This past July, the Federal Court of Appeal released its decision in Public Television Association of Quebec and Minister of National Revenue (P.T.A.Q.). The decision remains subject to potential appeal to the Supreme Court of Canada. The outcome reinforces the status of Canadian charity law as an outlier in international jurisprudence dealing with public benefit organizations, subjecting Canadian registered charities to significantly more stringent rules than are typical in other countries.
(Full disclosure: in my role as Executive Director of the Pemsel Case Foundation, I, and several of my Foundation colleagues, assisted in preparing the legal arguments made by Imagine Canada, which was granted Intervener status in the proceeding. So I am not a disinterested observer here.)
At issue was whether the fundraising activity and financing of programming that took place was in accordance with Canadian law. The test that the organization had to satisfy was that it exercised “direction and control” over the portions of the programming and fundraising purportedly carried out as Canadian charitable work. With all due respect, it is suggested here that the case, as decided, represents a missed opportunity to provide more scope or greater flexibility – or, at a minimum, increased regulatory certainty – for Canadian charities conducting their work through non-charitable intermediary groups. The Federal Court of Appeal, as is not unusual in charity cases, restricted itself in this decision to a narrowly-focused, fact-driven analysis, and declined to examine broader considerations that might have informed its reasoning.
The tendency of federal charity law jurisprudence to emphasize fiscal implications and undervalue common law precedent or equitable principles with respect to conferring or maintaining registered charity status has been documented by academics and other commentators. The effect of such an approach is both to disenfranchise the potential beneficiaries of a disputed organization’s work and to create a more ambiguous and, often, a more difficult regulatory environment for voluntary sector organizations to work in.
In P.T.A.Q., the proceeding concerned a Canadian registered charity’s dealings with Vermont Public Television, which is a 501(c)(3) organization – the U.S. Tax Code status under which charity-like groups are afforded favourable tax treatment and gain the right to issue tax receipts to their donors. Notably, if the Quebec organization had had a similar relationship with a Canadian educational broadcaster recognized as a registered charity, such as TV Ontario or Tele Quebec, it is unlikely that its conduct would have been questioned.
The Canada Revenue Agency argued, however, that the Quebec organization was a conduit for Vermont Public Television and therefore did not qualify for status as a registered charity. The charity asserted that it had adequate legal arrangements – in this circumstance, an agency relationship and fundraising documentation – in place to satisfy Canadian regulatory requirements and ensure that its mandated charitable work was carried out.
There was no allegation of misuse or diversion of monies. Both sides agreed that the resources were used for their intended purpose. At issue was whether the fundraising activity and financing of programming that took place was in accordance with Canadian law. The test that the organization had to satisfy was that it exercised “direction and control” over the portions of the programming and fundraising purportedly carried out as Canadian charitable work. At issue was whether the fundraising activity and financing of programming that took place was in accordance with Canadian law. The test that the organization had to satisfy was that it exercised “direction and control” over the portions of the programming and fundraising purportedly carried out as Canadian charitable work.
Although there were agreements between the charity and the station providing parameters within which the programming and fundraising were to be undertaken, the Court ruled that the Minister was reasonable in having found these agreements lacked certain provisions or were not adhered to sufficiently closely to meet the “direction and control” test. Specifically, the Court found reasonable the Minister’s position that a protocol entailing the Quebec charity annually choosing among packages of programming options prepared by Vermont Public Television was not enough to show “direction and control”. This suggests that a relationship where a Canadian charity relies on a non-charitable intermediary to advise on need and possible ways to address that need, with a view to having the intermediary later deliver the selected services, may not be sufficient for the charity to satisfy Canadian law.
The alternative – the charity independently specifying what work is to be done without significant input from an intermediary that has expertise and experience in the area – seems a sure recipe for inefficiency and mistakes. Moreover, in the context of international development work, such an approach would run contrary to the current widely-accepted view that success is most often achieved when groups collaborate closely with overseas partners, rather than dictating the nature of the work to be undertaken from a privileged position as the funder. Even domestically, best practice is not for funding bodies to micro-manage project development and content, but instead to engage and communicate with service deliverers to ensure wise and prudent use of resources.
With respect to the Fundraising Agreement, the Court pointed to a lack of evidence that Vermont Public Television adequately distinguished and documented its work on behalf of the Quebec charity from its own fundraising efforts. On the record, it appears that the provisions in the Fundraising Agreement could have been more extensive and that the paper trail with respect to Canadian donation could have been better. This led to a further finding of a lack of sufficient direction and control.
The more immediate, if unstated, problem for the Minister (and for the Court) may have been the fact that Vermont Public Television was contracted both to deliver the programming and to raise the funds. This approach created a seamless arrangement between the Quebec charity and the Vermont station, and undoubtedly contributed to the Minister’s characterization of the relationship as a “conduit”. However, from a public policy perspective – especially if a premium is put on delivery of services to the beneficiaries of a charity, rather than minimizing the draw on the federal coffers –, there is little reason to quarrel with such an arrangement. Indeed, the Even domestically, best practice is not for funding bodies to micro-manage project development and content, but instead to engage and communicate with service deliverers to ensure wise and prudent use of resources.better view is that it is a smart approach to leveraging the value of scarce charitable resources, and that such integration of functions promotes efficiencies and synergies. In contrast, focusing on the technicalities and minutiae of direction and control mitigates against this, if not undermining it altogether.
Taking into account these broader considerations, Imagine Canada, in its submissions to the Court, argued for moving away from a strict “direction and control test”, and suggested – based on a close reading of the cases and an understanding of the statutory history – endorsement of another, more flexible approach. This approach would have relied on showing that there was a “reasonable expectation” that the resources in issue would be used for charitable work.
The submission built on a position already found in Canada Revenue Agency guidance. The Agency’s guidance on “Canadian Registered Charities Carrying Out Activities Outside Canada” indicates that:
- where the nature of the goods being transferred is such that it can reasonably be used only for charitable purposes;
- where both the charity and a non-charitable intermediary understand and agree the property is to be used only for the specified charitable activities; and,
- where an investigation into the intermediary allows the charity to reasonably have a strong expectation that the organization will use the property only as intended;
the charity will be considered to be carrying out its own activities (i.e., having sufficient direction and control over the transfer).
The “reasonable expectation” standard would have entailed the same sort of requirements, but would not have applied only to goods necessarily of a charitable nature, and consequently could cover a transfer of money or other resources.
Adoption of such a test – as well as being more in keeping with the way contemporary organizations often operate or are encouraged to operate – would avert the need for charities to enlist a passel of lawyers and accountants when, for logistical or other reasons, they want to support charitable work that they are unable or don’t want to take on themselves or through another registered charity. It would also simplify and clarify the law and, we believe, bring Canada more into line with practice in other jurisdictions.