CRA Releases Draft Guidance on Registration of Arts Organizations

Andrew Valentine, Toronto

On November 1, the Canada Revenue Agency ("CRA") released for consultation a draft Guidance on Arts Organizations and Charitable Registration, which outlines CRA’s views on when an arts organization will qualify for registration as a charity.  CRA has invited comments from the public on the draft Guidance, and will consider all comments received by January 13, 2012.  Arts organizations operating as registered charities, or considering applying for registration, should review the draft Guidance carefully and consider submitting comments.

The Guidance focuses on arts organizations operated for the purpose of advancing education or to increase the public’s appreciation for the arts.  CRA notes that the Guidance does not apply to National Arts Service Organizations (a special designation given by the Minister of Canadian Heritage to certain non-profit arts organizations promoting arts across Canada) or organizations that seek to further other charitable purposes through arts programs or activities such as providing art therapy to relieve conditions associated with illness or disability.

Charitable Purposes

The Guidance notes that charities must be established for exclusively charitable purposes, and provides examples of purposes in the arts context that would qualify as charitable under the second head of charity (advancement of education) and the fourth head (purposes beneficial to the community).  The sample statements of purpose included in Appendices to the Guidance will likely serve as model objects once the Guidance is finalized. 

Some of the examples of arts activities that advance education include:

• organizing and delivering workshops, seminars, and classroom training or instruction on an art form/style, or on a related topic such as marketing;
• providing opportunities for students or young or emerging artists to exhibit, present, or perform their works or develop their crafts or skills before the public, as long as they are part of a broader educational program; and
• establishing or maintaining a resource library for particular art forms and styles.

In the context of organizations organized under the fourth head of charity, CRA states that arts organizations tend to fall under one of two categories:

• organizations that advance the public’s appreciation for the arts – this includes organizations that focus on exhibiting, presenting, or performing artistic works (in a way that meets the public benefit criteria, below); and
• organizations that promote commerce or industry in the arts – this includes organizations that focus on enhancing an art form and style within the arts industry as a whole for the benefit of the public, as opposed to advancing the interests of those engaged in the industry.

Public Benefit

The Guidance notes that, in addition to the requirement to be established and operated for exclusively charitable purposes, an organization must also meet the public benefit test.  In other words, it must provide a tangible or objectively measurable and socially useful benefit to the public or a significant segment of the public.  It must also ensure that any private benefits conferred as a result of its activities are no more than incidental.  Public benefit is presumed in the absence of evidence to the contrary in the case of educational arts organizations, but must be established when seeking registration as a fourth head charity (i.e., to increase the public’s appreciation for the arts).

In order to meet the public benefit test, the art being exhibited, performed or presented must meet ‘art form and style’ and ‘artistic merit’ criteria.  To meet the art form and style criterion, an arts organization must establish that the art it will present falls within categories of form (e.g., literature, dance, music, theatre) and style (e.g., within music: jazz, classical, choral) that have achieved common and widespread acceptance within the Canadian arts community. 

The artistic merit criterion requires organizations to demonstrate that the art being presented is of sufficiently high quality to qualify as a benefit to the public.  CRA acknowledges the subjectivity involved in such an assessment, and states that in order to demonstrate artistic merit, the organization should be able to show:

• Documents showing that the selection by the organization of artistic works and artists for presentation is, and will continue to be, controlled through open, unbiased adjudication/audition processes, which apply predetermined quality standards;

AND

• Two or more documents demonstrating that independent and expert sources (e.g., academic journals, professional art reviews, professional arts associations etc) have accepted that the art or performer in question is of high quality.

The organization must also ensure that it does not confer an excessive private benefit on private beneficiaries in the course of its activities.  Examples of organizations conferring unacceptable private benefits would include:

• organizations that promote the commerce and industry of the arts mainly by offering support services and advice to artists, significantly promoting the interests of individuals engaged in the industry; and
• organizations with purposes or activities that are focused on promoting the careers of artists, rather than on advancing the public's appreciation of art, resulting in an advantage to a non-charitable recipient.

Other comments in the Guidance

The draft Guidance makes several other important points regarding the registration and operation of arts organizations.  It notes that when an organization uses third parties (e.g., performers) to conduct activities on its behalf, the organization must be sure that it enters into a written agreement with the third party that establishes the charity’s direction and control over the use of its funds.  CRA refers readers to its Guidance on working with intermediaries.

The Guidance also addresses issues specific to the registration of cultural organizations – noting that promoting a culture as such is not charitable, but that education in or presentation of particular cultural art forms may be charitable.  It also addresses issues specific to the registration of arts councils, museums, art galleries and performing venues. 

Public Comments

With respect to public comments, CRA notes that it will accept both general comments on the usefulness and readability of the Guidance, as well as specific comments on particular aspects of the Guidance.  When making specific comments, CRA requests that the comments include the following:

• the paragraph number of the section you are commenting on;
• the issues with the paragraph in question; and
• a solution or alternative that could be considered, if possible.

Arts organizations with comments or questions arising from the Guidance are encouraged to send their comments to CRA by January 13, 2012.  Directions on how to submit comments are set out at the front of the Guidance.

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Charities Directorate Checklist - Continuance Under the Canada Not-for-Profit Corporations Act

Amanda J. Stacey, Toronto

The CRA Charities Directorate has useful information on its website for charities that are incorporated pursuant to the Canada Corporations Act that will be required to continue under the Canada Not-for-Profit Corporations Act (the “CNCA”).  The CNCA was proclaimed into force on October 17, 2011 and requires corporations incorporated under the Canada Corporations Act (among others) to continue under the CNCA within three years of this date.

Registered charities that have completed their continuance under the CNCA are required to file the following documents with the Charities Directorate:

• a copy of the Certificate of Continuance;
• a copy of Form 4031, Articles of Continuance (transition);
• a list of current directors (if amended);
• a copy of the current By-laws (if amended); and
• a statement of current activities (if the purposes have changed and have not been previously reviewed by the Charities Directorate).

Charities continuing under the CNCA must also complete and attach the Charities Directorate’s “continuance (transition) checklist”. This checklist confirms that all required documents have been included.

The Charities Directorate also provides a helpful “questions and answers” page concerning the transition process into the CNCA.  This page can be found here.

CRA notes that corporations that fail to file their Articles of Continuance by October 1, 2014 will be dissolved as corporations.  CRA advises that charities that have had their corporate status dissolved will receive a letter from CRA warning that their registered status is in jeopardy.  To avoid being revoked, charities will have 90 days from the date of receiving the warning letter to provide CRA with proof of its status as a legal entity.  This could include a Certificate of Revival from Corporations Canada.

Charities incorporated federally should start to think about the continuance process as soon as possible.  The Miller Thomson Charities and Not-for-Profit Group has begun to work with its clients on this process and will be pleased to help any charities or not-for-profit organizations looking for assistance with this process.

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Donating Stock to Smaller Charities

Arthur B.C. Drache, Toronto

It has been more than a decade since the federal government embarked on a course of making it easier to donate significant amounts to charities, with changes ranging from increasing the annual basic limit of donations from 20% to 75% and, more importantly, over time introducing many rules to facilitate in kind transfers such as stock, stock options and certain types of real estate.

While major gifts often require sophisticated tax planning involving both the donor and donee, there are some basic types of gifts of a small scale which would be beneficial to both donor and donee. Indeed, smaller charities (and those who would donate to them) often miss out on some very basic benefits simply because the organizations are not familiar with the gifting options available.

We were considering, in particular, the situation where a donor would like to donate listed stocks to a charity. The tax rules have for many years exempted from capital gains tax the gain on a transfer of listed stocks to a charity, thus allowing donors to avoid capital gains tax while still receiving a donation receipt for the fair market value of the shares.

Consider the portfolio of a “small” investor who among other things has shares with an adjusted cost base of about $14 a share. They are now worth about $60 a share. He also has many other “safe” investments, blue chips, which he had held for about ten years including other bank stocks and oil stocks.  This year he has some cash flow problems but did not want to cut back on donations to some of his favourite charities. He would normally give between $1,000 and $2000 to each of a half dozen organizations, including his church.

A gift of twenty shares in this example would be worth about $1,200. We use this simple example to illustrate the gifting options.

Assuming he gifted a full $1,200 to the charity, the value in cash of the tax credit would be $552.  Thus, after the gift had been made, he would have $340 to offset other tax liabilities.

The value of the gift of course is still $1,200, but he ends up with tax credits of $552; and equally important, he has no cash flow problem because he needn’t make up any shortfall in cash to give the charity the $1,200.

The major problem we have found is that because many charities do not have investments of their own, they do not have a brokerage account to which the donated stock can be gifted. As a consequence some charities simply do not want to take the gift of stock. This is not a unique situation but it helps to explain the genesis of the criticism that smaller charities do not benefit from the incentive. The fact is that many would and could benefit if they were aware of the options and took steps to accommodate different types of gifts.

There is no doubt that a programme which encourages the smaller charities to become familiar with the incentive and to use it to enhance gifts and benefit donors would be desirable.  It is not only the so-called “rich” who own appreciated shares. More modest givers can get significant tax benefits for comparatively modest gifts if they have the opportunity and if the process were facilitated by the organizations which might get the gifts.

*A version of this article was originally published in the December 2011 issue of Canadian Not-for-Profit News

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Charities, Politics and Lobbying

Kate Lazier, Toronto

In Canada, registered charities can only carry on limited political activities.   The Income Tax Act provides that a charity may devote a part of its resources to non-partisan political activities that are ancillary and incidental to its charitable activities.  A charity’s political activities cannot include the direct or indirect support of or opposition to any political party or candidate for public office. 

Thus, a registered charity’s political activities must be connected to the charity’s purpose and utilize less than 10% of the charity’s financial, physical and human resources.  This allows for limited lobbying activities on the part of registered charities.

There is lobbying registration legislation federally and in many provinces.  A charity that engages in lobbying a provincial or federal government should consider if it has an obligation to file as a lobbyist with that government body.  

Federally, under the Lobbying Act, a corporation is required to file lobbying returns if the corporation employs one or more individuals whose duties include communicating with public office holders on behalf of the employer (or on behalf of any subsidiary or parent corporation of the employer), in respect of:

1. the development of any legislative proposal by the Government of Canada or by a member of the Senate or the House of Commons;
2. the introduction of any Bill or resolution in either House of Parliament or the passage, defeat or amendment of any Bill or resolution that is before either House of Parliament;
3. the making or amendment of any regulation;
4. the development or amendment of any policy or program of the Government of Canada;
5. the awarding of any grant, contribution or other financial benefit by or on behalf of Her Majesty in right of Canada;
6. the awarding of any contract by or on behalf of Her Majesty in right of Canada; or
7. arranging a meeting between a public office holder and any other person.

These activities also include appeals made by a charity to persuade the public to communicate directly with a public office holder in an attempt to persuade the public office holder to endorse a particular opinion.

A public officer includes any officer or employee of the government of Canada.  This term is quite broad and includes officers or employees of the Senate, the House of Commons, a federal board, commission or other tribunal, Canadian Armed Forces, and Royal Canadian Mounted Police. It also includes a person who is appointed to any office or body by or with the approval of the Governor in Council or a minister of the Crown, other than a judge or the lieutenant governor of a province.

A corporation must register if these lobbying activities constitute a significant part (at least 20%) of the duties of one employee or would constitute a significant part of the duties of one employee if they were performed by one employee. 

The Lobbying Act defines employee as including an officer who is compensated for the performance of their duties. Thus, the Lobbying Act does not require the registration of duties performed by volunteers.

Failure to file a return is an offence and could result in substantial fines and prohibition against the Charity from communicating with public officials for a period of up to two years.

Charities engaged in politics should ensure their activities are within the scope allowed by the Income Tax Act and that the charity is in compliance with the relevant lobbying legislation.  This article has provided a brief overview of some of the federal lobbying legislation.  However, lobbying legislation in the province does vary.

The lawyers in Miller Thomson LLP’s Charity and Not-For-Profit Group can assist charities to understand and comply with the rules on political activities.

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What's Happening at Miller Thomson

Rachel Blumenfeld spoke at the Jewish Foundation of Greater Toronto on “Planned Giving” with David Brown on November 2, 2011.

Hugh Kelly made presentations in October 2011 to four groups of soon-to-retire school principals, vice-principals and teachers on Powers of Attorney and Wills.

Robert Hayhoe spoke at New York University Law School National Center on Philanthropy and the Law, 23rd Annual Conference (New York) on October 2011 on the topic “Border Patrol Around the World: Private and Public Benefit in Canadian Charity Law.”

Robert Hayhoe and Susan Manwaring participated in a panel at Osgoode Hall Law School, York University (with T. Carter, E. Hoffstein and D. Stevens) (Toronto) on October 2011 on the topic of “Roundtable: Looking Ahead to the Biggest Legal Challenges,” in The Intensive Short Course on Legal and Risk Management for Charities and NPOs.

Rupert Baudais wrote "Saskatchewan's Charitable Fundraising Businesses Act" in the November 2011 issue of Charity Talk, a publication of the Canadian Bar Association's Charities and Not-for-Profit Law Section.

Robert Hayhoe and Andrew Valentine wrote "Recent cases on charity law issues” in the November 2011 issue of Charity Talk, a publication of the Canadian Bar Association's Charities and Not-for-Profit Law Section.

Kate Lazier wrote “Canada Not-for-Profit Corporations Act proclaimed in force”in the November 2011 issue of Charity Talk, a publication of the Canadian Bar Association's Charities and Not-for-Profit Law Section.

Kate Lazier presented on "Understanding Your Legal Obligations: Child Protection Policies" for Winning Kids on November 29, 2011

Kate Lazier and Amanda Stacey spoke on "Maintaining a Stellar Public Image" at the Association of Fundraising Professionals, Greater Toronto Chapter Congress on November 28, 2011.

Susan Manwaring spoke at the Imagine Canada Risk Management Conference for non-profits held November 8, 2011 on the topic "Governance Checkup in Light of New Legal Requirements".

Susan Manwaring spoke with Larry Whatmore at the Imagine Canada Risk Management Conference for non-profits held November 8, 2011 on the topic “Governance Models - Is Carver Right for Us?”

Susan Manwaring spoke and participated by videoconference in the Mount Royal University Nonprofit Research Forum held November 25, 2011 on the latest “Legal interpretations concerning social enterprises; a state-of-the-art review of social enterprise developments across Canada”.

Susan Manwaring is participating in Imagine Canada’s National Summit for the Charitable and Nonprofit Sector being held November 28-30, 2011 in Ottawa.

Susan Manwaring and Robert Hayhoe spoke at a series of Grant Thornton LLP Not-for-Profit Organizations and Charities seminars held in October and November 2011 on the topic “Evolving CRA Views on Charities/Non-Profits Involved in “Business” Activities”

Susan Manwaring, Anthony de Fazekas, Robert Stewart and Eduardo Krupnik attended MaRS Discovery District at the Advisors Appreciation Reception on November 8, 2011 and presented as a panel on “Life Sciences/ Heath Care, Social Innovation”.

We are pleased to acknowledge Gail Black, Donald Carr QC, Wendi Crowe, William Fowlis, Robert Hayhoe, Susan Manwaring, Rosanne Rocchi, Martin Rochwerg, Dragana Sanchez Glowicki and Joseph Yurkovich all of whom were listed in the September 2011 issue of Best Lawyers.

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