A recent decision of the Ontario Superior Court affirms that in matters concerning charities, the Courts will intervene to ensure that the public interest is protected. In Innovative Gifting Inc. v. House of the Good Shepherd et. al., a fundraiser that charged exorbitant commissions and misrepresented the legality of its fundraising activities was ordered to pay back commissions it received from four charities. In making the order, the Court was heavily influenced by public policy considerations. Adam Stephens of Miller Thomson LLP was counsel to the charities on the Application.
Innovative Gifting was a charitable donation tax shelter promoter. It advised the charities that it would raise donations for them in the form of cash and shares and that the shares would be worth at least four times the value of the cash donated. It claimed that a non-resident Swiss philanthropist would gift shares to Canadian donors, which would be worth 6-8 times the value of the donor’s cash donation. If the donor, in turn, gave the shares to the charity, the donor would receive a tax receipt for the full value of the cash and shares. Put simply, the idea was that a donor could turn a $1.00 donation into a $5.00 (or greater) tax receipt. Innovative Gifting assured the charities that its fundraising initiative was legal and in accordance with Canadian tax laws.
On the basis of the above representations, four charities entered into contracts with Innovative Gifting. The contracts provided that the charities would pay Innovative Gifting a maximum fee of 18 per cent of the value of donated shares and cash. The contracts also stated that in the event that no shares were donated, a commission equal to 90 per cent of the cash donated would be paid. Representatives of the charities each testified that they did not believe that the 90 per cent commission applied to them because they were told that shares would accompany the cash gift.
Over $1 million in cash was raised by Innovative Gifting and provided to the charities. Shares were provided to the charities in some but not all cases. Further, and contrary to the representations of Innovative Gifting, the share certificates that were provided were worthless.
All charities initially believed that they were receiving cash and shares of value. Based on this understanding, the charities paid commissions to Innovative Gifting. The commissions were considered to be in the 10-15 per cent range of the total value of the cash and shares. In fact, and unbeknownst to the charities, since the shares were worthless, the charities were paying Innovative Gifting 90 per cent of the cash donations.
The charities each ultimately became suspicious of Innovative Gifting and ceased paying its invoices. At the time they stopped paying, the charities had collectively paid Innovative Gifting over $1.1 million in commissions.
In these tawdry circumstances, Innovative Gifting brought applications against each of the charities for payment of unpaid commissions. The charities responded by seeking the return of all commissions paid.
In her decision, Justice Roberts dismissed Innovative Gifting’s Application and granted the charities’ counter-applications. Her Honour’s conclusion was reached for a number of reasons, including that Innovative Gifting made material misrepresentations to the charities concerning the nature and legality of the gift-giving scheme, including the form and amount of the donations to be made and the amount of its fees. Further, although advertised as legitimate, Innovative Gifting’s scheme was clearly in contravention of the Canadian Income Tax Act. Despite the fact that the shares were worthless, Innovative Gifting had insisted that the charities provide income tax receipts to the donors for the cash and bogus value of the shares.
Justice Roberts stated:
As evidenced by the applicant’s invoices, the aim of [Innovative Gifting’s] scheme was to claw back to itself the value of the cash donations that were promised and made to the respondent charities on the misrepresentation that shares would also be donated and that the applicant’s fee would be taken from the aggregate value of the cash and shares. As the shares were not donated, the applicant’s invoices comprised almost the entirety of the cash donations.
Justice Roberts also found that the agreements entered into between Innovative Gifting and the charities were void for being contrary to public policy. First, she found that a commission of 90 per cent was contrary to section 149.1 of the Income Tax Act, which at that time required a registered charity to disburse for charitable purposes at least 80 per cent of the total amount for which charitable receipts were issued. Further, Justice Roberts reasoned:
The agreements are also repugnant on the ground that they are against the public interest because monies raised for charitable purposes do not go to the intended beneficiaries. The applicant does not disclose its fees on its website. A reasonable person would expect that there would be some administrative cost associated with charitable fund-raising and that the cost would be proportionate to the amount of money raised for charitable purposes. The applicant’s demanded fees of 90 per cent of the amounts raised cannot be accepted as reasonable.
In the result, the Court ordered Innovative Gifting to return to the charities all commissions paid.
Innovative Gifting v. House of the Good Shepherd et. al. is the most recent demonstration of the Court’s willingness to intervene in private contractual matters between charities and fundraisers to ensure that the public interest is protected. Charities that paid large “fundraising fees” to tax shelter promoters should consider whether some or all of these fees might be recoverable from the promoters.