Recent Submissions to HoC Standing Committee on Finance’s Study on Terrorist Financing

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.

Maintaining “Control and Discretion” in the United States

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.

Court of Final Appeal Deems Hong Kong Family Foundation a Trustee

by admin | May 28, 2015 | Charity & Not-for-Profit Law

On May 18, 2015, the Court of Final Appeal in Hong Kong, in Final Appeal No. 9 of 2014, made the final
judgement concerning the will and ensuing legacy of Nina Wang, who, before her death in 2007, was
Asia’s richest woman. The value of the assets involved in the estate is approximately US $4.2 billion. The
Court considered whether the Wang family-led Chinachem Charitable Foundation Ltd. (the “Foundation”) was a beneficiary under Ms. Wang’s will and could use the properties bequeathed to it as an absolute gift, or whether the Foundation was a trustee and must use the properties in accordance with the directions in the will. The Court held that the Foundation was a trustee, in the process limiting its ability to freely use the funds. The appeal was delayed by five years due to protracted contentious probate proceedings arising out of the allegation that Ms. Wang’s 2002 will was superseded by another will made in 2006 in favour of her personal feng shui consultant, Tony Chan.
The facts are interesting. In 2002, Ms. Wang executed a “homemade” will with the help of her sister but
no lawyer. In Clause 1 of her will, Ms. Wang set out that “All of my properties shall be bequeathed to [the
Foundation].” Clause 2 states as follows: “[1] I wish to entrust [the Foundation] to the supervision of a
managing organization jointly formed by the Secretary General of the United Nations; the Premier of the
PRC Government as well as the Chief Executive of the Hong Kong Special Administrative Region. [2]
Under its supervision, [i] not only must [the Foundation] continue all the projects which it has undertaken
since its establishment to enable their developments continuously, but [ii] it must also continue to achieve
the purpose of setting up a fund and a Chinese prize of worldwide significance similar to that of the Nobel
Prize.”
In order to interpret the role of the supervisory body referred to in Clause 2(1) of the will, the Court
considered whether the language was imperative and sufficiently clear in depicting Ms. Wang’s intentions.
It also attempted to read the will in context and as a whole. After referring to a line of relevant case law,
including UK and Canada cases, the Court concluded that the “most appropriate legal terms [to apply to
the will] are those that most naturally and simply give effect to Nina’s intentions.” It therefore held that
Clause 2(1) was only precatory and that the “correct interpretation of Clause 2(2) is that it imposes a trust
for charitable purposes.”
After determining that the Foundation was a trustee, the Court concluded that establishing a “managing
organization,” as referred to in Clause 2(1), was within the inherent jurisdiction of the courts’ schememaking power over the administration of charitable trusts because “there is a strong public interest in this
important benefaction having a clear and sounder legal basis than the language of Nina’s home-made
will.” The Court recommended that a scheme allowing for the administration of the charitable trust in Ms.
Wang’s will be prepared and submitted to the High Court for approval.
This case illustrates the importance in drafting a clear will, particularly when the will involves a large
donation, in order to ensure that the wishes of the testator are met. Although this case is in a different jurisdiction, it is interesting to see how the legal principles involving special purpose charitable trusts in the context of an estate gift to a charity are interpreted based on cases in the Commonwealth.

Australia 2015 Budget Impacts Charities

by admin | May 28, 2015 | Charity & Not-for-Profit Law

On May 12, 2015, the Australian Government tabled that country’s Budget 2015. Several proposed
measures will affect the operation of public benevolent institutions and health promotion charities in
Australia (“Eligible Organizations”), including proposed amendments to the fringe benefits tax (“FBT”),
a tax payable by employers who provide fringe benefits to their employees. While certain fringe benefits,
such as meals and entertainment, were uncapped in previous legislation, under the proposed amendments
employees will be able to access a cap of up to a grossed-up amount of $5000 worth of fringe benefits, separate from the general FBT amount. As employers, Eligible Organizations were previously subject to
uncapped exemptions under the FBT in this regard, and were able to provide fringe benefits to employees
tax-free. This assisted in attracting quality employees these types of organizations without paying high
private-sector salaries. It is not yet clear how far-reaching these proposed amendments will be and whether
they will affect all charities and not-for-profits currently eligible for FBT exemptions.
Another item of interest for charities and non-profits is the Australian government’s commitment to
continue funding for the National School Chaplaincy Program for the next four academic years ending in
the year academic year 2017 -2018. This program will assist approximately 2900 schools in Australia
engage the services of a school chaplain to provide pastoral care to students in schools. While Canada
does not have similar programs to those Australian initiatives outlined above, charities in Canada may
find it of interest to be aware of developments occurring in the charitable sector in other commonwealth
jurisdictions.