Miller Thomson adds Saskatchewan Charities Expertise

Miller Thomson is pleased to announce our merger with Saskatchewan full service law firm Balfour Moss LLP, effective January 1, 2011.  Balfour Moss is one of the oldest and most established law firms in the province. The addition of the Saskatoon and Regina offices will make Miller Thomson the only national law firm in Canada with a presence in Saskatchewan.

Miller Thomson’s Charities and Not-for-Profits Group is particularly pleased to announce the arrival of three new members of the Group: George Nystrom, Rick Van Beselaere and Glen Lekach.  Their arrival will better enable us to serve charities and non-profits in Saskatchewan as well as nationally.

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Miller Thomson Foundation 2011 Scholarship Programme

The Miller Thomson Foundation is pleased to announce the launch of our 2011 National Scholarship Programme. The Miller Thomson Foundation has increased the National Scholarship Programme from $200,000 to $300,000 annually, awarding 100 entrance scholarships in the amount of $3,000 each.

The National Scholarship Programme is a longstanding, ongoing initiative of the Miller Thomson Foundation.  Its purpose is to encourage and promote the attainment of higher education goals for individuals in Canada who have demonstrated a high level of academic achievement and made a positive contribution to their school and their community through extra-curricular and community activities.

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Canadian Task Force on Social Finance Releases its Report

Susan M. Manwaring, Toronto

The Task Force on Social Finance was conceived earlier this year by Social Innovation Generation (SiG) to consider opportunities to mobilize private capital for public good within either non-profit or for-profit enterprises.  Earlier this month, the Task Force released its report entitled “Mobilizing Private Capital for Public Good”.  The purpose of the report was to respond to the needs of social purpose organizations for new sources of financing.

Social finance along with social enterprise has become much more topical in Canada in the past few years.  This is not surprising given that similar movements in the United Kingdom, United States and Australia are considering whether there are opportunities to mobilize funds to support community and social purpose activities.  The report is directed at governments and the general public, and calls for parallel and concurrent action from the federal and provincial government, the financial sector, philanthropic leaders, and the community sector.  The report contained seven recommendations which, if pursued, would advance social finance in Canada.

These recommendations are:

1. Canada’s public and private foundations should invest at least ten percent (10%) of their capital in mission related investments (MRI) by 2020 and report annually to the public on their activity.
2. The Federal Government should establish, in partnership with private institutional and philanthropic investors, a Canada Impact Investment Fund.  The purpose of the Fund is to support regional funds to reach scale and catalyze the formation of these funds.
3. Investors, intermediaries, social enterprises and policymakers should work together to develop new bond and bond-like instruments that could be available to promote the flow of private capital into the voluntary sector.
4. Governments are encouraged to mandate pension funds to disclose responsible investing practices, clarify fiduciary duty obligations and provide incentives to mitigate perceived investment risks.
5. Changes should be implemented to modernize the frameworks within charities and non-profits currently operate to permit broader revenue generating activities in support of their missions.  In this recommendation there is a note for the need of a new hybrid corporate form for social enterprise.
6. A Tax Working Group should be established to consider incentives to provide lower cost and patient capital for social enterprises to enable them to maximize their social environmental impact.
7. Broaden the eligibility criteria of government sponsored business development programs that currently target small and medium enterprises so as to enable charities and non-profits and other forms of social enterprise to qualify for similar benefits.

Needless to say, this is a large and ambitious agenda.  In the introduction to the Federal Budget 2010, the Federal Government identified the need to advance social enterprise and to work with the sector to permit these types of activities.  The Canadian Task Force on Social Finance is setting the agenda to permit these discussions to move forward and to enhance the policy discussion.

We will keep you apprised of ongoing developments in this area in our Newsletter.

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Charity Employee Compensation – Bill C-470 Update – Salary Cap Dropped, Disclosure Remains

Susan M. Manwaring, Toronto
Amanda J. Stacey, Toronto

In the April 2010 edition of this newsletter we reported on a private members bill, Bill C-470, introduced by Albina Guarnieri, Member of Parliament for Mississauga East, that would have given the Canada Revenue Agency the discretion to revoke the charitable status of a charity where the charity had paid a single executive or employee annual compensation over $250,000 and that would have required disclosure of the salary and benefits of the top 5 employees working with the charity. 

We are pleased to report that Ms. Guarnieri proposed amendments to her Bill which were adopted by the Standing Committee on Finance before the Bill was sent back to the House for 3^rd reading.  The changes eliminated the proposed $250,000 salary cap.  The amended Bill did, however, proceed with the requirement that salaries be disclosed, although that requirement was also modified.

The revised Bill provides that the Minister shall, unless otherwise justified, make available to the public in such manner as the Minister deems appropriate the name, job title, and annual compensation of any executive or employee who is paid total compensation in excess of $100,000 per year.  Thus, the disclosure is generally mandatory.  As well, this disclosure is no longer limited to the 5 highest paid employees working for a charity – all employees earning in excess of $100,000 will now have to be disclosed.  The words “unless otherwise justified” were apparently included to allow for non-disclosure of salaries in circumstances that warranted it, for instance, if charity personnel are working in geographic areas where such disclosure would put them at risk.  If Bill C-470 is passed by Parliament and the Senate, the changes would apply to 2012 and subsequent years.

While we are pleased with the elimination of the salary cap, overall the continued existence of this Bill is extremely disappointing for the charitable sector.  Given the transparency with which the charitable sector as a whole operates, the surprise introduction of this Bill was not warranted.  The current T3010B Annual information return filed by all registered charities requires charities to indicate the pay range of their top 10 highest paid employees.  It was submitted to the Committee that these rules are more than adequate and provide disclosure without invading the privacy of individual employees and subjecting them to a scrutiny that those working in other sectors do not have to face.  We are surprised by the elimination of the top 5 highest paid employees limit and we are unaware of any discussion of either this change, or its implications, by Committee members during their clause-by-clause examination of the Bill.

A review of the transcripts of the committee hearings and the dialogue among Members of Parliament surrounding this Bill reveals that there is a lack of understanding about how the charitable sector operates.  What is even more disappointing is that the commentary suggests a general mistrust of charities.  It is evident from this dialogue that the sector needs to do a better job advocating for itself and making public the valuable work that it is doing and the fact that it is doing it in a professional and efficient manner.

We understand and applaud the need for transparency and accountability.  We also recognize the right of the public to know about the misadventures of charities as are often reported in the Canadian press.  However, those misadventures reflect the actions of a few.  The amazing and very positive work of many organizations goes unnoticed and unreported.  Charities need to get their good news stories into the public domain to avoid further unwarranted surprises in the future.

We will continue to update you on the status of Bill C-470 as it proceeds.

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Is the Provision of Fertility Charitable?

Kate Lazier, Toronto

At the end of September of this year, the City of Toronto had the pleasure of hosting the American Bar Association Tax Conference.  Lawyers from Miller Thomson’s charity and non-profit practice group attended the Tax Exempt Section of the conference.   While the rules are significantly different in the United States, we often catch glimpses of legal trends and issues that may migrate across the border.

A recent US case was the source of much discussion at the conference.  In the Free Fertility Foundation v. Commissioner of Internal Revenue, a foundation was established to provide sperm free of charge to women seeking to become pregnant.  The Foundation applied for charitable status in the US on the basis that it operated exclusively to promote health by providing free health products and services.  The charitable status application was denied by the IRS.

This case would normally raise interesting questions about whether the provision of fertility is a health service, whether the provision of sperm to low income families should qualify as charitable in relief of poverty, and general issues regarding equal access to reproduction for everyone.

Unfortunately, these questions were never explored in this case due to the bizarre facts of the case, which more clearly indicated a lack of charitable intent.  The foundation had only one sperm donor, who was on the board of directors and was also the sole financial contributor to the foundation.  The board of directors screened the potential sperm recipients on many criteria that had little to do with health – such as education level, record of divorce, contributions to the community and ethnicity.  Of the 819 applicants, only 24 received sperm.

The court held the foundation lacked the requirement to provide a public benefit.  The court noted that 

The free provision of sperm may, under appropriate circumstances be a charitable activity. Petitioner, however, does not qualify for tax exemption because the class of petitioner’s beneficiaries is not sufficiently large to benefit the community as a whole.

Furthermore the court held that this foundation did not promote health

The petitioner’s activities may promote the propagation of [a single individual’s] seed and population growth, but they do not promote health for the benefit of the community.

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Foreign Activities Guidance: Outside Canada Means Inside Canada as Well

Donald Carr, Toronto

As we reported in the July 2010 issue of this Newsletter, the Charities Directorate has issued its “Guidance for Canadian Registered Charities Carrying on Activities Outside Canada”, replacing Guide RC4106.  However, some may overlook that the Guidance also applies to charities which engage “intermediaries” which are not “qualified donees” to carry out activities for them within Canada.  Indeed, the Directorate is expected to issue a specific Guidance early in the new year for charities working with domestic intermediaries, which will likely mirror the Foreign Activities Guidance.

Although the Guidance does not have the force of law, it sets out what the Directorate expects from charities, or from organizations applying for registered status.  While the legal basis for some aspects of the Guidance may be questioned, charities should still pay attention to the Guidance so as not to encourage threats of deregistration.

A Charity Must Conduct Its Own Activities

As did its predecessor, the Guidance insists that a charity must conduct its own activities.  This requirement must be viewed in the context of the prohibition of grants to any entity that is not a “qualified donee”.  That expression is defined in the Income Tax Act, and is limited for the most part to Canadian registered charities.  Canadian charities – wherever they wish to carry on activities - cannot give monies to a non-qualified donee without “direction and control” over what is done with those monies.

Thus, all activities – in Canada or abroad – are required to be conducted either by the Canadian charity directly using its staff, volunteers and directors, or through an “intermediary”.  The Guidance provides detail on different forms of intermediary relationships.  An intermediary could, for instance, be a company hired specifically to do the particular charitable work, under the direct control of the charity.  It could be a “joint-venturer” – another organization, not a registered Canadian charity - where there would be a pooling of resources to carry out the charitable activity and an agreement on how that is to be run, with substantial input from the Canadian charity.

The most common intermediary relationship into which charities enter is that of agency.  In an agency relationship, the Principal, (here, the charity) enters into an agreement – preferably, by far, a written agreement – with a person or organization (the Agent), by which the actual activity is to be carried out.   That agreement appoints the Agent – within very specific guidelines and requirements – to conduct the activities on behalf of the charity and in the charity’s name.  One expects - and the Guidance requires - that the Agent has experience in the area of work involved and that the charity should have appropriate expectation that the Agent chosen will, indeed, carry out that work properly.  Legally, the activities so conducted by the Agent are the activities of the Principal itself – just as if the Principal had carried out the activities using its own staff or volunteers.

The Guidance states, citing three cases decided by the Federal Court of Appeal, that if any “intermediary” which is not a qualified donee is retained, the Canadian charity must maintain “direction and control” of the activities carried out on its behalf, and over its resources.  The cases cited all dealt with overseas activities, but would appear to apply equally to activities carried on domestically.  Thus, says the Directorate, even in a true agency agreement, the charity must establish detailed requirements for how the work is to be carried out by the Agent, require strict periodic reporting and regular accounting, and have little substantive delegation.

The Guidance sets out detailed requirements of what should appear in an agency agreement when used by a registered charity so as to demonstrate the required degree of direction and control.  Arguably, these requirements go beyond what is legally necessary to establish an agency relationship which permits the Principal, the charity, to be regarded as carrying on the charitable activities itself, including for the purposes of the Income Tax Act.  The legal nature of an agency relationship should permit greater scope for a registered charity to delegate activities than is explicitly contemplated in the Guidance (which only discusses delegation of day-to-day operating decisions, such as hiring staff and buying supplies).  However, while there is some basis to question whether the cases cited by the Directorate require “direction and control” as categorically as the Directorate states, charities must bear in mind that the Directorate enforces these requirements strictly.  Until there is an appropriate case before the courts which clarifies these issues, charities should do everything possible to comply, whether operating outside or inside Canada.

Transferring Resources to Non-Qualified Donees

The Guidance expands on the prior RC4106 commentary on when a charity can turn over the title to “resources” to a non-qualified donee.  In principle, this commentary should apply to transfers of resources inside as well as outside Canada.

When the resources in question are not real estate and the property can reasonably only be used for charitable purposes, the “charitable goods” policy may permit an outright transfer from the charity to the not-qualified donee.  The charity and the non-qualified donee must understand and agree that the property can only be used for specific charitable activities, and the charity must conclude reasonably that the non-qualified donee will use the property only for the intended charitable activities.

The Guidance has a much less onerous requirement than RC4106 with respect to transfers of real property to non-qualified donees in foreign countries.  The Guidance states that if it is not “practical” for the Canadian charity to own the property, arrangements can be entered into with a local organization or government, to transfer it.  However, there have to be assurances that the property will be used only for charitable purposes and the charity has to assess the risk that the property might be used inappropriately and be satisfied reasonably that such will not be the case.  It is not clear whether this approach can be used in Canada.

Conclusion

Overall, the Guidance maintains the main thrust of RC4106.  It does provide some clarification and, perhaps, some certainty for charities dealing with the Directorate.   However, it is clear that the Directorate continues to insist on its own views of how a charity should conduct its activities whenever an “intermediary” is used, whether outside, or within Canada.  Despite lawyers’ opinions about what is and what is not legally correct, to avoid conflict with the Directorate – which is what most charities want - charities should be reviewing the Guidance with great care.

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Can the Purpose of Promoting Debate on Government Policy be Charitable?

Andrew Valentine, Toronto

A recent decision of the High Court of Australia considered whether an organization established for the purpose of promoting the effectiveness of international aid – in part by challenging established government policy – was charitable.  A majority of the Court (five out of seven judges) held that it was.  The case provides a useful discussion of the limits on political purposes and activities to which charities are subject, and suggests a broadening view of what constitutes allowable political purposes. 

In Aid/Watch Incorporated v. Commissioner of Taxation, the High Court considered whether an organization, Aid/Watch, qualified for tax exempt status as a charity.  Aid/Watch had formerly been endorsed as a charitable institution under the Australian Income Tax Assessment Act, but had later had its endorsement as a charity revoked.  Aid/Watch’s purpose was to conduct and disseminate research on how governments and non-governmental organizations could reduce negative environmental impact when conducting various types of foreign aid.  Part of Aid/Watch’s activities involved efforts to promote what it viewed as positive changes in governmental activity and policy in the area of international aid.  The court below had denied charitable status on the basis that the organization was formed in part for political purposes, which it viewed as prohibited for charities.

In overturning the decision below, the majority of the High Court referred a line of cases which have held that organizations established for the purpose of advocating for changes in the law or government policy are not charitable.  The Court analyzed the reasoning in these cases, and summarized the principles established in the cases as follows:

1. A purpose contrary to the established policy of the law cannot be charitable;
2. Even if (a) does not apply, the purpose in question must have the real or imputed intention of contributing to the public welfare;
3. When the main purpose of the [charity] is “agitation” for legislative or policy changes, with respect to religion, poor relief, or education, it is “difficult” to find that (b) is satisfied; and
4. The source of the difficulty referred to in (c) is the apparent paradox in a “coherent system of law” of treating as for the public welfare “objects which are inconsistent with [the law’s] own provisions”.

The majority went on to state, however, that under the Constitution of Australia, which mandates a system of representative and responsible government, communication between electors, legislators and the officers of the executive (as well as among electors themselves) on matters of government and politics is an “indispensable incident” of that constitutional system.  Thus, the majority held that the “agitation” for legislative and political changes referred to in the older cases are a part of the operation of the constitutional processes which contributes to the public welfare.

Accordingly, the majority of the court held that Aid/Watch, by generating public debate as to the best methods for the relief of poverty by the provision of foreign aid, had two characteristics indicative of its charitable status.  The first is that its activities were apt to contribute to the public welfare, being for a purpose beneficial to the community (the relief of poverty).  Secondly, its “political” activities generated public debate concerning the efficiency of foreign aid directed to the relief of poverty.  For the reasons set out above, the Court held that this “political” component did not disqualify the charity from charitable status.  The Court thus held that organization could qualify as a charity under Australian law.

The implications of this decision remain to be seen, but on its face the decision suggests a broadening of the understanding of the types of “political” purposes that are consistent with the notion of charity at common law (at least in Australia).  If organizations with a purpose of pressing for legislative or policy changes to promote one of the recognized heads of charity can be charitable, this could significantly expand the number of organizations which may qualify as charitable.  The Court’s reasoning with respect to a system of government constitutionally premised on communication between electors, legislators and government officials would seem to apply to Canada’s political system as much as it does to Australia’s.

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Dernières nouvelles

Robert Hayhoe authored “When Should Charities Indemnify Directors” in Lawyers Weekly, published December 2010.

Robert Hayhoe and Kate Lazier presented “Fundraising Tax Law Refresher”, AFP (Association of Fundraising Professionals) Congress on December 1 in Toronto at the Metro Toronto Convention Centre.

Susan Manwaring, Kate Lazier, Amanda Stacey and Donald Carr co-presented at the Miller Thomson Charities Group seminar in Toronto on December 7 entitled "A Year in Review".

Iain Benson presented "Living Together with Disagreement" in December at the Ronning Centre Forums, University of Alberta.

Iain Benson spoke on "Fair Treatment of Religious Beliefs" in an Ontario Human Rights Commission webcast on December 9, 2010.

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