As 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.