It is well-known that a Canadian registered charity ought not to transfer funds to a foreign or domestic entity that is not a qualified donee. However, it is also important to bear in mind the application of the Income Tax Act (the “Act”) to transfers of property other than cash. One context where this arises is in transactions involving intellectual property.
The Act provides that a registered charity that makes a gift other than to a qualified donee or in the course of charitable activities may have its registration revoked. The Federal Court of Appeal has upheld a number of revocations of charities that transferred funds to foreign charities.
A gift is defined as a voluntary transfer of property made without consideration or anticipation of benefit. As intangible property is still property; it can be the subject of a gift from a Canadian charity to a non Canadian charity.
We have seen a number of situations involving proposed transfers of intellectual property from a Canadian registered charity to another entity, usually in the context of an international network of charities. Most such networks typically wish to consolidate trademarks into a central entity to protect the international brand, with trademark licences back to affiliates worldwide. Similarly, some international organizations require that all new intellectual property (for example copyrighted works) created in each affiliate should be transferred to the international organization.
If internationally standard branding is licensed to the Canadian charity at the time that the branding or the Canadian charity is created, then the licence typically involves a gift of property (the brand) from the foreign entity to the Canadian charity, subject to usage conditions. This transfer is not one to which the Canada Revenue Agency (“CRA”) will object. However, if the Canadian charity simply started off using branding similar to the international branding without any formal licence agreement, then the Canadian charity likely owns the resulting Canadian trademarks. The trademarks are property of the Canadian charity which cannot simply be transferred into the affiliate international entity as a gift without being offside the requirement that the Canadian charity not make gifts to a foreign entity, even if such a transfer may be in the best interest of the overall charitable movement.
Instead, whenever intellectual property is to be transferred from a Canadian charity to a foreign entity, the Canadian charity needs to receive fair market value consideration for it. This consideration is structured typically as back office services provided to the Canadian charity (and other national charities) by the central body or as a trade of one kind of intellectual property (perhaps the main trademarks) for another (perhaps the ability to use particular fundraising programs or particular programming created outside of the Canadian charity). If the value of what the Canadian charity receives from its affiliation with the international affiliation can be shown to be worth at least as much as the intellectual property to be transferred either on a one time or a continuing basis, then the CRA should not seek to recharacterize the transfer as a gift to a foreign charity. Otherwise, any Canadian charity that transfers intellectual property to an affiliated foreign charity risks loss of charitable registration.
N.B.: This article was previously published in the December 2014 issue of the Ontario Bar Association’s Charity and Not-for-Profit Law Section Newsletter.