by admin | May 26, 2016 | Charity & Not-for-Profit Law
In November 2015, an Oslo District Court in Norway found that the not-for-profit Norwegian Refugee Council (“NRC”) was liable for gross negligence in failing to meet its duty of care to its employee, Steve Dennis, who had been injured and kidnapped. NRC is an organization that provides food, shelter and education to refugees all over the world, including conflict zones in Asia, the Middle East and Africa. However, while working for the NRC in 2012, Mr. Dennis was shot and taken hostage for four days in Dabaab, Kenya. Since the time of his rescue, the court found that Mr. Dennis has suffered significant physical and psychological injuries, including post-traumatic stress disorder and depression, for which the court awarded $695,000 in damages. A resource link to an English translation of the decision can be found here, as posted by the Oslo District Court.
In its decision, which has received significant international attention, the court found that “aid organizations are major employers with the same responsibility for their employees as other employers.” In this particular case, NRC had sent Mr. Dennis to Kenya despite expert reports about increased possibility of kidnappings and violence in the area. Furthermore, NRC had previously conducted an internal security review and had found internal weaknesses in its own capabilities to respond to those threats. Although NRC is a widely respected not-for-profit organization in Norway, the court found that despite its “good deeds” the organization’s employees “must however know that their employer covers their back with a satisfactory handling of their security and that they will be taken care of if anything happens.” No appeal of the court’s decision has been announced to date.
Canadian charities and not-for-profits need to be aware of this developing case law, as it is not inconceivable that a similar finding could be reached in Canada if similar facts were to arise. Not-for-profits and charities alike owe their employees, volunteers and potentially agents a duty of care and could be found to be liable in negligence as NRC was in this case. This duty of care to employees and volunteers (among others) exists and needs to be managed effectively, particularly when an organization’s purpose is delivering often life-saving aid and resources in potentially dangerous areas of the world. Addressing the inherent risks associated with many international not-for-profit’s programs must be adequately addressed through due diligence and risk assessment procedures to protect the organization, its charitable property (if it is a charity) and its volunteers, employees and agents. Failing to take proactive action to address varying risks present in different areas of operations exposes an organization and its directors to potentially both civil (like the situation of NRC) and even criminal liability. Just as in the case of NRC, the liability of the organization is ultimately based on how it addressed (or failed to address) risk and liability prior to an event such as kidnapping or injury. There is no defence or leniency for organizations simply because of the organization’s highly laudable and potentially life-saving programs, and the liability cannot be addressed simply ‘after the fact’ in responding to situations. The risks are there, and must be addressed in advance, just as any other for-profit organization, particularly those operating internationally and in zones of varying level of risk and danger.
by admin | May 26, 2016 | Charity & Not-for-Profit Law
Updated Charities Audit Statistics for 2015-2016
On May 12, 2016, CRA updated its webpage titled The audit process for charities (the “webpage”). The webpage generally describes the reasons that CRA undertakes audits for charities on a yearly basis and notes that it audits roughly 1% of the registered charities in Canada each year.
CRA’s compliance approach is described as an “education-first” approach, and the outcomes that a charity can receive as a result of an audit include education letters, compliance agreements, sanctions, and revocation of registration. In addition, the webpage lists the types of recourse available to charities during and after the audit.
The updated webpage reflects the following audit outcomes in 2015-2016:
| No Change |
40 |
| Education |
444 |
| Compliance Agreement |
111 |
| Voluntary Revocation |
22 |
| Penalty/suspensions |
4 |
| Notice of intent to Revoke issued |
21 |
| Annulment |
59 |
| Other (includes other audit activities such as pre-registration and Part V audits) |
25 |
| Total |
726 |
Tax Preparers Sentenced to 51 Months of Jail Time
On May 11, 2016, CRA announced the conviction of Fareed and Saheem Raza (the “Razas”). As reported in our February 2016 Charity and NFP Law Update, the Razas were convicted under paragraph 380(1)(a) of the Criminal Code for defrauding the federal and provincial governments of amounts exceeding $5,000 between December 31, 2002, and June 24, 2011. The Razas were sentenced on May 10, 2016, to 51 months in jail for defrauding the government when they forged charitable receipts for a registered charity. Another individual, Faiz Kahn, was also convicted with the Razas, but received an absolute discharge.
Q&A Webpage for Assisting People and Charities Affected by the Alberta Wildfires
On May, 16, 2016, CRA published a Q&A style webpage titled Assisting people and charities impacted by the wildfires in Alberta. On the one hand, topics covered for charities affected by the wildfires include: what to do if charities were not able to file their T3010, Registered Charity Information Return (“T3010”) in time; what to do if their records were destroyed in the fires; what to do if they did not receive their T3010; what to do about meeting filing requirements for incorporating authorities. On the other hand, for charities that wish to assist those affected by the wildfires, CRA addresses topics such as raising funds to assist those affected by the wildfires; whether carrying out that activity comports with their charitable purposes; and what to do in the event their purposes do not comport with these efforts. For donors wishing to get involved to help out, CRA covers a range of questions dealing with how to discover which charities may issue official receipts; whether it is better to donate money or supplies; where an individual can find out more information about registered charities; and when donations can be claimed.
New Guidance on Becoming a Qualified Donee
On April 23, 2016, CRA released new guidance CG-025, Qualified Donee: Low-cost housing corporations for the aged. The new guidance replaces an Income Tax Rulings Directorate letter which was dated March 18, 2013.
According to the guidance, a low-cost housing corporation for the aged (“LCHCA”) that seeks qualified donee status must be resident in Canada and meet the criteria of paragraph 149(1)(i) of the ITA. Paragraph 149(1)(i) states that an LCHCA is “a corporation that was constituted exclusively for the purpose of providing low-cost housing accommodation for the aged, no part of the income of which was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof.” CRA interprets this to mean an organization that is constituted exclusively for the purpose of providing low-cost housing accommodation for the aged and operated only for that purpose. CRA has also interpreted “aged” to mean 55 years of age and over.
The guidance also explains that such accommodation “includes comfortable but modest rental accommodation, at rents that are low relative to rents generally available for similar accommodations in the same community (other than subsidized or non-profit accommodations).” An LCHCA may also provide housing related services such as “meals, laundry services, home furnishings, medical/nursing care, house-keeping services, resident aides’ services, and general assistance with matters of daily living.” As well, an LCHCA must not distribute income, either directly or indirectly, to, or for the personal benefit of, any member or shareholder. It also should not have the power to declare and pay dividends out of income.
The guidance also sets out how a corporation can seek QD status, as well as the documentation that the Charities Directorate will expect of an LCHCA when applying.
by Dev User | May 26, 2016 | Charity & Not-for-Profit Law
Elena Hoffstein – Guest Contributor, Charity & NFP Law Bulletin No. 386, May 25, 2016
Editor’s Note: This Bulletin is an update of our Charity & NFP Law Bulletin No. 380 that was previously posted on February 25, 2016, and reflects changes introduced by the 2016 Federal Budget.
On December 16, 2014, Bill C-43 received Royal Assent. The new rules introduced by the Bill affect the manner in which testamentary trusts are taxed and, in addition, change significantly the manner in which testamentary charitable gifts will be dealt with under the Income Tax Act, RSC 1985, c.1 (5th Supp.) (“ITA”).
In order to better appreciate the significance of the changes and their impact on testamentary charitable giving, it is important to review briefly the law as it was prior to 2016.
In the past, income and capital gains retained in inter vivos trusts were taxed at a different rate than testamentary trusts. Inter vivos trusts have always been taxed at the top marginal rates of tax. On the other hand, testamentary trusts and certain pre-1971 inter vivos trusts have enjoyed access to progressive rates of tax and other benefits not available to inter vivos trusts. Bill C-43 has eliminated the various differences between inter vivos and testamentary trusts commencing in 2016. There are two exceptions to these new rules. Firstly, the progressive tax rates will continue to apply to the first thirty-six (36) months of an estate that arises as a consequence of the death of an individual and that is a testamentary trust. This type of trust has been given a new name, the graduated rate estate or GRE, as it is now affectionately named. The second exception is for trusts that qualify as qualified disability trusts or QDTs for disabled individuals. It is not intended to discuss QDTs in this Bulletin.
For the balance of the Bulletin, please see Charity and NFP Law Bulletin No. 386.
by admin | May 26, 2016 | Charity & Not-for-Profit Law
On April 22, 2016, the Tax Court of Canada released its decision in the case of Wynter v The Queen, which dismissed a taxpayer’s appeal of a gross negligence penalty imposed under subsection 163(2) of the Income Tax Act (“ITA”) for the 2009 taxation year.
While the facts in this case are lengthy and complicated, in summary, the taxpayer became involved in a charitable donation program that was promoted by the tax preparer, DSC Lifestyle Services (“DSC”). Although both counsel for the taxpayer and the respondent effectively agreed that the evidence “did not establish that [the taxpayer] set out to cheat the administration of justice or knowingly participated in a scheme to evade tax,” the taxpayer hired DSC to prepare her tax returns and in doing so ended up filing false statements regarding charitable donations made in 2006, and business losses incurred in 2009. These false statements gave rise to the reassessment of those tax years, and the resulting gross negligence penalty imposed by CRA for the 2009 return.
In determining whether the penalties under subsection 163(2) applied to the taxpayer, the Court noted that the Minister had to establish “1. a false statement in a return; and 2. knowledge or gross negligence in the making of, assenting to or acquiescing in the making of the false statement.” The Court relied upon a number of the factors set out in Torres v The Queen to make this determination. The factors present in this case included the taxpayer’s education and experience; suspicion or need to make an inquiry about the tax preparer; the tax preparer’s fee structure, anonymity, unusual requests, and lack of acknowledgement in preparing the returns; whether a blatantly false statement was readily detectable; lack of inquiries of professionals or officials at CRA; and, the appellant’s trust in the tax preparer and his or her cohort. Ultimately, the Court noted that, unfortunately, the taxpayer “chose not to undertake … reasonable steps to verify the accuracy of the information she was submitting to CRA and was willfully blind.” As a result, the Court found that “in the context of all the evidence” that the taxpayer was “grossly negligent as defined by the relevant provision.”
Of particular interest is the Court’s critique of CRA’s fraud detection procedures. While it is unusual for the Court to comment on CRA’s procedures in this regard, the comments highlight the procedural gaps that allow fraudsters to evade responsibility for their actions. More specifically, the Court stated:
The problem arising from these long delays in contacting taxpayers and the lack of a meaningful early-warning system at CRA is that it provides fodder to the scam artists who have assured their clients that they are on top of the problem and that their experts will battle CRA so effectively there will be nothing to worry about. The absence of prompt follow-up and the issuance of form-letter reminders months later is in effect a golden opportunity for the fraudsters to say, “I told you we would fix your problem with CRA.” Then, by the time CRA issues an assessment and the collection department takes over, the con artists are long gone or – in some cases – have been arrested or convicted and – rarely, I suspect – sent to prison for any significant period. […] Human nature being what it is, there will always be con artists and no shortage of potential victims ready and eager to obtain the golden ticket to wealth but there has to be better detection techniques put into place by CRA as soon as possible to reduce the incidence of these tragedies. Perhaps, it is already underway. I hope so.
It will be of interest to note how CRA responds to the Court’s statements encouraging CRA to implement better fraud detection techniques.
by admin | May 26, 2016 | Charity & Not-for-Profit Law
On May 18, 2016, CRA released technical interpretation 2015-0593921 in response to an email request for comments on “whether an official receipt for a gift of property to a municipality can be made out for an amount other than the fair market value of the gifted property.” For the purposes of the response, CRA made the following assumptions about the gifting arrangement: “the donor is an individual, the gifted property is capital property, and the municipality is a qualified donee.”
CRA points out that the provision that allows a taxpayer to claim a tax credit is found in section 118.1 of the Income Tax Act (“ITA”) if the eligible amount is made to a qualified donee (“QD”), and is supported by an official receipt. According to subsection 118.1(2) of the ITA, this means that the official receipt must be in the prescribed form which is found in section 3501 of the Income Tax Regulations (the “Regulations”). For a gift which is a “gift of property other than cash,” the official receipt “must contain the fair market value of the property at the time that the gift was made.” If the QD cannot reasonably determine the fair market value (“FMV”) at the time the gift is made, then the official receipt for the donation may not be issued.
CRA also points out that generally, when subsections 118.1 (5.4) and (6) are considered together, “if an individual donates capital property to a qualified donee, the individual may designate an amount between the adjusted cost base and the fair market value of the donated property to be treated both as the proceeds of disposition for the purpose of calculating the individual’s capital gain and the fair market value of the donated property for the purpose of determining the eligible amount of the gift in calculating the donation tax credit.” In addition, CRA notes that if an individual designates an amount, that amount may not exceed the FMV of the property. Likewise, the designated amount cannot be less than whichever of the following three is greater: the amount of advantage, the adjusted cost base (“ACB”) of the property, or (for depreciable properties) the undepreciated capital cost. In any case, CRA notes that, for the purpose of determining the eligible gift amount, a designation under subsection 118.1(6) still requires that the FMV of the property at the time the gift was made is included on the official receipt.
Finally, CRA notes that there may be situations in which the deeming provision of subsection 248(35) may be relevant. The effect of this deeming provision is that, for the purpose of the eligible amount of the gift, “the fair market value of the gifted property is deemed to be the lesser of its fair market value otherwise determined and its cost, or in the case of capital property, its adjusted cost base, or in the case of a life insurance policy in respect of which the taxpayer is a policyholder, its adjusted cost basis, of the property immediately before the gift is made.”
by admin | May 26, 2016 | Charity & Not-for-Profit Law
On April 27, 2016, CRA released 2016-0624851C6, a French language response to a question made on January 21, 2016, at the Ordres des CPA du Québec — Table ronde sur la fiscalité des particuliers. The question posed to CRA was “Whether the existing administrative position to allow a charitable gift made by will to be included in the “total charitable gifts” of the deceased individual’s spouse or common law partner will continue to apply as of the 2016 taxation year?” CRA responded that the current administrative position will not continue to apply.
According to CRA’s response letter, donations shared between spouses are now covered under clause (c)(i)(A) of the definition of “total charitable gifts” found at subsection 118.1(1) of the Income Tax Act (“ITA”), and only apply to donations made during that individual’s lifetime. CRA notes that where an individual is not a trust, clause (c)(i)(C) of the proposed definition of “total charitable gifts” in subsection 118.1(1) — the section dealing with graduated rate estates — states that the total charitable gifts of the individual for a particular tax year includes the “eligible amount of the gift” with the following conditions.
- the gift is made by the individual’s estate;
- subsection 118.1(5.1) applies to the gift; and
- the year of the gift is the deceased’s taxation year or the previous taxation year.
Finally, CRA notes that since clause (c)(i)(C) of the proposed definition of “total charitable gifts” in subsection 118.1(1) does not include donations from an estate of a spouse or common-law partner, it is CRA’s position that the total charitable gifts of the surviving spouse for the taxation year, or the five preceding taxation years, may not include the eligible amount of a gift made by the estate. As a result of these changes, CRA will not be continuing with the administrative practice relating to gifts made in the context of a deceased individual for deaths after 2015.
For more information on the effects of the draft legislative proposals released by the Department of Finance on January 15, 2016, see Charity Law Bulletin No. 386 by Elena Hoffstein in this update.
