Carters is Pleased to Welcome Luis R. Chacin as a New Associate

by | Aug 30, 2018 | Uncategorized

Aug 2018 Charity & NFP Law Update

Carters is pleased to welcome Luis R. Chacin as an associate. Luis joins Carters after completing his articles with the firm and being called to the Ontario Bar in 2018. He has over nine years of experience in the financial services industry in Toronto and Montreal, and previously worked as legal counsel at the Office of the President and Cabinet in Venezuela. Luis’ practice focuses on corporate and commercial law, real estate, and wills and estates.

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Cemetery Case Highlights Need for Good Recordkeeping

by | Aug 30, 2018 | Uncategorized

Aug 2018 Charity & NFP Law Update

On June 6, 2018, the Small Claims Court (Ontario), released its decision in Abrams v Judean Benevolent & Friendly Society, which involved a claim for breach of contract with respect to the reservation and purchase of burial plots in the Greater Toronto Area. The plaintiff, Abrams, was an 87 year-old man who had reserved and purchased four side-by-side cemetery plots (“Plots”) in 1995 and 1998, respectively, from the defendant, the Judean Benevolent & Friendly Society (“Society”). Abrams was a member of the Society since 1994. The Plots had been purchased for the Abrams family in accordance with Abrams’ late wife’s wish that she be buried with her husband and their two children beside each other. However, Abrams discovered after the passing and burial of his wife in 2016 that someone else had been buried in the fourth plot which Abrams had earlier assumed belonged to his family. He accordingly sued the Society for $25,000 for breach of contract, loss of peace of mind, mental distress, as well as aggravated and punitive damages, given that Abrams was no longer able to fulfil his late wife’s wishes to bury the four family members side-by-side as he had planned.

In support of his claim, Abrams produced a copy of the cheque used to reserve the Plots under the names of himself and his family, a copy of the signed receipt acknowledging his payment for “4 plots side by side at Pardes Shalom Cemetery,” and letters from the Society confirming that the four Plots indeed had been reserved for him and his family, specifically naming the four individuals.

In its defence, the Society took the position that its current bylaw, which was enacted in January 2011 (“2011 Bylaw), only allows members of the Society to be buried in the Society’s plots, and that since Abrams’ son was no longer a member in good standing of the Society for failure to pay membership fees, the reservation for Abrams’ son had been cancelled on that basis. However, the Society lacked evidence supporting this position; the Society could not produce the bylaw that was in effect in 1995 and 1998 (when the reservation and purchase of the Plots was made) and the Society did not know what changes were made to the previous bylaws when adopting the 2011 Bylaw. On this issue, the court stated, “In my view, it is not reasonable to give meaning to a 1998 receipt using 2011 by-laws.” The court also noted that there was no evidence suggesting that a refund had been given to Abrams for the fourth Plot and that the receipt and letters produced by Abrams pertaining to his purchase of the Plots did not contain any conditions and were interpreted by the deputy judge as “confirming outright entitlements [to the Plots] not contingent on anything.”

As a result, the court found that the Society had breached the contract with Abrams, as it was not possible to reserve three additional plots that were beside the deceased wife’s plot. Abrams was awarded almost $1,000 for the return of the reservation fee and cost of the fourth plot, $5,000 for mental distress and $1,200 in legal costs.

This case serves as a reminder to charities and not-for-profits that the records of an organization, including past versions of bylaws and documentation relating to the rights of members, should be safely kept so that they can be retrieved in the event that they are later required in the context of a dispute or a legal claim.

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The Federal Court of Canada released its decision in Heffel Gallery Limited v The Attorney General of Canada on June 12, 2018, which clarified the criteria by which an object of fine art falling within Group V of the Canadian Cultural Property Export Control List (“Control List”) may be exported out of the country. For exports, section 40 of the Cultural Property Export and Import Act (“Act”) requires an export permit for objects included on the Control List. Section 11 of the Act outlines certain criteria that a potential export must meet in order for a permit to be issued. The criteria under paragraphs 11(1)(a) and (b) of the Act is the same criteria required to meet the definition of “total cultural gifts” under subsection 118.1(1) of the ITA, which forms part of “total gifts” for tax purposes under subsection 118.1(1).

In this case, Heffel Gallery Limited (“Heffel Gallery”), an art auction house operating throughout Canada, had applied to the Canadian Cultural Property Export Review Board (“Board”) for an export permit to ship a painting to London, UK. The Board denied the application on grounds that the painting did not meet the export permit requirements under section 11 of the Act, as it was of “outstanding significance” and “national importance,” pursuant to subsections 11(1) and (3). Heffel Gallery brought an application for judicial review to the Federal Court of Canada, which declared the Board’s decision as unreasonable.

The court held that the Board had adopted an overly broad interpretation of subsection 11(1) of the Act by focusing solely on the first requirement for “outstanding significance” under paragraph 11(1)(a), and automatically treating any artwork meeting this threshold as if it also satisfied the requirement for “national importance” under paragraph 11(1)(b). In concluding that the Board’s decision was unreasonable, the court emphasized that “outstanding significance” and “national importance” must be determined separately.

Importantly, the court held that an artwork that is “of such a degree of national importance that its loss to Canada would significantly diminish the national heritage” pursuant to paragraph 11(1)(b) of the Act must have a direct connection to Canada, and must “at a minimum … have a significant impact on Canadian culture.” This significance must be “particular to Canada and Canadians” as opposed to an object that merely provides for a study into the multicultural environment in Canada. In this case, the court held that the painting in question did not meet this high threshold of “national importance.” The court held that the Board had incorrectly focused only on the issue of “outstanding significance” under paragraph 11(1)(a) of the Act and failed to consider whether the artwork was also of “national importance.” As a result, the court held that the Board’s decision that the artwork was of national importance was unreasonable.

The stringent interpretation of the test for outstanding significance and national importance under section 11 of the Act will likely impact registered charities with respect to tax receipting. Under the ITA, registered charities may issue a tax receipt to donors for gifts of certified cultural property, which are given such status pursuant to the section 11 test. Because the threshold for the national importance criteria has now been raised to require a direct connection to Canada, fewer gifts will meet the test for certified cultural property, thereby decreasing the number of cultural property items that will be eligible for tax receipts. Given that this tax incentive was established to encourage the transfer of cultural property from private to public collections, the decreased availability of this tax incentive will likely negatively impact the quantity and quality of donations made. The decision has since been appealed by the Attorney General of Canada to the Federal Court of Appeal. While the appeal is pending, the Government of Canada has released a practice notice regarding applicants for certification of cultural property outlining that applicants can either satisfy the national importance test established in this case or request a deferral from the Board until a decision has been made on the appeal of this case. However, charities that receive gifts of cultural property will want to closely monitor the status of the appeal for further developments in the law.

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Inclusion in Best Lawyers in Canada 2019

by | Aug 30, 2018 | Uncategorized

Aug 2018 Charity & NFP Law Update

Terrance S. Carter, Theresa L.M. Man, and Jacqueline M. Demczur of Carters Professional Corporation were again recognized as leaders in the area of Trusts and Estates Law in the Charity and Not-For-Profit Law subspecialty by the 2018 edition of The Best Lawyers in Canada. Terrance S. Carter has been recognized since 2006, Theresa L.M. Man has been recognized since 2012, and Jacqueline M. Demczur has been recognized since 2014.

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Excess Corporate Holdings of Private Foundations under Alter-Ego Trusts

by | Aug 30, 2018 | Uncategorized

Aug 2018 Charity & NFP Law Update

On May 8, 2018, the Canada Revenue Agency (“CRA”) responded to a question at a Roundtable regarding the application of excess corporate holdings rules (no. 2018-0745861C6). Specifically, the question addressed whether subsections 188.1(3.3) and (3.5) of the ITA would apply where a private foundation receives the residue of an alter-ego trust after the death of the life interest beneficiary.

By way of background, the excess corporate holdings regime was introduced for private foundations to limit potential opportunities for persons connected with a foundation to use their own and the foundation’s shareholdings for their own benefit. The rules limit a private foundation’s share ownership that also takes into account the holdings of any relevant person (defined in subsection 149.1(1) to generally mean a person not dealing at arm’s length with the foundation). The rules in section 149.2 of the ITA provide that a private foundation must divest itself of excess shares if the private foundation and any non-arm’s length persons (“relevant persons”) collectively own more than 20% of any class of a corporation’s shares. Failure to do so can result in loss of charitable status for the private foundation. Subsection 188.1(3.3) of the ITA sets out conditions in which the subsection 188.1(3.5) provisions for avoidance of divestiture would apply to a private foundation.

Further, paragraph 149.2(5)(b) allows a private foundation five years to meet the divestment obligation if the excess is the result of a donation by way of a bequest. The term, “bequest”, is not defined in the ITA but is defined in Black’s Law Dictionary as “the act of giving property by will or property disposed of in a will.” The CRA acknowledges that paragraph 149.2(5)(b) will apply in a situation where the private foundation acquires the shares as a beneficiary under an individual’s will. For tax and other estate planning reasons, an individual will transfer shares to a so-called life interest trust as a will substitute and such trusts generally include an alter-ego trust and a joint spousal and common-law partner trust as well as spousal trusts.

As such, given that the alter-ego trust may be considered a will substitute for an individual and results in the acquisition of shares by the private foundation in circumstances substantially similar to that which would occur under a will (in that the individual has all of the use of the freeze shares while he is alive and the shares are distributed to the private foundation after his death), the CRA was asked to comment on whether the private foundation will be subject to subsection 188.1(3.5) such that it will be treated as owning a portion of the freeze shares.

The CRA was of the view that whether subsections 188.1(3.3) to (3.5) apply to a particular situation is a mixed question of fact and law that can only be determined following a review of the circumstances and all underlying documentation with respect to the situation. However, given the broad nature of these provisions, where a private foundation is a beneficiary under an alter-ego trust, consideration must be given to subsections 188.1(3.3) to (3.5) for the purposes of determining the private foundation’s excess corporate holdings percentage and divestment obligation percentage for a taxation year.

​Read the August 2018 Year Charity & NFP Law Update