On June 6, 2011, the Minister of Finance re-introduced the 2011 federal Budget. The Budget was originally released on March 22, 2011, but was not passed due to the dissolution of Parliament and the subsequent election. The updated Budget includes all of the measures affecting charities that were previously introduced in the March 22 Budget, subject to a couple of minor technical changes. The new measures in the Budget consist largely of rules intended to increase the transparency in the sector and to limit what are viewed as unintended or excessive benefits available to donors. We reported on these measures in the March issue of this Newsletter.
As expected, the measures in the Budget are generally effective as of the date of the original release of the Budget on March 22, 2011. Thus, charities and donors need to be aware that these rules will apply to gifts and other transactions occurring on or after March 22. The other technical change from the March 22 Budget is that the deadline for public submissions commenting on the proposed “exclusivity of purpose and function” test for Registered Canadian Amateur Athletic Associations is extended to August 31, 2011.
As noted, this year’s Budget focuses on curbing perceived excessive benefits and increasing transparency. It does not include additional support for the charitable sector through new donation incentives or the lessening of the regulatory burden. The updated Budget indicates that the Government supports a motion calling for the House Standing Committee on Finance to study charitable donation incentives, and will call on the Committee to undertake this study in the first session of Parliament. It may be hoped that the Committee’s study leads to new measures improving the incentives for charitable giving.
Kate Lazier, Toronto
On June 20, 2011, CRA released Guidance CG-004 Using an Intermediary to Carry out a Charity's Activities within Canada. This Guidance is intended to complement CRA’s previously-released Guidance CG-002, Canadian Registered Charities Carrying out Activities Outside of Canada, on which we reported in the July 2010 issue of this Newsletter (available here). Both documents address the same basic issue: how can a charity work with organizations (whether inside or outside Canada) that are non-qualified donees (not registered charities) in order to carry out its charitable activities. Charities that conduct activities within Canada using third parties, such as non-profits that are not registered charities, will need to review the new Guidance carefully to ensure compliance.
The Guidance confirms that a registered charity is only permitted to use its resources in two ways, whether inside or outside Canada: (i) on its own activities (those which are directly under the charity's control and supervision, and for which it can account for any funds expended); and (ii) on gifts to qualified donees. The Guidance focuses on how a charity can meet the first requirement when working in Canada with entities that are not qualified donees.
The new Guidance largely follows the content of the Guidance on Foreign Activities. It first sets out when a charity will be considered to be carrying out its own activities. A charity will be considered to be carrying on its own activities when it uses its own staff or volunteers to carry out an activity, and when it works with an intermediary pursuant to an agreement providing for direction and control over the use of the charity’s resources. It also confirms that a charity will be considered to carry on its own activities when transferring goods to a non-qualified donee that are of a nature that they can only reasonably be used for charitable purposes (e.g., medical supplies, school supplies), provided that the charity has investigated the non-qualifed donee and reasonably expects that the entity will only use the property in this way.
The Guidance sets out the various structures that can be employed when working with an intermediary – e.g., agency relationships, joint ventures, contracts for services – and sets out the elements that should be included in a written agreement (and followed in practice) to ensure that the charity maintains direction and control. It also confirms the record-keeping requirements that apply when a charity works with an intermediary.
Charities have always been subject to these requirements when working with intermediaries within Canada, but it is now particularly important that charities review their current arrangements and agreements to ensure that they comply with these rules. CRA can be expected to apply the requirements in the new Guidance when auditing a charity’s domestic activities.
A copy of the new Guidance is available here.
Andrew Valentine, Toronto
Over the past few months, CRA has released several documents commenting on the rules under the Income Tax Act that apply to non-profit organizations (NPOs). We have reported in past issues of this Newsletter on CRA’s increasingly strict interpretation of the tax exemption for NPOs. These more recent technical interpretations provide a useful summary of CRA’s current position on the NPO exemption.
In a technical interpretation released on April 7, 2011, CRA responded to three questions from a taxpayer regarding the NPO exemption. The taxpayer inquired as to (i) whether an unregistered charity could qualify as an NPO, (ii) whether NPOs are restricted to particular activities in order to qualify for the exemption, and (iii) whether an NPO can fundraise while continuing to qualify.
With respect to the first question, CRA confirmed that an unregistered charity cannot qualify for tax exempt status as an NPO. Thus, if an organization’s formal objects are confined to exclusively charitable purposes, the organization cannot be an NPO and can only achieve tax exempt status by being registered as a charity (or by amending its objects to include non-profit purposes that are not charitable at law).
In response to the second question – regarding the activities that an NPO is permitted to carry on – CRA confirmed that an NPO must be organized and operated for exclusively non-profit purposes (“any other purpose except profit”, as it is phrased in the Income Tax Act). It then provided a useful summary of its current position on what this means for an NPO. CRA stated as follows:
* An organization can earn profits, but the profits should be incidental and arise from activities that are undertaken to meet the organization’s not-for-profit objectives (these profits are referred to below as “incidental profits”).
* Earning profits to fund not-for-profit objectives is not considered to be itself a not-for-profit objective.
* An organization should fund capital projects and establish (reasonable) operating reserves from capital contributed by members, from gifts and grants, or from accumulated, incidental profits.
* Capital contributions, gifts and grants, and incidental profits should generally be accumulated solely for use in the operations of the organization (including funding capital projects or setting up operating reserves) and should not be used to establish long-term reserves designed primarily to generate investment income.
* Maintaining reasonable operating reserves or bank accounts required for ordinary operations will generally be considered to be an activity undertaken to meet the not-for-profit objectives of an organization. Consequently, incidental income arising from these reserves or accounts will not affect the status of an organization.
* Limited fundraising activities involving games of chance (e.g., lotteries, draws), or sales of donated or inexpensive goods (e.g., bake sales or plant sales, chocolate bar sales), generally do not indicate that the organization as a whole is operating for a profit purpose.
* In determining whether an organization has any profit purpose, the activities of the organization must be reviewed both independently and in the context of the organization as a whole.
CRA commented that certain types of profitable activities may be acceptable for an NPO, including running a canteen at an amateur hockey rink or a cafeteria at a non-profit youth hostel, or charging admission above direct cost for a children’s concert (assuming the organization was organized for the purpose of promoting youth participation in music). In each case, CRA stated the profitable activities are directly in support of not-for-profit objectives – i.e., providing appropriate facilities, promoting participation in music – and will generally be incidental in amount. CRA confirmed that an activity undertaken for the purpose of earning profits will not be acceptable, even if all profits are destined to support the NPO’s non-profit purposes.
Another document released on April 7, 2011 – an advanced income tax ruling commenting on a particular fact situation – confirmed CRA’s rejection of the “destination of funds” test for NPO status. The organization in question was operating a profitable commercial retail establishment, with these profits being used towards the organization’s non-profit activities of promoting employment. CRA confirmed that even if the profits from a for-profit activity will be used exclusively in the organization’s non-profit purposes, the organization cannot qualify for the NPO exemption. Only where profits are incidental to the organization’s non-profit purposes, and where the organization is not using its NPO status as a “cloak” to avoid tax on a commercial enterprise, will the organization qualify as an NPO. It stated that the operation of an unrelated commercial establishment constitutes a profit purpose and that the organization could not therefore qualify as an NPO.
On March 30, 2011, CRA commented on another question from a taxpayer, this time inquiring about the tax treatment of payments made to members of an NPO. The situation that the taxpayer had in mind involved payments intended to assist members in financial difficulty with child care expenses. Such payments would be made on the basis of a means test for each prospective recipient. The taxpayer asked how such payments would be taxed in the hands of the recipient, and whether the payments would jeopardize the NPO’s tax exempt status.
CRA first considered how such payments might be taxed in the hands of the recipient. It noted that they might be considered windfalls or gifts, in which case they would not be taxable to the recipient. It then stated that the more likely interpretation of the payments in question is that they are social assistance payments, which would be included in the income of the recipient and then deducted when calculating taxable income.
Turning to the NPO’s tax exempt status, CRA noted that the criteria for maintaining status as an NPO include the requirement that no part of the income of the organization may be payable or made available for the benefit of its members. CRA stated that it is a question of fact whether any given organization qualifies as an NPO, but noted that if an organization is making its income available for the personal benefit of its members, it will not qualify. This appears to suggest that organizations making social assistance payments to members out of income might not qualify for NPO status.
Taken together, these technical interpretations largely confirm CRA’s recent position with regard to the requirements for maintaining NPO status under the Income Tax Act. CRA’s comments on the types of for-profit activities that may be acceptable for an NPO are helpful, and suggest that CRA may be taking a slightly less rigid approach than what was suggested in its earlier technical interpretations released over the past year and a half. NPOs will nonetheless need to continue to be vigilant in ensuring that they meet the requirements under the Act, and will be well-advised to obtain legal advice before engaging in any for-profit activities and before making any payments to members.
Amanda J. Stacey, Toronto
CRA has recently released two technical interpretations concerning eligibility for the clergy residence deduction under the Income Tax Act. In the first one, dated February 1, 2011, CRA was asked to opine on whether the taxpayer qualified as a member of a religious order engaged exclusively in full-time administrative service by appointment of a religious order.
CRA reviewed the two-part test that must be met to be eligible for the deduction. This test involves both a religious status test and a religious function test. As an ordained orthodox rabbi, the taxpayer met the status test. With respect to the function test, CRA reviewed the test that an organization must meet to qualify as a religious order for the purposes of the deduction. This is a six-part test that was established by Justice Bowman in the McGorman decision in 1999. The first part of this test involves a determination of whether an organization is “primarily religious”. Unfortunately, as is the case with most CRA technical interpretations, this document is heavily redacted and we are not privy to the organization’s purposes. In this case, CRA determined that the primary purpose of the organization was the provision of community services, not religion. CRA stated that the range of services provided appeared to be primarily geared towards the “uplifting of the Jewish community and to help them in time of need”. CRA acknowledged that while the organization may be offering many religious services to the community, in its view religion was not a primary purpose of the organization. CRA concluded that the organization is a “faith-based and non-profit social service community which operates a variety of programs”. CRA also stated that it did not have any information that indicated that the organization was bound by a “statement of faith” or that “any particular vow was unique to the organization which set its members apart from the layman”. As such, it did not, in CRA’s view, qualify as a religious order.
This technical interpretation is in line with CRA’s recent technical interpretations in that it appears to be a narrowing of the test for religious order status and in particular the meaning of the first part of the test – whether an organization is primarily religious. CRA acknowledges in this technical interpretation that an organization that is primarily religious may have other objects within its overall religious purpose and that its objects may go beyond preaching the gospel and prayer and extend to works beneficial to humanity such as running hospitals or helping the poor and homeless. However, this is not the first technical interpretation in recent months that concludes that a social service type organization with a religious focus is not primarily religious. CRA’s statement that the organization does not appear to be bound by a statement of faith, or the like, may indicate a fundamental misunderstanding of this type of organization and religion. Statements of faith are typically used in the Christian context but are not necessarily widely used in other faiths.
In the second technical interpretation, dated April 5, 2011, CRA was asked for its views on whether a campus minister at a university, and employed by the Navigators of Canada, qualified for the clergy residence deduction. The taxpayer in question claimed that he was a member of a religious order. The CRA agreed with this view as it considers the Navigators to be a religious order for the purposes of the deduction.
The taxpayer also took the position that the he satisfied the function test by virtue of ministering to a congregation. The CRA looked at whether the duties of the campus minister qualified as ministering to a congregation. The CRA stated that it was its understanding that campus ministries are ministries that focus on the spiritual growth and development of students. The following is a list of the specific duties of the taxpayer:
- preach and teach on spiritual and theological subjects;
- research and study religion, Scripture and theology;
- plan and conduct public worship services;
- preside over sacraments such as the “Lord’s Supper”; and
- perform memorial services as required.
Based on this and based on the fact that the term “ministering” is a very broad concept, the CRA concluded that the taxpayer was considered to be ministering to the student group that was attending his campus ministry. On the question of whether the student group qualified as a congregation, the CRA concluded that students attending the campus ministry do so to acquire religious rather than academic instruction. Considering the nature of the duties performed by the taxpayer and the purpose of the students attending the campus ministry, the CRA agreed that the students constituted a congregation for the purposes of the deduction and, as such, the taxpayer was considered to be ministering to a congregation. As such, the taxpayer qualified for the deduction in this case.
Organizations that have concerns or questions regarding the eligibility of their employees for the clergy residence deduction should feel free to contact us.
Susan Han, Toronto
Ever since Anglo-Saxon times, lenders have advanced money on the security of land. Although some of the more exotic mortgage derivatives dreamt up by Wall Street may be new, plain old mortgages have been around for as long as there have been legal rights in real property. And for most of that history, borrowers and lenders arranged their affairs privately. They turned to the courts only when there was a problem, primarily to deal with what should happen when the borrower defaulted. Today though, the activity of lending on the security of mortgages is regulated. In fact, trading in, syndicating and administering mortgages are all subject to supervision by regulatory agencies, often more than one.
The current Ontario legislation governing this activity is the Mortgage Brokerages, Lenders and Administrators Act, 2006. This replaced the old Mortgage Brokers Act and came into force July 1, 2008, representing the first substantial overhaul of the legislation in 35 years. There was widespread industry consultation prior to its becoming law and at its passage, it was not a particularly controversial piece of legislation.
The objective of the legislation is consumer protection. This is to be achieved through regulation of the mortgage industry, by licensing the participants, having proficiency requirements, making errors and omissions insurance mandatory and prescribing minimum practice standards such as a books and records requirement. The legislation also puts in place a more effective enforcement regime. The Crown agency that administers the Act is the Financial Services Commission of Ontario or FSCO.
The primary purpose is to regulate the industry, but if there are people outside the industry who are carrying on activity for which they are supposed to be licensed, there will be a violation of the Act. This could include charities that provide loans or financing secured by real property.
The Act requires that all persons (businesses and individuals) (i) carrying on the business of dealing in mortgages or dealing in mortgages for remuneration, (ii) trading in mortgages, (iii) carrying on business as a mortgage lender or (iv) carrying on the business of administering mortgages be licensed and subject to the supervision of the Superintendent of Financial Services. The trigger for licensing is “carrying on business” or in the case of individuals, engaging in the activity for remuneration.
There are exceptions from the requirement to be licensed, for financial institutions, lawyers, trustees in bankruptcy, certain crown corporations and businesses such as consumer reporting agencies and collection agencies. Simple referrals are exempt from the licensing requirement.
There is no blanket exception for charitable or not-for-profit corporations. Generally, in order to be “carrying on business”, there has to be some payment or compensation; services provided free of charge are usually not considered to be businesses. However, an organization can be “in business” without the expectation of returning a profit for the owners or shareholders. Associations or credit societies forming part of the cooperative credit system are not exempt and are required to be registered under the Act. Regulators formulated the exemptions on the basis that certain organizations or activities, such as financial services, are already adequately regulated under other legislation. Since the consumer protection objective was being met, there was no need to duplicate legislation. Simply because an organization or association does not seek to make a profit will not automatically result in an exemption from the requirement to be licensed if the organization engages in activity that should be registered.
The legislation requires both organizations and individuals to be licensed. In the case of an individual, simply earning a salary for performing certain types of tasks will trigger the licensing requirement.
Prior to the current regime, private mortgage lenders were largely outside the regulatory ambit. Under the Act however, even private lenders who can be considered to be “in the business” must be licensed. So for example if an entity advances money on the security of a mortgage, and facilitates and administers the arrangement by doing the paperwork, obtaining the valuations, arranging for registration of the charge, collecting payments and enforcing when necessary, there is a possibility that the entity is carrying on activity for which it should be licensed.
Charities and not for profit organizations who arrange mortgage financing should consult counsel to ensure that they are not inadvertently in breach of applicable legislation.
What's Happening at Miller Thomson
Robert Hayhoe presented on “Private Foundations and Donor Advised Funds” at STEP on June 3, 2011.
Sheldon Wood, Carol VandenHoek and Robert Hayhoe presented a Miller Thomson seminar in Kitchener-Waterloo on issues affecting churches on June 7, 2011 entitled “Pastor-People-Protection: What you need to know.”
Kate Lazier spoke on “How to Transition to Under the ONCA” at Ontario Bar Association’s Canada and Ontario Not-For-Profit Law on June 7, 2011.
Kate Lazier spoke on “Update on Federal and Ontario Not-For-Profit Law Reform” at LSUC’s The Six-Minute Business Lawyer 2011 on June 13, 2011.
Martin Rochwerg spoke on June 16, 2011 at the Canadian Private Family Office Invitational in Banff, Alberta on “Top Tax and Charitable Planning Ideas”.
Susan Manwaring spoke at the RBC series Not-for-Profit Team Workshop – “An update on the NFP Corporations Act - Impact to our Clients - What We Need To Know” on June 23, 2011.
Arthur Drache released the July 2011 issue of Canadian Not-for-Profit News.
Iain Benson contributed an article to the Ontario Bar Association entitled “Inter-Religious Dispute Not a Human Rights Issue as Outside the Human Rights Tribunal’s Jurisdiction.”
Amanda Stacey contributed an article to the Ontario Bar Association entitled “The Partnership Project.”
This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice.
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