind, it allowed him to claim a charitable donation tax credit for a $15,350 cash gift he had made to one of the subject charities.

In Kaul v The Queen, released on January 18, 2019, the court considered the FMV of artwork that was purchased and donated through an art donation program that was marketed as a tax savings investment vehicle (the “Art Program”). Through the Art Program, individuals bought sets of 11 prints produced for $20 – $40 each at an inflated price of $3,500 – $3,900, and immediately donated 10 of the prints to a charity. Appraisals were arranged through the Art Program, with the prints being appraised at least three times higher than the donors’ acquisition price. Charitable receipts given to the donors reflected the inflated appraised amount.

Considering the FMV of the donations, the court reviewed the evidence and found that the FMV of the prints at the time of donation had not increased from the purchase price paid by the donors. It agreed with its previous decision in Klotz v The Queen, quoting it and stating that it was “devoid of common sense and out of touch with ordinary commercial reality” for the FMV of the prints to increase threefold during the short span between the donors’ purchases and subsequent donations. It therefore dismissed the appellants’ claims and ordered one appellant’s matter be sent back for reassessment.

These two cases are neither the first instances of individuals attempting to inflate the FMV of gifts in kind in order to receive a higher tax credit, nor are they likely to be the last. Nonetheless, these cases illustrate the importance of conducting proper valuations for gifts in kind to accurately reflect the FMV in charitable donation receipts, and illustrate that the CRA continues to keep a close eye out for donation receipts with inflated values.

​Read the February 2019 Charity & NFP Law Update