The Ontario Court of Appeal did something in Stamford Kiwanis Non-Profit Homes Inc. v. Municipal Property Assessment Corporation (“Stamford Kiwanis”) that it rarely does: overturn its own decades-old precedent.
Much of the commentary on this case has focused on the decision’s implications for affordable housing providers, or on how it broadened the court’s approach to the specific property tax exemption in question.
(Full disclosure: Our recent article on the decision in an earlier Insight does just that, in addition to containing more detail on the case.)
However, all charities, not just those in the housing sector or seeking a property tax exemption, should be encouraged by this decision.
There is much for all charities to be hopeful for in this ruling from Ontario’s highest court – and in the relegation of the earlier The Religious Hopitallers of St. Joseph Housing Corp. v Regional Assessment Commissioner (“Religious Hospitallers“) decision to the trash-bin of history.
What did the Stamford Kiwanis decision do?
Stamford Kiwanis considered a property tax exemption found in s. 3(1)(12)(iii) of the Ontario Assessment Act (the “Act”). Under that provision, “any charitable, non-profit philanthropic corporation organized for the relief of the poor if the corporation is supported in part by public funds” is exempt from paying municipal tax.
Why was the Religious Hospitallers decision a problem?
Almost three decades ago, a charitable corporation called Religious Hospitallers of St. Joseph Housing Corp. (“Hospitallers”) was refused the exemption for its housing units because it only owned those units. The Hospitallers did no fundraising and paid a related charitable entity, the Order of the Religious Hospitallers of St. Joseph (the “Order”), to manage the properties. The Court of Appeal in 1998 held that the lack of active management of the units or fundraising by the Hospitallers for its own purposes was fatal to the exemption application. It ignored the activities of the obviously related Order.
Instead, Ontario’s highest court enunciated a separate legal test: the need for “the corporation itself, by some form of endeavour of the corporation, which would provide the relief involved.”
Did Stamford Kiwanis actually reverse the law?
Recently, Stamford Kiwanis Non-Profit Homes Inc. (“Stamford Homes”) ran into the same problem. Stamford Homes’ three residential properties were rented to low-income tenants and Stamford Homes received government funding. However, it used a for-profit property manager for day-to-day management of the properties.
Finding themselves bound by the Court of Appeal’s precedent in Religious Hospitallers, two Ontario lower courts denied Stamford Homes the municipal tax exemption.
It therefore was a surprise when a five-judge panel of the Court of Appeal decided it should overturn the previous panel of the same court’s decision in Religious Hospitallers and allow the exemption. It held that s. 3(1)(12)(iii) of the Act does not require “any separate endeavour or evidence of private fundraising” and that Religious Hospitallers was wrongly decided “by limiting [the exemption’s] ambit and introducing the foreign element of endeavor.” To arrive at this conclusion, it had to make a number of findings to justify the drastic step of overturning the Religious Hospitallers decision. Those deliberations demonstrate how important the Court of Appeal felt it was to correct the approach employed towards the interpretation of legislation which exempts charities from tax.
Clear recognition and support for the social good performed by charities
Below, we describe three “wins” that all charities and non-profits across Canada can claim from the Ontario Court of Appeal’s recent decision.
1. Tax exemptions: Not loopholes, but means for achieving social ends
The Court’s decision deliberately emphasizes the need to use the helpful interpretation principle established by a decision of the Supreme Court of Canada predating Religious Hospitallers. That dual-purpose principle recognizes that tax laws serve two separate and distinct purposes:
- Raising government revenues; and
- Achieving social and economic ends.
Those two purposes can come into conflict and instead of assuming tax laws are primarily aimed at raising revenue, the second purpose is to be considered and not simply subsumed in favour of the first. The Ontario Court of Appeal signaled the importance of using this interpretation approach by referring to it as “the dual-purpose interpretation as mandated by the Supreme Court [of Canada]”.
This approach allowed the Court to overrule Religious Hospitallers, based upon it having overlooked this rule in 1998. There was also clear reference to and approval expressed for an intervening 2004 Court of Appeal decision (Ottawa Salus Corp. v. Municipal Property Assessment Corp.) which employed the dual-purpose interpretation principle to find for a different property tax exemption and implicitly recommends ongoing reliance on this approach. The Court of Appeal tacitly affirms that tax exemptions exist, not as loopholes to be exploited, but as deliberate policy choices to allow tax savings to be channeled by charities toward the public good.
This is powerful judicial recognition that the legislative purpose of exempting certain organizations from paying tax is to help those organizations spend more of their limited resources on their socially beneficial purposes. This will encourage Canadian charities faced with the question of whether to pursue various tax exemptions.
2. Holding space for holding companies
We often advise not-for-profits and charities across Canada on how to best operate utilizing complex organizational structures that involve multiple entities, including sole-purpose property holding companies. There are good, practical reasons why multiple entities and holding companies exist—for instance, to spread and manage liability risk, and/or to separate an organization’s operations from the organization’s ownership of assets.
Since the 1998 Religious Hospitallers decision, some organizations in Ontario had to contort themselves in order to meet the Endeavour Test and benefit from the property tax exemption under the Act. By actively taking on activities like managing property or fundraising directly, these organizations prioritized eligibility for the tax exemption over good governance, risk management or operational efficiency; letting the proverbial tax tail wag the dog.
As a result of the Stamford Kiwanis decision, organizations serving the poor in Ontario no longer have to choose between sound corporate governance and a tax exemption where the availability of the exemption may be the difference between the charitable program being economic or unfeasible. These organizations are now free to adopt trust or corporate structures that best meet their operational, liability, and fiduciary goals without being forced into adopting artificial arrangements aimed solely at addressing the Endeavour Test.
Charities may wish to now discuss with legal counsel (perhaps again) whether to restructure their arrangements to utilize property holding companies, even if those holding companies do not directly carry out activities or programs.
3. Go with the flow(-through)
The Court of Appeal’s decision reflects a growing recognition that the Third Sector plays an important role in civil society and that artificial barriers to their work are not helpful. One such barrier is the thinking which underlies the decision in Religious Hospitallers: namely the idea that charities have to actively carry out their own activities. That, in a nutshell, is what the Endeavour Test really requires.
Readers familiar with the regulatory framework the Canada Revenue Agency (CRA) has historically applied to registered charities, will recognize the similarity of this concept with the CRA’s insistence that registered charities can only spend their resources either on qualified donees (mainly other registered charities) or on their “own activities” and the distinctions between passive and active uses of charitable assets. The CRA’s insistence on identifying, and the Court’s search in Religious Hospitallers for, non-passive activities arises from the same thinking: that charities are only socially valuable if they are dynamically carrying out some activity.
Parliament decided to change this thinking in response to calls for reform and more flexibility from the sector. In June 2022, the Income Tax Act (Canada) was amended to introduce a new way for charities to fund other organizations. These new qualifying disbursements rules allow registered charities to make gifts to non-qualified donees, which count towards a charity’s annual disbursement quota and which do not require the charity to actively exercise direction and control over their use.
In Stamford Kiwanis the Court of Appeal deliberately decided to overturn this traditional way of thinking in resonance with the CRA’s more recent approach: charitable and philanthropic organizations need not carry out their own activities directly in order to be eligible for tax incentives.
While a proper analysis of the United States Supreme Court’s unanimous decision in Catholic Charities Bureau, Inc. v. Wisconsin Labor and Industry Review Commission (PDF) also released this year is far outside the scope of this article, there are some echoes of the same intent to look beyond the activities of a single entity when examining relevant charitable activity. While the decision is obviously decided on completely different basis, this principle is arguably visible in Justice Thomas’ concurring opinion, where he took issue with separating the charity’s actions from those of the related Roman Catholic Diocese of Superior, Wisconsin, calling the Catholic Charities Bureau a “mere arm” of the Diocese.
Concluding comments: Three cheers
As a decision of Ontario’s highest court, Stamford Kiwanis is binding law in Ontario. It is also persuasive authority in other provinces for similar property tax exemption provisions.
However, the decision is persuasive, influential, and noteworthy in other respects.
By purging the law of the Endeavour Test, the Ontario Court of Appeal did more than just remove a roadblock to the provision of affordable housing in its home province:
- It restored and bolstered the dual-lens approach to interpreting tax laws.
- It brings the law in line with how many modern organizations operate and hold assets.
- It affirms that charities and non-profits should not need to carry out activities directly in order to advance important social aims—and to receive preferential tax treatment for it.
For charities and non-profits operating across Canada, those are three good reasons to cheer Stamford Kiwanis.
Have a question about this article? Need structuring advice, an opinion on your organization’s eligibility for the municipal tax exemption, or options on funding other entities? A member of Miller Thomson’s award-winning Charities and Not-For-Profit Group would be pleased to assist. We also encourage you to subscribe for legal insights relevant to your organization and the charitable sector.
