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.
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
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.
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.
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.
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).
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
* An organization
should fund capital projects and establish (reasonable) operating reserves from
capital contributed by members, from gifts and grants, or from accumulated,
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
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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:
and teach on spiritual and theological subjects;
and study religion, Scripture and theology;
and conduct public worship services;
over sacraments such as the “Lord’s Supper”; and
memorial services as required.
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.
that have concerns or questions regarding the eligibility of their employees
for the clergy residence deduction should feel free to contact us.
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.
Robert Hayhoe presented on
“Private Foundations and Donor Advised Funds” at STEP on June 3, 2011.
Sheldon Wood, Carol
VandenHoekandRobert Hayhoepresented a Miller Thomson seminar in
Kitchener-Waterloo on issues affecting churches on June 7, 2011 entitled
“Pastor-People-Protection: What you need
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.
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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