Canada Revenue Agency
A Website of The Centre for Public Legal Education Alberta

LawNow Magazine

relating law to life

You are here: Home / Archives for Canada Revenue Agency

The Purposes and Activities Divide in Charity Regulation

By

Not for Profit Law ColumnOver the last couple of years the media has been filled with stories and there has been much fretting in the voluntary sector about the Canada Revenue Agency (CRA)’s auditing of registered charities’ Political Activities. It is unclear as yet, however, how much regulatory compliance action will be taken based on isolated or individual acts of the groups being examined – as opposed to impugned work that was seen and undertaken by the organization as closely linked to advancing its mandate.  That is, groups having what at common law would be called an unstated political purpose.

Leaving aside partisan political behaviour, which is in a category by itself, CRA should avoid sanctioning organizations for one-off or incidental political conduct.  Here is why.

As has been noted in this column before, common law concerning charity issues generally turns on construction and interpretation of an entity’s purpose(s).  While the meaning of charity at common law and the technique used so that meaning can evolve – reasoning by analogy from what the courts have in past held to be charitable – are adopted for regulation of registered charities under the Income Tax Act (ITA), the story doesn’t end there.

Frequent references to “activities” in the ITA have clouded the jurisprudence and have often lead to troubling rulings. Leaving aside partisan political behaviour, which is in a category by itself, CRA should avoid sanctioning organizations for one-off or incidental political conduct.  Here is why. Unhappily, the primacy of purpose or purposes in assessing eligibility for status as a registered charity is apt to be lost when the courts, as they frequently do, delve into the minutiae of an organization’s day-to-day operations as part of their assessment of whether it ought to be given preferential tax treatment.

An emphasis on regulation of activities – presumably motivated by the same fiscal integrity considerations – has also begun to crop up in CRA guidance documents.  For example, CRA has issued guidance on “Research as a Charitable Activity” and has commented in some of its materials on “Providing information as a charitable activity”. In this commentary, focus on the purpose(s) for which the activity was undertaken is given short shrift.

However, as Justice Iacobucci stated at paragraph 152 of his majority decision in Vancouver Society of Immigrant and Visible Minority Women v Minister of National Revenue, [1999] 1 SCR 10 an activity needs to be assessed on the basis of the purpose it is undertaken to advance, and not against other criteria:

While the definition of “charitable” is one major problem with the standard in s. 149.1(1) , it is not the only one.  Another is its focus on “charitable activities” rather than purposes.   The difficulty is that the character of an activity is at best ambiguous; for example, writing a letter to solicit donations for a dance school might well be considered charitable, but the very same activity might lose its charitable character if the donations were to go to a group disseminating hate literature.  In other words, it is really the purpose in furtherance of which an activity is carried out, and not the character of the activity itself, that determines whether or not it is of a charitable nature…

This suggests that for an activity of an organization to taint its charitable nature, one of four problems must be evident with the activity:

  • notwithstanding the group’s purpose (or purposes) being charitable, the activity manifestly does not advance the purpose or purposes, or the activity is too remote from the purpose(s) for it to be reasonably said that the activity is furthering the purpose(s);
  • the activity constitutes, because of its quality or quantity, a collateral non-charitable purpose of the entity;
  • the activity is illegal (including being in breach of provisions of the Income Tax Act governing the conduct of registered charities) or contrary to public policy; or
  • the activity entails impermissible private benefit or impermissible distribution of the entity’s assets or resources.

Thus, the ITA 149.1 “activities” provisions can, and ought, to be read in keeping with these narrow disqualification criteria. Not as authorizing regulatory micro-management.

If provincial constitutional authority over charities’ day-to-day operations and the broader context of federal charity regulation is taken into account, a more legally consistent, better and fairer way to interpret the statute becomes possible.

For example, in describing entities that potentially qualify for charitable registration, the ITA differentiates between, and imposes different regulatory requirements on, operational charities and funder charities.  Certain of the “activities” provisions, therefore, are included to distinguish between groups that do charitable work and groups that pay for it.

For charities working through non-charity intermediaries either domestically or abroad, however, these provisions are sometimes taken to mean that they must be the legal actors undertaking the work.  An examination of the legislative intent that prompted introduction of the “activities” language in these sections of the Act strongly suggests that this is not the proper reading of the statute.  Rather, what is required is that they be something more than a mere funder.

Other references to “activities”, such as sections 149.1(6), (6.1),(6.2)  and (10), deal with, among other matters, non-partisan political engagement, carrying on a business related to a charity’s purpose(s), gifts to qualified donees or other work that could potentially be characterized as non-charitable, and deem these undertakings charitable for purposes of the ITA.  If the ITA regime  reflects the common law, then these provisions ought to be viewed as safe harbours that provide certainty with respect to ITA treatment of conduct that could qualify as charitable.

Finally, some references to “activities” are included to identify and distinguish the reporting and regulatory treatment of investment or administrative expenditures from those related to gifting, programming or other direct spending to advance the charity’s purpose(s).  This makes sense in the context of promoting transparent and timely use of funds that have enjoyed preferential tax treatment.

Independent Contractor or Employee

By

photo of man working on a stack of filesWith business culture evolving, we see increasingly varied means to manage one of the most expensive and critical components of a business – human capital.  Whether a business is motivated to reduce labour costs, streamline available skills, or minimize staff during slower periods, At first blush, it may appear easy to determine whether individuals are employees or ICs.businesses are tending to engage independent contractors (ICs) as compared to employees.  For the purposes of this article, unless otherwise stated, an IC is a self-employed individual, whether incorporated or not.  Note that this discussion may not apply to contracts entered into in Quebec.

How do I know if I am an employee or IC?

At first blush, it may appear easy to determine whether individuals are employees or ICs.  Have they signed an employment contract?  Did they receive a T4 Statement of Remuneration Paid from the payer?  Do they report ‘employment income’ or ‘business income’ on their tax returns?

However, simply examining these factors is not sufficient to determine the actual nature of the relationship.  Interested parties, such as CRA and the courts may look beyond surface indicators to determine the legal nature of the relationship.  They most commonly begin by examining the intention of the worker and the payer.

A common intention can be communicated in a number of ways – for example, in emails, an informal verbal arrangement, or a formal written agreement. If the worker or payer is unsure of the relationship, either party can request a ruling from CRA to have the status determined.  In other words, a contract between the worker and payer may assist in providing support to CRA or a court of a certain intention.  However, quite often these contracts may not be afforded much weight if the nature of the relationship is not consistent with the expressed intention.

That said, a contract can provide another very important role in documenting the terms of the relationship.

After considering the intention of the worker and payer, CRA and the courts normally consider the following five main factors:

1. Control

Control is the ability, authority or right to determine the manner in which a worker performs the work to be done.  More control is generally exercised over employees than ICs.  Control is often the most critical element in these decisions. The degree of control a payer has over a worker may indicate whether the worker is an IC or employee (though the industry may also impact type and degree of control).

It is the right of a payer to exercise this control that should be considered, rather than whether or not they actually exercised it.  More control is generally exercised over employees than ICs.  Control is often the most critical element in these decisions.

Factors that may indicate an employment relationship include:

  • the payer directs, schedules and controls the work;
  • the payer determines the specific tasks the worker will perform;
  • the payer has the final say on all decisions and actions;
  • the payer trains the worker on how to do the work;
  • the relationship is one of subordination;
  • the worker requires permission of the payer to work for others.
2. Equipment and Tools

Consider who owns, rents or leases the tools to do the work.  A worker who has made a significant investment in a tool is likely to retain significant rights over the tool, thereby diminishing a payer’s control.

Tools can range from the equipment required for the work, Consider who owns, rents or leases the tools to do the work. to the workspace used to do the work and even intellectual tools such as training and experience.

Factors that may indicate an employment relationship include:

  • the payer supplies most tools and is responsible for repairs, maintenance and insurance;
  • the payer reimburses the worker for supplying their own tools.
3. Opportunity for Profit

Consider whether a worker can realize a profit or incur a loss.  ICs have the ability to pursue and accept contracts, whereas employees are not normally in a position to realize a business profit or loss.  Even if employees are paid based on commissions, or provided a production bonus, the increase in income is not usually considered profit.

Factors that may indicate an employment relationship include;

  • the worker cannot accept or reject projects;
  • the worker cannot schedule their own work;
  • the worker is entitled to benefit plans normally only provided to employees;
  • the worker cannot hire a substitute, or the payer pays for the substitute;
  • the worker is assigned other tasks at no extra remuneration so the efficiency of completing their work does not enhance their income.
4. Financial Risk

Consider any ongoing costs the worker may bear.  Employees do not usually bear financial risk, as costs they incur may be reimbursed, and they do not have fixed ongoing costs.

Factors that may indicate an employment relationship include:

    • the worker is not usually responsible for operating costs;
    • the worker is not financially liable if he does not fulfill obligations of the contract. For example, deficiencies in the work are not corrected at the worker’s own cost or time;
    • the payer determines and controls the method and amount of pay.
5. Integration

Consider integration of the worker’s job in the payer’s business.  An employee is generally more integrated into a business, as compared to an IC, which is more ancillary to the business.

If the worker or payer is unsure of the relationship, either party can request a ruling from CRA to have the status determined.

Further discussion on these considerations can be found on the CRA website and in their Guide RC4110 – Employee or Self-employed.  CRA also provides specific commentary on certain industries (eg. real estate and construction) that tend to trigger more questions.

The Impact of an IC being considered an Employee – What’s the Downside?

The debate over whether an individual is an employee or IC may seem insignificant at first, however, for those affected, it can be crippling.  Though the tax costs can be high, other non-tax considerations can also significantly impact a payer and worker.

Payers are not required to withhold certain source deductions such as the Canada Pension Plan (CPP) and Employment Insurance (EI) premiums for ICs.  However, subject to a few certain exceptions, employers are required to withhold these amounts for employees.   CRA will often assess the payer with CPP and EI premiums (for both employer and employee portions) when they consider an individual to be an employee rather than an IC.  This can be a costly bill. The debate over whether an individual is an employee or IC may seem insignificant at first, however, for those affected, it can be crippling. For example, a corporation engages 10 ICs for many years paying them $50,000 annually.  If CRA assesses all ten workers as employees for the preceding three years (which is commonly the case), the bill for the CPP would exceed $130,000. CRA may also assess EI, and penalties and interest on the total balance due.   Often, these disputes arise when an IC is terminated and applies, perhaps incorrectly, for EI.

The financial costs do not necessarily end with the tax bill, however.  Individuals considered employees may be entitled to benefits and rights, such as overtime pay, vacation pay, and minimum wage, included in their province’s respective Labour Standards or Employment Standards Codes.

Take, for example, the $180 million class-action lawsuit brought against the Canadian Hockey League (CHL) alleging that the junior hockey players are in fact employees and not ICs.  The lawsuit claims that, as employees, the players are entitled to a minimum wage, as well as certain other benefits such as holiday, overtime and vacation pay,and is claiming punitive damages.  Further, if the workers are found to be employees, the CHL may also be liable for additional amounts (if challenged by CRA), such as CPP and EI.

The Impact of an Employee being considered an IC – What’s the Downside?

In some cases, an individual may apply to Service Canada for certain employment benefits, such as employment insurance (EI), maternity or paternity leave or disability benefits, only to be  denied on the basis he or she is an IC.  For example, individuals may believe they are entitled to maternity or paternity benefits and budget accordingly.  When the baby arrives, and benefits are denied, the family may suffer significant financial costs and stress.

Also, should workers be considered ICs and not employees, they could face GST/HST issues due to failure to collect and remit this tax.

Incorporated Independent Contractors (ICs) – The Personal Service Business (PSB) Issue

One common way payers try to avoid being considered an employer is to require their workers to incorporate.  The corporation then provides the worker’s services.  This may offer benefits to both parties: the payer is not subject to ‘employment’ benefit rules, and the worker may enjoy tax advantages unavailable to employees.  However, if the relationship would be one of employment, absent the corporation, the arrangement may be considered a PSB, attracting significantly higher taxes.

Incorporated workers must be diligent to ensure that they are not engaged in an ‘employment-like’ relationship.  Similar considerations as those mentioned above would determine whether a PSB exists.  However, the courts may not consider the intention of the parties in analyzing such relationships.

Conclusion

As the above indicates, the classification as an employee or IC carries significant implications for both parties.  Both should take proper care to ensure appropriate treatment.

 

A helpful Guidance on Ineligible Individuals, but questions remain

By

Not for Profit Law ColumnAndrew Coyne recently drew much attention when he mused in the National Post about the merit of abolishing the charitable tax credit so registered charities could have free rein to engage in political activities. However, the credit is arguably at far greater risk from the abusive tax shelters that have been seen over the last decade or so.  Those shelters saw the siphoning off of hundreds of millions, if not billions, of dollars in resources from charitable work and into private pockets.

The schemes were structured in various ways, but basically entailed a donor receiving more money from his or her claim of a donation tax credit than the value of what was actually given to a charity or other qualified donee by way of a gift.

The federal government responded to the abuse aggressively.  As well as an extensive audit initiative and litigation of cases associated with the schemes, it brought in a range of legislative measures.

One key statutory change was a new deeming provision. It set the value of certain donations at the cost to the donor, rather than the fair market value (unless that was lower), if the property donated had been acquired less than three years prior to the donation, or had been acquired with a view toward its being donated.

As well, in its 2011 budget the federal government established the category of “Ineligible Individuals” and provided the Canada Revenue Agency (CRA) with discretion to refuse registration, revoke registration or apply other sanctions where an “ineligible Individual” potentially controlled or managed the resources of a registered charity or group that sought registered charity status.

The definition of Ineligible Individuals includes:

  • tax shelter promoters whose schemes have led to a registered charity’s status having been revoked within the last five years; as well as
  • those who govern, direct or manage a charity that has been subject to revocation for a serious breach of Income Tax Act (ITA) requirements within the last five years.

This makes it an effective tool for CRA to deal pro-actively with tax shelter abuse.  That’s to the benefit of the sector, since exploitation of the donation credit provisions of the ITA on the scale seen in the early years of the 21st century could undermine public confidence in preferential tax treatment of charities and donations to them.  It also massively diverts resources from genuine charitable work.

Unfortunately, the measures extend far beyond just tax abuse situations.  A person with a conviction for a criminal or “relevant” offence or someone who governed, directed or managed any registered charity whose status was CRA makes clear it has discretion as to whether to sanction a charity connected to an ineligible individual, and that it will examine situations on a case-by-case basis to determine how to respond.  revoked on the basis of what may reasonably be considered to have constituted a serious breach of the ITA requirements for registration are all caught under the definition.  Given the number of possible “relevant” offences and the number of registered charities that have their registration revoked for cause each year, that potentially puts a large group of people under scrutiny and an immense amount of discretion in CRA’s hands.

In August, CRA released a Guidance on how it will administer the legislation.  The approach CRA sets out is quite reasonable in the circumstances and does its best not to saddle organizations with cumbersome compliance requirements.

CRA makes clear it has discretion as to whether to sanction a charity connected to an ineligible individual, and that it will examine situations on a case-by-case basis to determine how to respond.  It also indicates that it will deal with the organization, rather than the individual in question when it has a concern.  Organizations that are not contacted do not have to meet any specific compliance obligations.

The new Guidance features a self-assessment questionnaire so someone can evaluate if he or she falls within the definition of an Ineligible Individual, but does not require the organization to pre-screen staff or volunteers.  It also allows the organization to make representations as to its due diligence or other measures to limit the scope of responsibilities or activities of someone meeting the definition, or to provide information indicating that CRA is incorrect in asserting that an individual is ineligible.

That said, there will be challenges as the new regime is implemented.  Among the issues that that spring to mind are:

  • given the notice protocol proposed by CRA, what obligation does the charity have with respect to protecting the impugned person’s privacy in its follow up with the individual and CRA? and,
  • if it becomes necessary to remove the person or alter the position or practices associated with him or her, can this be done without breaching corporate, labour or other laws to which the charity’s operations are subject?

Given this, it would seem prudent for charities prior to having, or when they have, an Ineligible Individual situation arise, to seek legal counsel to ensure it is or can be dealt with appropriately.

But getting back to Mr Coyne, his column is at least partly rooted in his skepticism about the appropriateness of a tax agency overseeing the operational aspects of organizations. Given the federal government’s broad taxation powers under the Constitution, there is no doubt that the federal government can and ought to protect the integrity of the tax system.  But that is different from delving into the day-to-day decisions of charities. As has been noted here before, it is much more rarely that the government places – and the CRA enforces – constraints and transparency obligations on corporations or other taxpayers that enjoy the benefits of tax credits.  This makes for, at best, a very unlevel playing field.

Under the Canadian Constitution, jurisdiction over the operational aspects of charities actually resides primarily with the provinces.  The federal registered charity regime confers tax benefits over groups that are defined, at common law, as charities.  Given the federal government’s broad taxation powers under the Constitution, there is no doubt that the federal government can and ought to protect the integrity of the tax system.  But that is different from delving into the day-to-day decisions of charities.  That’s why measures such as the ineligible individual provisions ought to be drawn as narrowly as possible.

In this regard, the 2011 Budget measures overreach.  A better approach would have been to focus exclusively on preventing donation tax shelter abuse – a big enough problem in itself – and not burden the sector with trying to divine the meaning of, and the CRA trying to administer consistently and fairly, provisions which ought to be of no concern to the tax agency nor, indeed, the federal government.

 

Is Good Luck Taxable?

By

hand holding playing cards: 3 Kings and 2 AcesEasy Money

There seem to be plenty of opportunities to win – big and small – in our lives, from lotteries to radio contests to a friendly wager with a friend.  Whether it’s $10 on who wins the golf game, or $10 million from the lottery, does the tax man share in our good fortune?

In Canada, the answer is generally “no” – receipts derived by luck are normally classified as non-taxable “windfalls”.  Very little complicates a person’s income tax situation quite as much as crossing a national border.  While Canada does not tax gambling winnings, other countries have different tax laws.  The Income Tax Act specifies that no capital gain or loss results from the chance to win a prize, and that the cost of such a prize is equal to its fair market value at the time of acquisition.

The Canada Revenue Agency (CRA) notes, in Interpretation Bulletin IT-213R (Prizes from lottery schemes, pool system betting and giveaway contest), that prizes are not taxable as capital gains or as ordinary income, unless they can be found to be income from employment, a business or property, or a prize for achievement in “a field of endeavour ordinarily carried on” by the recipient.

Eyes on the Prize

While the prize itself is tax-free, any income generated from the prize remains taxable.  It’s probably unsurprising that the income from investing prize money would be taxable.  If the value of the prize appreciates over time, then any gains would be subject to taxation in the ordinary course.  This might be the case for the winner of a “dream home lottery” who sells the property ten years later. However, consider a “million dollar prize” which is not paid out in one lump sum, but over time.  For example, the winner receives payments of $50,000 annually for 20 years.  Assuming a rate of return of 2.5% (the Government of Canada 10 year bond rate), the right to receive $50,000 a year for 20 years is worth about $769,000, and that, not $1 million, is the prize won.  The remaining $231,000 is interest earned on that initial investment, taxable as received over the 20-year period.  The issuer of the annuity should issue T5 slips reflecting this interest income annually.  This could come as a nasty shock if the winner was not expecting to pay tax on over $19,000 of interest which would be part of the first year payment (gradually declining in future years).

As the cost is equal to the value of the prize, sale of the prize shortly after winning is unlikely to result in a gain, so the proceeds should be received free of tax.  If the value of the prize appreciates over time, then any gains would be subject to taxation in the ordinary course.  This might be the case for the winner of a “dream home lottery” who sells the property ten years later.  In that case, the owner may have resided in the property and possibly be able to realize any gains free of tax due to the Principal Residence Exemption (See “Your Principal Residence and Taxes”, by the same author, LawNow Jul/Aug 2013).  Many other prizes will not likely gain in value over time – the winner of a sports car, for example, faces little risk of a future sale for more than the car’s value at the time they won it.

Taking Care of Business

Can winnings be received in the course of business?  As with most tax matters, the answer can be uncertain, and is dependent on the facts.  For example, a lottery ticket retailer might be awarded a prize for selling a winning ticket.  This prize would be considered part of the consideration received for selling lottery tickets, and therefore included in the retailer’s business income.  It bears noting, however, that this interpretation reflects a change in CRA’s interpretation, communicated within CRA in the summer of 2013.  Prior to that, CRA’s interpretation, published in March, 1981, was that a prize for being the seller of a winning ticket was based solely on chance, and therefore was not subject to taxation.  This specific issue has never been addressed by the courts, so it is unclear whether CRA’s current or prior interpretation is, in fact, correct.

Know When to Hold ‘Em

There have been a variety of cases before the Tax Courts assessing whether gambling activities should be considered a business activity of a professional gambler, such that winning would be taxable, and losses deductible, as with any other business.  The courts have looked to a variety of factors in making such determinations, including the degree of organization of the gambling activities, any special knowledge, skill or private information possessed by the gambler, the extent of gambling activities and the gambler’s intention, whether personal enjoyment or entertainment, or playing for a profit.

A 1961 court decision (Harry Edgar Morden) contrasts the activity of a professional bookmaker with those of a typical gambler.  The bookmaker calculates the odds over an extended period of time, sets payouts such that the aggregate odds are in his favour, and accepts wagers on any result, at the quoted odds, thus creating an organized business methodology. There have been a variety of cases before the Tax Courts assessing whether gambling activities should be considered a business activity of a professional gambler, such that winning would be taxable, and losses deductible, as with any other business.  The individual gambler lacks such an organized, systemic approach, and any winnings are attributable to luck, as much or more than skill, and his activities are less the conduct of a commercial activity and more for personal entertainment.

A 1981 Tax Court decision (John Balanko), upheld by the Federal Court of Appeal in 1988, characterized the differentiating factor as one of risk, noting that risk-taking is necessary in any business venture, but that a characteristic of a business is the management or minimization of risk.

A 1997 case (Alvin J. Luprypa) addressed winnings from playing pool.  The court concluded that the taxpayer carried on a business of playing pool for profit.  He was a skilled player, practicing Monday to Friday afternoons, and playing at a bar, starting after 11 PM.  He was calculating and disciplined, managing risks carefully.  He drank alcohol only on the weekends, when he did not play pool, to gain an advantage over inebriated opponents.  As he carried on a business, his earnings were taxable.  However, the court also concluded that the taxpayer believed, reasonably, that his winnings were not taxable.  Penalties imposed for failure to report income either knowingly or under circumstances amounting to gross negligence were therefore reversed.

A 2006 case (Leblanc v. The Queen, 2006 TCC 680 (CanLII) ) addressed two brothers who, from 1996 to 1999, won over $5.5 million (net of losses) playing government-run sports lotteries.   They resided near the Quebec and Ontario border so that they could play in both provinces, typically betting $200,000 to $300,000 weekly.  They reviewed published odds for the games, eventually developing a computer program to calculate their betting approach.  Due to Lottery Corporation limits, they purchased tickets from multiple retailers, negotiating discounts until the limits were reduced to a level that this was no longer possible.  At one point they decided picking up the lottery tickets was too much work, so they hired three friends to pick the tickets up and increased their workforce when the limits were reduced. Eventually, they had fifteen “helpers”.

CRA asserted that they wagered in an organized fashion, using a system which ensured that any winning wagers would generate substantial prizes.  Their negotiation of discounts and hiring of fifteen helpers was advanced as support this was a business.  Expert testimony indicated that the odds against winning these sports lotteries were “astronomical”, and not remotely consistent with the payouts.  These odds could not be beaten by skillful play – skill played no part in winning or losing.    The court noted that the only evidence presented to show the brothers had a system was that they had won.  All other evidence pointed to compulsive gamblers who got lucky, and not to an organized business.  The winnings were not taxable.

Viva Las Vegas

Very little complicates a person’s income tax situation quite as much as crossing a national border.  While Canada does not tax gambling winnings, other countries have different tax laws.  The most common foreign tax jurisdiction for Canadians is that of the United States, where gambling and lottery winnings are included in ordinary income, and subject to taxation.

For citizens of the United States residing in Canada, this means they will be taxable on such winnings, as the United States is one of only a handful of countries which base taxation on citizenship.

As well, Canadians winning prizes from sources in the United States are also subject to taxation.  Typically, the payor is required to withhold and remit taxes directly to the Internal Revenue Service (IRS) when the prize is won by a non-resident of the United States, generally at a flat rate of 30%.  Some forms of gambling winnings are exempt from withholdings, including blackjack, baccarat, craps, roulette and big-6 wheel.  The Income Tax Treaty between Canada and the United States permits taxable gambling winnings by Canadian residents to be reduced by gambling losses. However this would normally require the filing of a U.S. tax return, and provision of evidence of these losses.

With a Little Luck

Although the occasional court case has held someone to be a professional gambler, this is a rare exception to the general rule that gambling – win or lose – does not have income tax consequences in Canada.

 

Judging Guidance

By

Not for Profit Law ColumnIt is trite law that guidance about registered charities issued by the Canada Revenue Agency (CRA), through its Charities Directorate, does not have the force of legislation or regulations. Courts can reject or ignore it when determining the permissibility or impermissibility of an organization’s conduct and the consequences flowing from that conduct.

The Income Tax Act (ITA) relies heavily on the common law to establish the scope and parameters of what qualifies an entity as eligible for registration as a charity.  As well, very few Regulations with respect to ITA provisions governing registered charities have been issued.  That, in practice, leaves material released by the CRA as a primary source of information after the legislation itself.

Even so, court decisions are frequently rendered without any discussion whatsoever of the CRA’s published position. Canadian judges, when they do consider the guidance, are apt to comment on it only in passing. They rarely directly address the particulars asserted in a specific document and their accuracy or legal validity.  This means that one is often left to assume or infer whether the CRA’s statement of the law is correct or complete.

The Charity Commission for England and Wales, as a statutory regulatory body operating in a jurisdiction where authority over charities is not split between two levels of government, as it is in Canada and Australia, starts with much greater rule-making powers than the CRA.  In addition, the British Parliament saw fit to create a mechanism in its charity legislation for regulatory interpretations issued by the Commission to be judicially tested.

Under the legislation, a court (in the English system called a Tribunal in this context) can consider issues relating to the legal treatment of charities, as reflected in the Commission guidance, by way of a reference from the Attorney-General.  Although there are procedures in some Canadian courts for consideration of reference or stated cases, including matters with respect to the federal Income Tax Act, there is no special provision for the consideration of charity matters as there is in England.

Even so, court decisions are frequently rendered without any discussion whatsoever of the CRA’s published position. Canadian judges, when they do consider the guidance, are apt to comment on it only in passing.

In part, the English system was put in place to address the legal impact of legislative measures contained in the 2006 Charities Act. These potentially affected the meaning of charity – including the statutory recognition of certain non-traditional purposes and provisions with respect to the public benefit requirement associated with status as a charity.  While, at the federal level, Canada has never moved to set out the meaning of charity in statute, among the key issues arising here are how current or new ITA provisions governing registered charity should – or can – be reconciled with the meaning of charity as developed through the common law.

There are two prominent recent examples of questions about the Charity Commission’s interpretation of the law put to the Upper Tribunal in the U.K., resulting in the Commission amending its guidance to conform with the court’s findings.

In Independent Schools Council v Charity Commission for England and Wales and others [2011] UKUT 421 (TCC) a reference was put concerning the impact of fee-paying on whether an entity established for an education purpose satisfied the public benefit requirement essential to qualifying as a charity, and related questions.  The Tribunal found that charity trustees had a duty to make provision for the poor benefiting from a charity’s work in a way that is more than minimal or token. It rejected use of an objective ‘reasonableness’ test, the apparent benchmark in the Commission guidance, in relation to the adequacy of provisions made for the poor by such a charity.  It ruled that it was for the charity trustees, acting reasonably, to determine the appropriate provisions to ensure access by those not able to meet fees.

Although the case concerned educational charities specifically, the ruling was seen as having wider implications for charities that charged fees for their programs or services.  The ruling stated that parts of the Charity Commission guidance were in error or “obscure” and confused the public benefit requirement associated with being a charity with the duty of a charity’s trustees to operate their charity for public benefit. The Tribunal ordered some of the guidance to be withdrawn.

In Charity Commission for England and Wales and Others v Her Majesty’s Attorney General (FTC/84/2011) the key issue was the impact of the 2006 Charities Act on the public benefit requirement applicable to organizations whose purpose was the relief and/or prevention of poverty. This issue arose because, prior to enactment of the legislation, a significant exception existed for organizations mandated to relieve poverty. This was commonly known as the ‘poor relations cases’ an exception to the general rules of a charity having to benefit a broad section of the community and that beneficiaries not have blood or contractual ties to the settlor of the charity.

Although the Tribunal affirmed that the legislation had not significantly changed the law, the detailed analysis in its judgment served to assuage the Commission and public’s doubts about the state of the law, which had prompted the Attorney General to bring the reference case.  It also clarified a number of minor legal points.

The lack of an adequate mechanism to address charity law questions here, in a way similar to the reference questions put in England, has resulted in gaps and uncertainty about the law of charities in Canada.

The lack of an adequate mechanism to address charity law questions here, in a way similar to the reference questions put in England, has resulted in gaps and uncertainty about the law of charities in Canada.  This has undoubtedly meant that opportunities for organizations to gain charitable status to help them in doing their work or to engage to the fullest extent possible in initiatives or activities permitted to charities have not been realized.

Short of major charity law reform in Canada, facilitating – on the English model – more extensive consideration by the courts of the state of the law and the CRA’s representations of what the law is could be highly beneficial to both voluntary sector organizations and the regulator itself.  And the resulting clarity would surely benefit Canadian society.

 

Tax Issues for New Canadians

By

381F4BannerWhile there are many attractions to Canada, I cannot recall anyone attracted by a desire to experience our income tax system! Like most developed tax systems, ours can be extremely complex, and can impose results perceived as neither just nor equitable. Many tax issues are unique to new Canadians, while others are more likely to affect them.

Wherever I Lay My Hat…

Like many countries, Canada taxes on the basis of residency, and Canadian residents are taxable on all income earned, whether arising within or outside Canada.

The determination of residency can be an uncertain area. The tax courts look to “residential ties” to determine a person’s residency. Stronger residential ties include a dwelling place (owned or rented), the residency of a spouse and dependents (e.g. children), and the duration and frequency of trips to Canada. Weaker ties, more commonly examined where the major ties are either inapplicable or divided, include personal property (e.g. clothes, vehicle, furniture), social ties (e.g. club memberships, church), economic ties (e.g. investments, bank accounts, credit cards) and personal ties (e.g. health care, driver’s licence, voting, non-dependent relations). Provincial health care coverage generally requires residency in a province, making this a common question from skeptical CRA auditors. An Alberta resident covered by provincial health care is likely a Canadian resident as well. Canada Revenue Agency (CRA) form NR74 sets out many of the issues the CRA will consider in making a residency determination.

Canada Revenue Agency (CRA) Form NR74 sets out many of the issues the CRA will consider in making a residency determination.

Some individuals are deemed resident in Canada regardless of residential ties. These include many government employees such as members of the Armed Forces, as well as any person who is physically present in Canada for 183 days or more in the calendar year (commonly referred to as a “sojourner”).

I Just Got Here!

The sojourner is easily confused with a part-year resident. An individual who takes up residency in April will be in Canada more than 183 days in the year, while one arriving in September will not. The sojourner rules only apply to someone whose actual residency has not changed in the year. Where residency commences (or ends) in a calendar year, that person will be subject to tax on world-wide income for that portion of the year in which she was resident, and only on income from Canadian sources for the portion of the year when she was non-resident.

The date of change is also important for other reasons. For most part-year residents, eligibility for personal credits to reduce taxes is pro-rated for the period of residency. Someone commencing residency on December 1 would only qualify for 31/365 of the usual credits. There is an exception for an individual subject to Canadian taxes on “all or substantially all” (typically considered 90% or more by CRA) income for the year. For example, an immigrant who earned no income prior to arriving in Canada on September 1 would qualify for full credits, as all of their income is taxed here.

A person taking up residency is also considered to have purchased most of their property (some exceptions, like Canadian real estate, exist) at its value immediately prior to taking up residency. Effectively, this resets the cost of the property at its value on immigration, exempting gains (or losses) occurring from Canadian taxation while the owner is  not a resident.

Let’s Make a Deal!

An immigrant may also be subject to taxation in his country of origin, possibly resulting in two countries taxing the same income. Most countries have a network of income tax treaties which govern how taxing rights are divided, and intended to minimize double taxation. In Canada, treaties override domestic law in all cases of conflict. Treaties commonly address “tiebreaker” rules to ensure an individual is not considered resident in multiple countries.
Most treaties also address income taxed in both countries, requiring one country to provide tax relief for taxes paid to the other.

As well, treaties may provide that certain income is taxable only in the country of source, or the country of residency. Income exempt from Canadian taxation must still be reported on an income tax return, but is deducted from taxable income. Such income remains part of “net income”, which determines eligibility for some social benefits, such as the Canada Child Tax Benefit and the GST Credit, or the Social Benefits Repayment which can “claw back” employment insurance and old age security.

Some income is not exempted from tax, but the maximum tax which can be charged is restricted. This is common for passive income sources like dividends, interest and royalties.

Most treaties also address income taxed in both countries, requiring one country to provide tax relief for taxes paid to the other. Most commonly, this takes the form of a “foreign tax credit” where the country in which the income is earned has the first right of taxation, and the other country reduces its own taxes by the tax paid to the first country. This is intended to restrict the total cost to the greater of the two countries’ taxes. Canadian tax legislation provides for foreign tax credits regardless of whether a treaty imposes that requirement.

Tell Me All About It!

Many income payers are required to report to the  CRA,  filing T4 slips reporting wages and T5 slips reporting interest or dividends, for example. Income from foreign sources seldom has similar reporting. To address this, Canadian residents are required to file disclosure forms related to “specified foreign property” (SFP) and some other foreign assets.

 …the costs of moving to Canada are not deductible…

The most common filing is required where the person owns SFP having an aggregate cost in excess of $100,000 (in Canadian funds) at any time in the taxation year. Generally, such property reflects investments, such as foreign bank or securities accounts, shares or debt of foreign corporations or other entities, foreign real estate and interests, and foreign trusts like mutual funds. Property used in active business outside Canada, used primarily only for personal use (e.g. a vacation home), and property requiring disclosure under other provisions falls outside the SFP provisions.

These filings are not, however, required to be filed for the year a person first becomes a Canadian resident, nor if the property was not owned while the person was a non-resident of Canada.

Moving Expenses

Normally, the Canadian income tax rules permit an individual to claim the cost of moving to take up employment or operate a business. Unfortunately for new Canadians, such a deduction is not available for moves commencing or ending outside Canada unless the individual was a resident of Canada both before and after the move. As a result, the costs of moving to Canada are not deductible in this manner.

Is That All There Is?

This is a very general summary of Canadian tax rules specifically relevant to new Canadians. Numerous other general and specific provisions exist which can impact new and existing Canadians to varying degrees. Additional information can be obtained online from the Canada Revenue Agency, including information for new Canadians specifically. Unfortunately, the Canadian tax system too often provides a poor welcome indeed to new Canadians. It is small consolation that longtime Canadians also commonly consider it unwelcoming.

Tax Problems

By

NotforProfitAs I write this a controversy is playing out in the United States over apparent targeting of Tea Party and other conservative groups by local offices of the Internal Revenue Service (IRS) to determine if they met American statutory requirements for exemption from tax. Under U.S. law such groups must be constituted primarily for social welfare purposes, rather than political purposes, to be eligible for status as exempt organizations. The controversy stems from the fact that groups were said to have been identified for scrutiny based on their political leanings, rather than on more neutral criteria.

In Canada, as in the U.S., there is ever present tension between the right of individuals and groups to organize their affairs in such a way as to minimize their tax liability and the powers given to tax authorities to protect the fiscal integrity of the tax base and ensure that everyone pays their fair share. There is wide consensus that the U.S. authorities overstepped their bounds. It is, however, also true that public outrage can be triggered when the groups are perceived as not having paid what they ought to have. This lack of appetite for tax dodgers can be seen in the furor over General Electric not paying tax in the U.S. in 2010 and the protests over Starbucks paying only minimal taxes in the U.K. over a 15-year period.

Non-profit groups are no different and there is likely not much public sympathy for dealings involving voluntary sector groups that potentially undermine the integrity of the tax system. One suspects that American taxpayers would not be upset if the IRS had ferretted out groups abusing the system without going about it in such a ham-fisted way.

Three recent developments in Canada touch on where the balance is between the powers of tax authorities to deal with suspected misconduct involving registered charities or their donors and the right of groups and individuals to arrange their affairs as they choose.

Budget 2013 introduced a measure designed to discourage participation in questionable charitable donation tax shelters and reduce the risk of amounts owing related to such schemes becoming uncollectible. The provision allows the Canada Revenue Agency (CRA) to collect 50% of disputed tax, interest or penalties pertaining to these transactions even where the taxpayer has legally objected to the assessment and the matter is still pending.

While this change widens the powers of the CRA, the courts have recently weighed in in the opposite direction and taken the tax authority to task over aggressive enforcement approaches in tax shelter cases and, more broadly, in a case where it took issue with a tax planning arrangement.

In Ficek v. Canada (Attorney General), 2013 FC 502, the Federal Court dealt with the CRA’s obligation to examine the individual’s tax return “with all due dispatch” where delay in examination stemmed from a policy of the local Tax Services Office to discourage certain types of tax shelter donations.

The Court found that the CRA had not met its statutory obligation for due dispatch in assessing the return because, rather than being necessitated by considerations related to examining the return and ascertaining tax liability, the delay resulted from trying to discourage participation in a donation tax shelter under a local policy.

It noted the discrepancies in treatment of taxpayers subject to the local policy and those in other parts of the country, and remarked that there was no rationale to justify this different treatment. It granted the taxpayer a declaration that the Minister failed to comply with the duty to assess with all due dispatch.

The Federal Court of Appeal case of Prescient Foundation v. Minister of National Revenue, 2013 FCA 120 did not concern a donation tax shelter, but it did deal with what the CRA characterized as a “tax planning arrangement”. The revocation was founded on four independent grounds asserted against Prescient:

  • it participated in a tax planning arrangement for the private benefit of others;
  • it transferred an amount of $574,000 for a share purchase that was in fact a non-charitable gift to a non-qualified donee arising from the tax planning arrangement;
  • it made a gift to a non-qualified donee in the form of a $500,000 transfer to a non-profit organization in the United States; and
  • it failed to maintain adequate books and records.

The Court upheld the revocation, but in doing so, it made several comments about the CRA and how it exercised its powers. It held, notwithstanding the CRA’s assertion otherwise, that on “extricable questions of law, including Interpretation of the [Income Tax] Act”, the Minister is to be held to a standard of correctness, and it is only on questions of fact or mixed law and fact that the Minister only has to meet a standard of reasonableness.

It further criticized the CRA’s reliance on legislative provisions prohibiting gifts to non-qualified donees that had been announced but not enacted. It stated that no authority was offered for the Minister’s proposition that, to qualify as charitable, a public foundation must not only operate exclusively for charitable purposes, but must also only disburse funds to qualified donees. It found that there was no enforceable statutory requirement providing for such a restriction, and that therefore this ground for revocation was unfounded.

Additionally, the Court, in its analysis of the Inadequate Books and Records revocation ground, took issue with the lack of particulars. It held:

For the revocation of a registration to be reasonable under this ground, the Minister must (a) clearly identify the information which the registered charity has failed to keep, and (b) explain why this breach justifies the revocation of the charity’s registration.

The Court did ultimately uphold the revocation, finding certain tax planning transactions were not undertaken for charitable purposes and that Prescient’s conduct with respect to Books and Records was also grounds for revocation. Meanwhile, with some incremental contributions having been made in the Canadian context, the debate over the balancing of the responsibilities of tax authorities with the rights of those who would, could or should be taxed continues apace.

More Clarity on Program-Related Investment Rules in New CRA Guidance on Community Economic Development

By

Not for Profit Law Column New GuidanceAlthough the idea that charities ought to be more entrepreneurial is frequently lauded these days, the practical difficulties of doing so are easy to underestimate. One aspect of this is the suggestion that charities could or should engage in more revenue-generating activities as a means of advancing their mandates.

More of such activity would not be out of keeping with the long tradition of many charities selling products or services to recoup all or part of their costs, and in some cases to cross-subsidize money-losing programs. However, it is not readily apparent how much of an untapped market there is for charities to undertake more of this type of revenue-generation.

Many charities are established in response to market failures, so looking for a business-like solution doesn’t make a whole lot of sense. If an economic opportunity already existed in a way that could be commercially exploited, there wouldn’t be the need for the charity in the first place.

As well, there are regulatory restrictions on charities engaging in business – stemming both from the charity law prohibition of undue private benefit and from concerns over putting charity assets unacceptably at risk – that limit this type of activity. Not to mention complaints of unfair competition occasionally voiced by members of the for-profit business community.

Another way for charities to become involved in commercial or revenue-generating companies or organizations is through investing. That investing can be in entities focusing on profit-maximization or on a social purpose, environmental purpose or other community benefit. Again, investing by charities in groups mandated for other than purely financial return – commonly known as Program-Related Investment (PRI) – is a practice that has been around for some time. However, it has drawn more attention of late. And given recent ups-and-downs in conventional investments, the appeal of alternatives grows. As with frontline business activity, however, there are regulatory issues to be addressed when charities devote their resources in this way.

In July, the Canada Revenue Agency (CRA) released new guidance on “Community Economic Development Activities and Charitable Registration”.

This guidance features an extended discussion on the rules for program-related investing by registered charities. [Full disclosure: the author of this article, both through work with The Muttart Foundation and Charities and Not-for-Profit Section of the Canadian Bar Association, was involved in providing feedback on earlier drafts of the recently-released guidance).

While the previous guidance dealt with PRIs, there were a number of issues in CRA’s approach to such investing that were unfavourable or discouraged charities from engaging in the practice. At least some of those issues have been addressed in the new version, which should make it easier for charities wanting to explore this area to do so.

There are various ways that charities can structure PRIs. As well as such securities as equities (whether direct share purchases or participation in mutual funds) or bonds, investments can also be configured as loans or loan guarantees.

The previous guidance indicated that PRIs had to be limited to qualified donees. That is, investments had to be in registered charities or other bodies or organizations recognized under the Income Tax Act. The new guidance states that investments can be made in entities other than qualified donees, but where the investment is not in a qualified donee, the charity must put in place sufficient direction and control that the initiative qualifies as the charities’ “own activities”. That ensures that the funds invested will not be diverted from charitable ends. Where the investment is in a qualified donee, use of the resources for public benefit is assumed.

The guidance sets out some examples of PRI investments in entities that are non-qualified donees to illustrate how such arrangements might work. The oversight requirements parallel those that must be present when a charity operates programs or projects through non-qualified donees domestically or abroad. As well as information on expectations with respect to on-going monitoring and ways to constrain use of the investment, the guidance sets out some suggested measures for withdrawing from PRI commitments if required. As the guidance indicates, even where participation is through share purchases, it ought still to be possible to terminate the investment if there is diversion of the resources from what was intended.

A new section of the guidance addresses the issue of specialized intermediaries to facilitate program-related investments by charities, and suggests such groups could potentially qualify as registered charities on the basis of their promoting the efficiency and effectiveness of charities.

A key difficulty encountered in the past was the treatment of PRIs for disbursement quota purposes. Prior to changes in Budget 2010, charities were expected to spend 80% of receipted revenues on charitable work before the end of its subsequent fiscal year. This resulted in a potential problem if PRIs were not recognized as expended on charitable work. With repeal of the 80% rule, however, this problem will likely be encountered less frequently. The retention of a smaller 3.5% disbursement quota on assets not directly used for charitable activities or administration means, however, that this difficulty has not been entirely eliminated.

The guidance clarifies how various investment vehicles should be accounted for, and deals with how transactions should be treated with respect to meeting the 3.5% disbursement quota. In those instances where the charity has made a PRI and fails to meet its disbursement quota, the guidance states that the Charities Directorate may consider the opportunity costs associated with the investment(s) as equivalent to an expenditure.

Because of the division of powers under Canada’s constitution, limitations and procedural requirements for investment decisions by trustees and charities are typically a matter of provincial legislation. The guidance informs charities of this issue, but does not get into specifics.

Even with release of the new guidance, the challenges of charities delving further into the commercial marketplace ought not to be gainsaid. But this is perhaps an opportune time for charities to re-examine PRIs and whether they can play more of role in advancing their work through this type of activity. Doing so may pay off in more ways than one.

The Taxpayer Bill of Rights

By

The Taxpayer Bill of Rights is a set of fifteen statutory and administrative rights outlining the service standards that Canadian taxpayers can expect in their dealings with the Canada Revenue Agency (CRA).  The Bill was introduced in 2007 on the premise that increased accountability and transparency on the part of the CRA would, in turn, ensure greater compliance with tax laws on the part of taxpayers.  The rights within the Bill are protected according to different processes based on whether the right is statutory or administrative. Statutory rights follow the redress process which is laid out in the Income Tax Act.  For example, right 4 states that you have the right to a formal review and subsequent appeal.  According to the Income Tax Act, a taxpayer has the right to object to income tax assessments and reassessments and determinations and redeterminations such as the Goods and Services Tax/harmonized sales tax (GST/HST) Credit, the Canada Child Tax Benefit, and the Disability Tax Credit by filing an objection within 90 days from the date on the notice.  If the taxpayer disagrees with the CRA’s decision based on his or her objection, then the assessment or determination can be appealed to the Tax Court of Canada.

Administrative rights, such as the right to be treated professionally, courteously, and fairly, govern the relationship that the CRA has with taxpayers.  They are service rights which are accorded to taxpayers by the CRA and unlike the statutory rights, they are not included in the Income Tax Act.   However, service rights are upheld through the CRA- Service Complaints process and, if necessary, through the Taxpayers’ Ombudsman.  None of the rights outlined in the Taxpayers’ Bill of Rights are legally enforceable under Canadian law and are essentially a set of regulatory standards for the CRA’s dealings with taxpayers.  They are as follows:

  1.  You have the right to receive entitlements and to pay no more and no less than what is required by law.
  2. You have the right to service in both official languages.
  3. You have the right to privacy and confidentiality.
  4. You have the right to a formal review and a subsequent appeal.
  5. You have the right to be treated professionally, courteously, and fairly.
  6. You have the right to complete, accurate, clear, and timely information.
  7. You have the right, as an individual, not to pay income tax amounts in dispute before you have had an impartial review.
  8. You have the right to have the law applied consistently.
  9. You have the right to lodge a service complaint and to be provided with an explanation of our findings.
  10. You have the right to have the costs of compliance taken into account when administering tax legislation.
  11. You have the right to expect us to be accountable.
  12. You have the right to relief from penalties and interest under tax legislation because of extraordinary circumstances.
  13. You have the right to expect us to publish our service standards and report annually.
  14. You have the right to expect us to warn you about questionable tax schemes in a timely manner.
  15. You have the right to be represented by a person of your choice.

 

In addition to the fifteen individual tax rights, the CRA introduced the CRA Commitment to Small Business which is a five-part statement outlining the ways in which the CRA pledges to support small businesses through effective and efficient interactions.  This is done by reducing the amount of paperwork required of small businesses in complying with the CRA.

The Taxpayers’ Ombudsman position was also created in 2007 as a recourse mechanism for taxpayers who have filed an objection with the CRA and are not satisfied with the results of their review.  The Ombudsman provides an impartial and independent review of taxpayers’ complaints only after they have been through the CRA complaint process and remain unresolved.  Furthermore, the Ombudsman will only review service-related complaints.  A report entitled The Right to Know written by J. Paul Dubé, Taxpayers’ Ombudsman, is a response to complaints received by taxpayers regarding their service interactions with the CRA.  The Ombudsman’s website also includes a tipsheet on what you can expect when dealing with the CRA.

Since its inception, various aspects of the Taxpayer Bill of Rights have been subject to criticism by the Canadian public.  The first official taxpayer rights document, the 1984 Declaration of Taxpayer Rights, contained a right pertaining to the presumption of honesty on the part of the taxpayer when substantiating a claim.  The omission of this right from the Taxpayer Bill of Rights places the burden of proof squarely on the taxpayer.  The Australian Taxpayers’ Charter, for instance, directly states that “We presume you tell the truth and that the information you give us is complete and accurate unless we have reason to think otherwise.”

However, the main criticism has been that the rights contained within the Taxpayer Bill of Rights are not entrenched within the law and therefore they are not legally protected.  The American Taxpayer Bill of Rights by comparison is codified within the Internal Revenue Code thus ensuring greater compliance on behalf of the government and the taxpayer.

If you are interested in reading more about the Taxpayer Bill of Rights, some non-governmental sources of information include the Canada Revenue Agency Report Card by the Canadian Federation of Independent Business and the Chartered Accountants of Canada and CGA-Canada websites which both feature information on general taxation.

2012 Federal Budget Features Tighter Reporting on Charities’ Political Activities

By

Now charities provisions in the 2012 federal Budget generated more attention than any measures relating to the sector have in a very long time. The government announced that it was tightening rules around charities’ political activities. The focus of the new requirements was mostly on enhanced reporting; however, embedded in the announcement was a crucial substantive change.

The catalyst for the new measures seems to have been involvement of some environmental charities in the regulatory processes and public debates over pipelines.

The legislative move – accompanied by an $8 million boost in Canada Revenue Agency (CRA) resources over two years to amend its T3010 charity reporting form and enhance its compliance capability in dealing with political activities – drew both praise and criticism, with some commentators welcoming it as potentially reining in bad actors and others as stifling legitimate disagreement on policy matters. Unfortunately some of this commentary repeated and reinforced common misperceptions about the rules governing registered charities’ political activities.

Historically, foundations and other registered charities have enjoyed scope under the Income Tax Act (ITA) to make gifts to qualified donees. Specifically, the ITA provided “’charitable purpose” includes the disbursement of funds to qualified donees”. This language allowed the making of gifts to certain organizations, enumerated in the ITA, beyond registered charities, and – perhaps more importantly – meant that the charity making the gift did not have to enquire into its eventual use.

The flexibility this afforded was important. It meant that a foundation could, for example, provide a grant designed entirely to cover the grantee’s administrative costs, rather than one that would be spent proportionately or exclusively on the group’s delivery of its charitable programs. With many funders and donors now earmarking their support for specific programs or projects, a foundation’s ability under the old rules to fully underwrite less popular aspects of a charity’s operations has become increasingly valuable. The new provisions will remove this flexibility with respect to funding of political activity.

Under the new rules, foundations (or other registered charities) making transfers to qualified donees, where “it can reasonably be considered that a purpose of the gift is to support the political activities of a qualified donee,”will have to report the expenditure as having been made on its political activities. This imposes a difficult new administrative burden on funder charities to monitor their aggregate granting potentially devoted to political activities.

Pending the actual legislation and administrative guidance from the Canada Revenue Agency (CRA), it is unclear what the test will be for “it can reasonably be considered,” or what due diligence may be expected of granting charities in enquiring into the eventual use of funds they transfer to other qualified donees. However, the existence of this additional monitoring and reporting requirement it likely to cause some charities to not grant to groups engaged in high profile campaigns.

The new rules will likely add to the already significant confusion in the sector and among the public about the permissible political activities of charities. Many funders and operating charities already refrain from work that might be considered political activity (or policy work that advances their charitable purposes) because they don’t want to risk non-compliance and possible deregistration. However, there is frequently more scope within the law (and within public opinion) to be assertive in this area than charities may realize.

As to public opinion, the Muttart Foundation’s 2008 Talking About Charities survey found that 64% of respondents agreed that “opinions that charities express on issues of public concern have value because they represent a public interest perspective” and shows 80% or higher backing for charities speaking out on issues like the environment, poverty or healthcare; meeting with government officials; using research results to support a message; or, placing advertisements in the media.

Legally, it is well established that charities cannot be constituted – i.e., have a stated object or purpose – to advance a political end. In the case law, political purposes have has been defined as supporting a political party or candidate for public office or seeking to retain, oppose, or change the law or policy or decisions of any level of government in Canada or a foreign country.

This prohibition is framed in terms of purposes, however, and there is recognition both in the case law and in the ITA that charities may, within certain limitations, engage in non-partisan political activities. The ITA, for example, includes provisions that where a registered charity meets a substantially all test based on it purposes or activities, its nonpartisan political activities are deemed charitable.

As well, the courts have long held that charities may undertake a wide range of public policy work in furtherance of their charitable objects. Such work is not considered political activity and is not subject to limitations (other than not becoming so significant that it becomes a collateral purpose of the organization). Indeed, given what apparently generated the Budget provisions, this may give rise to a minor irony. Depending on an organization’s objects, participating in an environmental assessment hearing or public awareness campaign might well be considered to advance a charity’s purposes – meaning that the new political activity rules wouldn’t apply.

LawNow

Funded by

 
Font Resize
Contrast