May 2019 Charity & NFP Law Update
On April 16, 2019, the Federal Court of Appeal (“FCA”) released its decision in Canada (AG) v Heffel Gallery Limited, an appeal of a judicial review decision concerning gifts of cultural property.
As discussed in the August 2018 Charity and NFP Law Update, the lower court considered the Canadian Cultural Property Export Review Board’s (“Board”) interpretation of “outstanding significance” and “national importance” under paragraph 11(1)(b) of the Cultural Property Export and Import Act (“Act”). By way of background, this case involved an application by Heffel Gallery Limited (“Heffel Gallery”), an art auction house, to the 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 because the national importance test was met by works “of such a degree of national importance that its loss to Canada would significantly diminish the national heritage” through a “direct connection to Canada.” This decision was significant to charities, as the test for outstanding significance and national importance is the same criteria used to determine whether an item that is donated to a registered charity is a donation of cultural property, and therefore receiptable under the Income Tax Act (“ITA”).
On appeal of the Federal Court of Canada decision, the FCA first outlined the Board’s interpretation of “outstanding significance”, indicating that it considered, among other things, the number of works by the artist in Canada, the general importance of the artist, and the opportunities to view and study the artist’s work in Canada. It also outlined the Board’s interpretation of “national importance”, indicating that the Board considered whether the loss of the work would diminish Canada’s “national heritage” and that it concluded that a work could be of national importance “even if the object or the creator has no direct connection with Canadian history or Canada.”
The FCA then considered whether the Board’s interpretation of paragraph 11(1)(b) of the Act was reasonable. In this regard, the FCA looked to the composition of the Board, the specific wording in paragraph 11(1)(b), as well as subsection 4(2) of the Act, which allows the Governor in Council to include objects or classes of objects in the Canadian Cultural Property Export Control List “regardless of their places of origin.” Having found the Board’s interpretation of paragraph 11(1)(b) to be reasonable, the FCA then considered whether the Board’s determination that the artwork was of national importance was reasonable. It examined the criteria considered by the Board and found the Board’s decision to be reasonable, as it fell “within a range of possible, acceptable outcomes which are defensible in respect of the facts and the law.”
The FCA stated that the court’s standard of review in this case was “reasonableness”, and that courts are required to abide by the principle of deference. It held that the lower court was required to defer to the Board, as the Board was the administrative decision maker and “[held] the ‘upper hand’ with regard to the interpretation of its home statute.” Rather than approaching the Board’s decision with deference, the FCA found that the lower court had adopted its interpretation and measured it against that of the Board, and deemed the Board’s interpretation to be unreasonable for not conforming to the court’s interpretation. The FCA therefore overturned the lower court’s ruling and held that it had erred in its conclusion that the Board’s interpretation was unreasonable for being overly broad.
The FCA’s decision comes on the heels of amendments to the ITA proposed in Budget 2019, discussed in Charity & NFP Law Bulletin No. 443. On the one hand, the FCA’s decision and affirmation that “national importance” need not require a direct connection to Canada means that the national importance test will continue to apply to exports of cultural property under the Act. On the other hand, Budget 2019 will remove the “national importance” requirement for the enhanced tax incentives for donations of cultural property under the ITA. These Budget 2019 provisions were included in Bill C-97, Budget Implementation Act, 2019, No. 1, which most recently passed second reading and was referred to Committee on April 30, 2019. If passed, works that are not directly connected to Canada may still qualify as gifts of cultural property under the ITA.