Recent events, particularly the controversy in Alberta over the dealings of Trinity Christian School Association and various people and organizations connected with the Association, make a review of the question of charities and non-arm’s length transactions timely. So that’s the subject of this column.
The Trinity Christian School Association matter surfaced in the context of the funding Alberta’s Ministry of Education provided to the organization as part of its programming to support home schooling initiatives. It is alleged that aspects of the use of those funds was improper. Some of the players involved are registered charities, others are not. Among the concerns was that certain transactions were among people or entities who were not “at arm’s length”. If true, that can be a problem not just in regard to use of public funds, but also with respect to charity law.
Followers of the recent American election campaign may recall the concerns raised over some of the dealings of Donald Trump’s Foundation, which are alleged to have benefited his businesses or him personally rather than advancing charitable ends.
Suggestions of “pay to play”, such as those made about the Clinton Global Initiative or the Trudeau Foundation, turn partly on whether the dealings are non-arm’s length, but can also involve additional legal considerations (for example, laws governing the conduct of officeholders). Both Justin Trudeau and Hillary Clinton asserted, in response to claims of impropriety, that they had severed their ties with their respective organizations.
All this shows the variety of circumstances and how often non-arm’s-length questions can arise.
The variety of family or business relationships that can exist between different entities and the individuals who control or manage those entities can never be fully captured in a law or regulation. Whether in Canada or the United States, there are strict rules around a charity having transactions with entities over which, owing to family or business ties, individuals associated with the charity have control legally or in practice or with people with close ties to the charity. The broad policy concern in the charity realm is to preclude monies raised or generated for charitable purposes being diverted to non-charitable uses. So, when the conduct involves entities or persons that do not have registered charity status in Canada, or the equivalent tax-exempt status in the United States, apprehensions are heightened.
The Americans address issues with non-arm’s-length conduct by, among other measures, placing a wide ban on “self-dealing”. This ban applies to a range of transactions that cannot be engaged in by those who fall in the category of a “disqualified person”. They also impose penalties on “Excess Benefit Transactions”. In Canada, provisions to deal with such conduct include prohibitions against gifting to a “non-qualified donee”, and intermediate sanctions for gifting to a “non-qualified donee” and for conferring undue benefits on someone not acting at arm’s length from a charity. In both countries, if the infractions are numerous or egregious enough, a charity may lose its tax-privileged status.
These rules prevent someone establishing a charity, then retaining a governance role as a director or trustee while becoming a paid employee of the organization. They also preclude founding a group, then joining the staff while passing along the majority of governance responsibilities to persons who are not sufficiently independent from you or other founders (such as close relatives).
In Canada, the “Charities and giving glossary” (http://www.cra-arc.gc.ca/chrts-gvng/chrts/glssry-eng.html ) on the website of the Canada Revenue Agency may be the best place to start to determine if your situation is apt to lead to trouble. That said, all charities have day-to-day dealings in the marketplace. Particularly in rural or small communities, the circle of those engaged with charities may be limited. Conducting business in such circumstances need not always be problematic. So long as transactions are at “fair market value” (technically, therefore, not constituting a “gift”), in Canada the regulator typically will not take issue with the relationship. The same applies for Canadian charities when they are transacting business with entities or individuals that are not their beneficiaries, other charities or groups given “qualified donee” status under the Income Tax Act. If the dealing is at fair market value, it doesn’t generally raise concerns.
The variety of family or business relationships that can exist between different entities and the individuals who control or manage those entities can never be fully captured in a law or regulation. Therefore, provisions in this area have to be worded generally or feature a catch-all element that captures problematic conduct that is not specifically named. Generally, it is easier to identify specific relatives in setting out prohibitions in the rules, while problematic business relationships are less well defined. In any event, the measures leave both the charitable sector and the regulator considerable leeway in how they do things.
Because the courts decide questions of whether a situation is arm’s-length or not on a case by case, fact-driven basis, they don’t provide much additional guidance.
In Canada, the “Charities and giving glossary” (http://www.cra-arc.gc.ca/chrts-gvng/chrts/glssry-eng.html ) on the website of the Canada Revenue Agency may be the best place to start to determine if your situation is apt to lead to trouble. For the term “at arm’s length” the glossary states the following:
[It] describes a relationship where persons act independently of each other or who are not related. The term “not at arm’s length” means persons acting in concert without separate interests or who are related.
The same document also provides a helpful definition of “Fair Market Value”:
Fair market value is usually the highest dollar value you can get for your property in an open and unrestricted market and between a willing buyer and a willing seller who are knowledgeable, informed, and acting independently of each other.
Whether the Trinity Christian School Association was onside or offside the non-arm’s-length rules is as yet uncertain, but other Canadian registered charities are well-advised to exercise due diligence to avoid situations where the kinds of questions now facing the Association arise.
About Peter Broder
