Federal Court Upholds Jeopardy Order against Charitable Organization
By Terrance S. Carter & Author(s) Apr 2025 Charity & NFP Law Update
Published on April 30, 2025
In Minister of National Revenue v. Ne’eman Foundation Canada, decided on April 10, 2025, the Federal Court addressed the legal complexities surrounding “jeopardy orders” against registered charities under the Income Tax Act (ITA). The decision provides valuable insight into the evidentiary burden on registered charities challenging such orders and the Minister’s obligation of full and frank disclosure, as well as highlighting the ability of the Minister to collect tax debt from a former registered charity whose status has been revoked by utilizing subsection 225.1(1) of the ITA. The Ne’eman Foundation Canada (the “Foundation”) was a registered charity whose primary function was raising funds in Canada which were then transferred to agents abroad in order to fulfill its charitable objectives. Following an audit for the period of January 1, 2016, to December 31, 2017, the Minister of National Revenue (the “Minister”) issued a Notice of Intention to Revoke the Foundation’s charitable registration on July 2, 2024, citing concerns about the Foundation’s operations. These concerns included allegations that: (1) the Foundation was not operated exclusively for charitable purposes; (2) it conferred private benefit on its CEO, founder and sole bank authority, Chaim Katz, and a for-profit corporation he owned in Israel; (3) it failed to maintain adequate control over its resources; and (4) it lacked proper record-keeping. The Foundation filed a Notice of Objection in response, the merits of which are still to be determined, but the Minister revoked its charitable registration on August 10, 2024. Subsequently, the Minister obtained a “jeopardy order” on November 29, 2024 in order to prevent the dissipation of the Foundation’s assets. According to the CRA, a jeopardy order “allows the CRA to take immediate action to collect […] tax debt.” This order was granted ex parte by Justice Pentney based on evidence cited by the Minister suggesting a decline in the Foundation’s bank account balances, outgoing transfers to an Israeli entity connected to Mr. Katz, and Mr. Katz’s continued use of the Foundation’s credit card after the revocation. Justice Pentney also noted Mr. Katz’s involvement with another charity, The Emunim Fund, and attempts to transfer the Foundation’s assets to it, despite Mr. Katz being an “ineligible individual” under the ITA due to the revocation of the Foundation’s status. At trial, the Foundation brought a motion to set aside the “jeopardy order”, arguing that the Minister’s evidence should be disregarded, that there were no reasonable grounds to believe the Foundation’s funds were in jeopardy, and that the Minister failed to make full and frank disclosure when applying for the order. The Court’s decision addressed each of the Foundation’s arguments. It first considered the admissibility and weight of the audit report, concluding that it was admissible as evidence of the Minister’s belief, subject to the Foundation’s right to challenge the underlying evidence. The Court also rejected the Foundation’s argument for an adverse inference against the Minister due to the absence of direct evidence from individuals with personal knowledge of the facts, citing specific provisions of the ITA and relevant case law that permit affidavits based on belief and establish the evidentiary value of CRA officer affidavits. The Court then analyzed the Foundation’s claim that its actions, including the depletion of bank accounts and credit card expenses, were consistent with its efforts to reduce its revocation tax during the winding-up period. The Court noted that while a former charity can reduce its tax liability through charitable expenditures and transfers to eligible donees, the Foundation failed to provide sufficient evidence to demonstrate compliance with the ITA in this regard. Specifically, the Foundation did not produce the requested receipts and descriptions of its charitable activities for 2024, hindering the Court’s ability to assess the legitimacy of its expenditures. Regarding the Minister’s alleged lack of full and frank disclosure, the Foundation argued that the Minister failed to inform Justice Pentney about the Foundation’s ability to reduce its revocation tax during the winding-up period and wrongly asserted that the winding-up period had ended. The Court, however, found that Justice Pentney was aware of the Foundation’s former charitable status and the possibility that the transfers were related to winding-up activities. The Court ultimately concluded that the Minister’s concerns about the Foundation’s history of non-compliance, the decline in bank accounts, and Mr. Katz’s involvement with The Emunim Fund were valid and justified the jeopardy order, irrespective of the winding-up process. The Court also addressed the Foundation’s argument that the Minister should have considered alternative means of recovering the tax debt, such as pursuing third-party transferees. The Court affirmed that it was not its role to dictate the Minister’s collection methods. Accordingly, the Court upheld the “jeopardy order”, finding that the Foundation had not met its burden of demonstrating reasonable grounds to doubt the jeopardy to its funds or that the Minister had failed to make full and frank disclosure. The Foundation had also raised arguments regarding the constitutionality of s. 225.2 of the ITA (a provision which addresses collection restrictions) as it relates to registered charities, but the parties agreed to leave this issue to be addressed at a later date. Ne’eman Foundation underscores the importance of meticulous record-keeping and compliance with the ITA for registered charities, particularly during the winding-up period following a notice of intention to revoke registration. It also highlights the challenges faced by registered charities in setting aside “jeopardy orders”, requiring them to provide substantial evidence to counter the Minister’s concerns. |