The Federal Court of Appeal recently released its decision in Sheldon Inwentash and Lynn Factor Charitable Foundation v. The Queen. This case concerns the question of whether a charitable foundation with a single trustee can be designated as a public foundation.
The Income Tax Act recognizes two broad categories of registered charities: charitable organizations and charitable foundations. Within the charitable foundations category, there are two sub-categories: public and private foundations. Because private foundations are subject to more restrictive rules than public foundations under the Act, it is often more desirable to be registered as a public foundation. The Act sets out a definition of both private foundation and public foundation. A private foundation is defined as “a charitable foundation that is not a public foundation”. The definition of public foundation is currently in a state of flux. Back in 2006 the Minister of Finance proposed amendments to the definition of public foundation that have yet to be enacted into law. Notwithstanding this, on July 11, 2007 the Canada Revenue Agency issued a news release announcing that it was going to give effect to the proposed change to the definition of public foundation. The proposed definition essentially requires that 50% or more of directors, trustees or like officials of a public foundation must deal with each other at arm’s length and the public foundation cannot receive a majority of its funding from a person or a group of persons that control the foundation in any way or make up more than 50% of the directors, trustees or like officials of the foundation.
The issue in this case was whether a foundation with a single trustee can meet the arm’s-length requirement for a public foundation. We should note, as did the Federal Court of Appeal, that the Act is silent on the question of whether a public foundation can be established with a single trustee. The Court examined the particular language of the definition of public foundation and noted that the requirement that more than 50% of the trustees must be “at arm’s length” signals an intention that there must be more than one trustee of a public foundation. The use of the phrase “with each other” also indicates that more than one trustee is contemplated. The Court held that the language used by Parliament has “precisely and unequivocally evidenced its intent that public foundations must have more than one trustee (or director, officer or like official)”.
The Court also reviewed the statutory context and purpose of the definition of a public foundation and the differences between private and public foundations. The Court noted the differences between the two definitions and the overarching concern for potential abuse in self-dealing, particularly with respect to the establishment of private foundations by private individuals, and noted the various rules applicable to private foundations, including the prohibition against carrying on business activities, the excess business holdings rules and the non-qualifying securities rules, as reasons to support the interpretation that a public foundation must have more than one trustee. The Court noted that by increasing the number of arm’s-length trustees, the risk of a public foundation self-dealing with its donors is reduced.
The appellant in this case had relied upon the fact that the CRA has taken contradictory administrative positions on whether a public foundation requires two or three trustees. In a news release dated March 19, 2009, the CRA confirmed its position that a public foundation requires at least three trustees; however, the court noted that in internal documents the CRA seems to have accepted that two trustees would be sufficient. At the end of the day, the Court declined to say more on this subject and stated that CRA’s administrative policy is not determinative of the meaning of a provision of the Act.