by admin | May 28, 2015 | Charity & Not-for-Profit Law
Canada (National Revenue) v Revcon Oilfield Constructors Incorporated, a judgment of the Federal Court
released on April 23, 2015, discusses solicitor-client privilege during tax planning. The decision is the
result of a summary application made by Canada Revenue Agency (“CRA”) through the Minister of
National Revenue, after Revcon Oilfield Constructors Incorporated (“Revcon”) failed to produce material
to the CRA in connection with a reorganization that it undertook in 2011. CRA requested the material pursuant to section 231.7 of the Income Tax Act (ITA), though Revcon asserted solicitor-client privilege
over the material and refused to provide it.
The ITA, at s. 231.7, defines “solicitor-client privilege” as “the right, if any, that a person has in a superior
court in the province where the matter arises to refuse to disclose an oral or documentary communication
on the ground that the communication is one passing between the person and the person’s lawyer in
professional confidence, except that for the purposes of this section an accounting record of a lawyer,
including any supporting voucher or cheque, shall be deemed not to be such a communication.”
The materials in dispute fell into four categories:
- Items that would identify Law Firm X, an undisclosed law firm which was retained by the
Respondent’s counsel for the purposes of the restructuring transactions being audited [the Law
Firm X claim].
- Items which include “shorthand tax law language used by Law Firm X that describes the
Transactions in a manner that could potentially be prejudicial to the Respondent’s interests” [the
Nomenclature claim].
- Items which include Law Firm X’s opinion respecting the transactions or the work product of Law
Firm X’s legal retainer [the Structuring claim].
- Items which were communications for the purpose of obtaining legal advice or assistance [the
Legal Advice claim].
The Court rejected the Law Firm X claim and the Nomenclature claim. The judge concluded, in line with
well-established principles of solicitor-client privilege, that only documents containing legal advice were
privileged. Charities and not-for-profits should be reminded that although CRA cannot view documents
subject to legal privilege, legal privilege can be waived if the charity or not-for-profit is not careful when
sharing communications, such as sharing legal opinions with third-parties. If an auditor requests a
document that a charity or not-for-profit suspects is privileged, the organisation should place the document
in a sealed package and retain the package until a judge provides an order about its status.
by admin | May 28, 2015 | Charity & Not-for-Profit Law, Counter Terrorism Law
The Federal government in May 2015 introduced several new pieces of legislation relating to antiterrorism in Canada. One of the Acts is the Removal of Serious Foreign Criminals Act, which proposes to amend several federal Acts in an effort to streamline the removal of foreign nationals who commit serious crimes in Canada, allow for the mandatory transfer of foreign criminals back to their country of origin and render foreign criminals ineligible for a record of suspension. Among its contents is a provision for making all foreign nationals, and some permanent residents sentenced to more than six months for a serious crime in Canada, ineligible for a criminal record suspension, as well as a provision allowing Canada to transfer a criminal without their consent where provided for under the terms of a future treaty. This Act is currently in First Reading in the House of Commons.
Also in May 2015, the Prevention of Terrorist Travel Act was introduced alongside amendments to the
Canadian Passport Order (“CPO”). These amendments are part of Economic Action Plan 2015 Act, No.
1, the legislation implementing Budget 2015, and are thus currently in Second Reading at the House of
Commons. The amendments to the CPO will grant Federal Court judges the ability to cancel, refuse or
revoke passports as a preventative measure to stop an individual from committing a terrorism offence, as
defined by the Criminal Code, or for the national security of Canada or a foreign country or state. The
revocation of a passport could last for up to 10 years. The Prevention of Terrorist Travel Act pertains to
judicial proceedings involving a CPO decision. Among other provisions, the Act stipulates that during a
proceeding, on the Minister’s request, a judge must hear submissions on evidence in the absence of the
public and the applicant and their counsel, and the judge must ensure that the applicant is provided with
only a summary of the evidence if in the judge’s opinion it would be injurious to national security or endanger the safety of any person if disclosed.
Economic Action Plan 2015 Act, No. 1 also implements changes to section 55(3) of the Proceeds of Crime
(Money Laundering) and Terrorist Financing Act, as alluded to in Budget 2015. These changes will require that the Financial Transactions and Reports Analysis Centre of Canada, if it has reasonable grounds to suspect that designated information would be relevant to investigating or prosecuting a money laundering offence or a terrorist activity financing offence, disclose the information to an agency or body that administers the securities legislation of a province.
The legislation described above reflects the Federal government’s increased focus on addressing terrorist
activity. These measures are generally reflective of the approach towards terrorist activity as found in
legislation such as Bill C-51, as discussed in Anti-Terrorism and Charity Law Bulletin No. 39, The Impact
of Bill C-51 on Charities and Not for Profits. Also like Bill C-51, the legislation described above may raise concerns for Canadian charities and not for profits, specifically those operating in conflict zones or otherwise becoming the subject of investigation by law enforcement and other agencies. Close attention to the development of this legislation will be important so that every organization may conduct a close pro-active review of charitable activities and due diligence procedures to ensure limitation of risk for the organization itself, as well as its directors, officers, employees, and members.
by admin | May 28, 2015 | Charity & Not-for-Profit Law
On April 29, 2015, Canada Revenue Agency (“CRA”) released a technical interpretation (CRA # 2014-
0559501E5) describing what type of activities are likely to be considered “primary services” or “secondary
services”, in relation to the definition of “eligible volunteer firefighting services” in the Income Tax Act
(“ITA”). This CRA View is only available in French. While it does not address the search and rescue
volunteer credit under section 118.07 of the ITA, in 2014, the ITA was amended to allow volunteer
firefighters or volunteers who perform search and rescue services and who perform 200 hours of eligible
service to claim a tax deduction.
“Eligible volunteer firefighting service” is defined under subsection 118.06(1) of the ITA as:
services provided by an individual in the individual’s capacity as a volunteer
firefighter to a fire department that consist primarily of responding to and
being on call for firefighting and related emergency calls, attending
meetings held by the fire department and participating in required training
related to the prevention or suppression of fires, but does not include
services provided to a particular fire department if the individual provides
firefighting services to the department otherwise than as a volunteer.
In this CRA View, CRA was asked, in particular, whether activities such as monthly practices, including
simulations of interventions, and prevention visits, such as visits to homes to inspect fire alarm systems,
fall within the above definition. In response, CRA provided general comments concerning its
interpretation of 118.06(1). Although the ITA itself does not refer to “primary” or “secondary” services
in relation to the volunteer firefighter tax credit, CRA administers the credit by referring to the services in the above definition, i.e., responding to and being on call for firefighting and related emergency calls as a firefighter; attending meetings held by the fire department; and participating in required training related to the prevention or suppression of fire as “primary services”. Other activities are also eligible for the credit as “secondary services”, such as time spent repairing and maintaining vehicles and equipment used by the fire department. Generally, the number of hours devoted to primary services must exceed the number of hours devoted to secondary services. In this regard, CRA stated that assessing such activities will be a question of fact and that in this specific situation, the monthly practices may be primary services where they include a portion related to the prevention or extinguishing of fires, but that prevention visits or verification of fire alarms were secondary services as they are not included in the definition at 118.06(1) of the ITA.
This commentary is noteworthy as more provinces introduce similar legislation. For example, Manitoba
recently introduced a tax credit for volunteer firefighters as part of its 2015 Budget
by admin | May 28, 2015 | Charity & Not-for-Profit Law
On May 14, 2015, the BC Societies Act (the “Act”) received Royal Assent. Once in force, the Act will
replace the current Society Act, enacted in 1977, which governs approximately 27,000 societies. This
modernization of the incorporation and governance framework for non-profit corporations corresponds
with recent modernization brought by the federal Canada Not-for-profit Corporations Act and the Ontario
Not-for-Profit Corporations Act, 2010, which the sector is still waiting to be proclaimed.
The Act contains new measures including distinguishing “member funded” societies from societies that
are funded by public donations or government, which will influence public disclosure requirements and
governance restrictions; imposing duties and rules on senior managers; requiring a “member proposal” be
added to the agenda of a members’ meeting if the proposal is signed by 5% or more of the society’s voting members; and implementing a new online filing system for incorporation, bylaw changes, and other filings at the corporate registry.
Once the Act is proclaimed, a pre-existing society must transition under the Act within two years by filing a constitution, by-laws (consolidated into a single set of bylaws) and a statement of directors and registered office of the society. Notice of enabling regulations and a timetable for implementation of the Act is pending.
by admin | May 28, 2015 | Charity & Not-for-Profit Law
As reported in the April 2015 Charity Law Update, at the request of the House of Commons Standing
Committee on Finance (“Committee”), Carters Professional Corporation (represented through Terrance
S. Carter) appeared on April 30, 2015 to make a submission to the Committee with regard to its study of
the cost, economic impact, frequency and best practices to address the issue of terrorist financing, both
here in Canada and abroad. A supplemental submission was made by Carters to the Committee on May
8, 2015, to bring to the Committee’s attention the earlier recommendations made by the Subcommittee of
the Standing Committee on Public Safety and National Security (“Subcommittee”) in their report in 2007,
which recommendations were consistent with those contained in the earlier Carters submission.
Also appearing before the Committee on April 30, 2015 was Samuel Schwisberg, in-house legal counsel
for the Canadian Red Cross, who was appearing on behalf of the Canadian Bar Association Charities and
Not-for-Profit Law Section (“CBA”). Mr. Schwisberg made a superb submission, stating that charities
can be an important asset in countering terrorism given their outreach to communities both within Canada
and outside Canada.
In his comments before the Committee, Mr. Schwisberg provided an accurate reflection of the current
impossible situation faced by charities wanting to comply with Canada’s complex anti-terrorism
legislation in conflict areas by explaining that:
Even for a larger organization, the way the law is constructed now… Picture
me at a board of directors. They ask me, “Are we compliant with all the
laws of Canada?” Can I state that with any great confidence, given the way
the law is stated? It is quite possible that some would-be terrorist, three
years down the road, after getting treatment at an emergency response unit,
a MASH we’ve set up there, goes and commits an act of terrorism.
If you look at the pure writing of the law, the literal meaning of the law, we
could be held liable for that. There is a lot of reliance on prosecutorial
discretion, which we don’t feel is consistent with the rule of law. In our
submission, there needs to be more clarity in the law so that charities have
a clear understanding of what they can and cannot do.
This very clear depiction of the conundrum faced by charities wanting to work in the international arena,
particularly those charities providing assisting in conflict areas, reflect why change in legislation and in
enhanced guidance from CRA, as explained in the recommendations made by CBA, the Subcommittee
and Carters, is so important for the government to consider at this point in time.
by admin | May 28, 2015 | Charity & Not-for-Profit Law
On March 13, 2015, the Internal Revenue Service (“IRS”) released LTR 201511033 (“the Letter”), which
is a final adverse determination by the IRS revoking the tax-exempt status of an “American Friends of”
organization, because it did not exercise full control and discretion over how funds donated to it were used
by its related foreign organization. In the Letter, the IRS described why it concluded that the actions of
the “American Friends of” organization in question (identifying details such as the name of the
organization have been redacted from the Letter) resulted in the organization being a mere conduit for the
foreign organization in question.
In the United States, organizations referred to as “American Friends of” organizations are used to raise
tax-deductible funds to support the tax-exempt purposes of foreign organizations, which must correspond
to the purposes described in section 170 and subsection 501(c)(3) of the Internal Revenue Code (the
“Code”), which set out the requirements for tax-exempt status as well as the tax deductions for charitable
gifts. Specifically, “American Friends of” organizations must comply with the requirements in IRS Revenue Ruling 63-252, which contains five examples of tax-deductibility involving foreign organizations and concludes that if “contributions [are] subject to control by the domestic organization” or “the foreign organization is merely an administrative arm of the domestic organization,” the contributions are tax deductible. This ruling therefore underscores the importance of an “American Friends of” organization retaining control and discretion over all payments, disbursements, and grants made by it.
In the Letter, the IRS highlighted a number of ways in which the organization in question failed to
demonstrate sufficient control and discretion. These include making payments to personnel, including the director, of the foreign organization without being able to provide sufficient documentation regarding the
identity of the recipients or the exempt purpose of the payment. Additionally, the IRS maintained that the
“American Friends of” organization could not provide records to show that:
- the making of grants was within the exclusive power of the board of directors;
- the board of directors reviewed all requests for funds;
- the board of directors required that the grantees could provide periodic accounting; and
- the board of directors could, at its discretion, refuse to make grants.
Due to these findings, the IRS determined that the organization no longer qualified for tax-exempt status
under the Code.
Although the legislative schemes regarding charitable contributions to foreign organizations are different
in Canada and the United States, this Letter illustrates interesting parallels between the “control and
discretion” analysis in the United States and the “direction and control” analysis in Canada. It is also
noteworthy that some lawyers in the United States, including Victoria B. Bjorklund and Morey O. Ward,
in their recent continuing legal education presentation at Georgetown Law, have called for the IRS to use
this Letter as an opportunity to create an updated precedential guidance on this important topic. Additionally, among other recommended best practices, they also suggested that “American Friends of” organizations should review, in advance, all requests for funds, analyze such requests and approve only those which are satisfactory and reflective of their own purposes, as opposed to providing blanket support of a general nature to a foreign organization. When combined with the fact that, in Canada, the Federal Court of Appeal recently heard the appeal in Public Television Association of Québec v Minister of National Revenue (see the separate article above on this case in this Charity Law Update), which considers Canadian law on this topic, it is clear that the question of contributions to foreign organizations is becoming a topic of greater importance for charities on both sides of the border.
