Ontario Government Releases Good Government Bill that Includes Positive Changes For Charities
By: Susan Manwaring and Kate Lazier
The Ontario Good Governance Act, 2009 repealed the Charitable Gifts Act and amended the Charities Accounting Act, Accumulations Act and the Religious Organization Lands Act.
Charitable Thoughts is published by the Charity and Not-for-Profit Law Section of the Ontario Bar Association. Members are encouraged to submit articles. The articles that appear in this publication represent the opinions of the authors. They do not represent or embody any official position of, or statement by, the OBA except where this may be specifically indicated; nor do they attempt to set forth definitive practice standards or to provide legal advice. Precedents and other material contained herein are intended to be used thoughtfully, as nothing in the work relieves readers of their responsibility to consider it in the light of their own professional skill and judgment.
Ontario Government Releases Good Government Bill that Includes Positive Changes For Charities
Susan Manwaring and Kate Lazier*
On December 3, 2009 the Ontario Government passed Bill 212, the Good Government Act, 2009. This statute updates the law as it applies to charities that operate in Ontario and levels the playing field for charities operating in Ontario to be consistent with charities operating in other provinces in Canada. The legislation is effective on the day the Bill receives royal assent, which is expected this week.
More particularly the changes include the following:
1. The statute has repealed the Charitable Gifts Act. The Charitable Gifts Act was particularly problematic in that it restricted charities from directly or indirectly owning more than a 10% interest in a business. This rule was quite broadly worded and the language of the statute led to more questions than answers about what it meant for a charity to own a 10% interest in a business. The restriction was outdated and submissions to the Ontario Government had been made for a number of years suggesting that this statute should be repealed. This step is welcome and the government should be applauded for repealing this law.
The repeal of this statute does not mean that charities can now, without thought, set-up for profit companies and/or pursue business activities. There remain issues to be addressed under the Income Tax Act (Canada) which are relevant to this question. The repeal removes one hurdle but the others still need to be carefully considered.
It has also been brought to the attention of government officials that the provisions that repeal the Charitable Gifts Act do not “cure” breaches that occurred prior to the Act being repealed. Officials have acknowledged this gap but have confirmed both verbally and in writing that it is highly unlikely that a remedy for such a breach would ever be sought.
2. The Good Governance Act, 2009 amended the Charities Accounting Act as a consequence of the repeal of the Charitable Gifts Act. In particular, the Charities Accounting Act will now contain provisions which will permit the Public Guardian and Trustee of Ontario to make inquiries and require information or documents respecting entities in which an executor or trustee holds a substantial interest. The phrase “executors or trustees” includes directors of any charitable corporation as the Charities Accounting Act defines those individuals to be trustees for the purpose of its administration. These provisions will allow the Public Guardian and Trustee to ask questions about business interests held by charities. The new legislation provides that the Public Guardian and Trustee can ask for the business records of the entity, information respecting the assets and liabilities of the entity, accounts of income and expenses for the entity, financial statements of the entity and the particulars of any fees, salary or other remuneration paid to any person by the entity.
The determination of what constitutes a substantial interest is very similar to the determination used by the Income Tax Act for the excess business holdings rules. If the executor or trustee beneficially owns, controls or has direction, either directly or through another entity, over more than 20% of the voting rights, or 20% of the assets of the entity, the Public Guardian and Trustee will be permitted to inquire for the information listed in the section.
Section 4.1 of the Charities Accounting Act will provide that a court will be permitted to make certain orders in the event of application made by the Public Guardian and Trustee after reviewing the information provided. The types of orders that the court may make relate to the management, operation, ownership or control of the entity and are tied to ensuring that the entity is operating in the best interests of the charitable purpose for which the estate or trust is held. Section 4.1 also provides that anyone who contravenes the section is guilty of an offence and can be liable to a fine not exceeding $25,000.
It should be noted that this provision requires proactive requests for information to be made by the Public Guardian and Trustee. There is no annual requirement to file information about an entity respecting this information where the estate or trust has a substantial interest. Rather the Act provides the Public Guardian and Trustee with additional tools to obtain information relating to any business in which the charity or estate has a substantial interest. It would be expected that the Public Guardian and Trustee would rely on these rules in situations where it comes to its attention that there is a concern regarding the entity.
3. A second amendment to the Charities Accounting Act relates to interests in real or personal property held for a charitable purpose. Historically, the Charities Accounting Act restricted the holding of land by a charity and provided that it could only be held to the extent that it was used for the charitable purposes. That was interpreted to mean that the charity could not own excess land and lease it out. The section is now reworded and no longer provides for vesting in the Public Guardian and Trustee if there is excess property held. The proposed section provides that a charity that holds an interest in real or personal property shall use the property to benefit the charitable purposes.
As reworded, the section remains somewhat unclear. However, the government officials have stated that the amended section is intended to be relieving and that excess real or personal property that is not directly used in the charitable activity can remain in the charity and can be invested in accordance with prudent investor standards of the Trustee Act.
4. The Religious Organization Lands Act has been amended. This statute previously restricted the length of a lease of land that a religious organization may enter into. The prior restriction of leasing for no more than 40 years has been removed.
5. The Accumulations Act has been amended to clarify that the rules of law and statutory enactments relating to accumulations do not apply and are deemed never to have applied to charitable trusts. This resolves a somewhat technical concern relevant to longstanding charitable trusts.
New legislation, when released, often brings questions and comments. It is undoubtedly true that there will be some requests for clarification on the new legislation. However, as a general proposition, these changes are relieving and helpful for the charitable sector and are changes which the Ontario Bar Association, Charity and Not-for-Profit Section has been discussing with the office of the Public Guardian and Trustee for a number of years. These changes should be well received and will permit greater flexibility to charities when structuring revenue generating activities in the future.
Hutterite Case Could Have Significant Impact on Canadian Religious Charities
Peter Broder*
Religion has always fit awkwardly within the framework of charity law. The Preamble to the 1601 British Statute of Uses, in which our law of charities is rooted, makes no mention of religious worship or services – although it does confirm the charitable nature of the repair of churches. The courts subsequently extended charitable status to religious practice as well as to the buildings in which it occurred.
Over time recognition expanded from the establishment Church of England to encompass other denominations and later from monotheistic faiths, to those with polytheistic beliefs.
But the waning of authorized state religion in England and accompanying proliferation of denominations qualifying as charitable marked the onset of tensions between government powers and religious freedom that we continue to grapple with today. The preferential tax treatment accompanying charitable status gives government an interest in overseeing religious groups that is sometimes at odds with the allegiance many believers feel to the tenets of their faith or church leaders.
A recent Supreme Court of Canada case, Alberta v. Hutterian Brethren of Wilson Colony, offers new insights on balancing regulatory needs and religious freedoms in Canada.
The case concerns the Alberta government’s move to withdraw an exemption previously available to Hutterites - the requirement that their driver’s licence include their photograph. The Hutterites believe that having their photographs willingly taken contravenes the Second Commandment of The Bible. The exemption was withdrawn because the province was moving to a licencing system that included a facial recognition data bank as part of an effort to reduce identity theft. A majority of the Court found in favour of the province holding that the removal of the exemption was justified under the Charter. The judgment clearly strengthens the hands of regulators.
First, Justice McLachlin, writing for the majority, puts paid to the notion – raised in lower court decisions in the case – that an alleged Charter violation can be remedied by accommodating the affected individuals to alleviate the harm associated with the supposed breach. In applying the Oakes analysis, which is the now-familiar touchstone in Charter cases, she asserts that elements of the test set out in Oakes should not be replaced by, or conflated with, the duty to accommodate. She indicates that the duty to accommodate is a branch of law historically associated with human rights jurisprudence and should not be imported into Charter cases. Rather, s. 24(1) of the Charter provides for remedies where a breach of rights or freedoms is found.
Even more striking are the Chief Justice’s comments with regard to the proportionality effect of the law and its impact on the religious rights of the Hutterian Brethren.
In assessing the weight given to the impingement on the freedom of religion enjoyed by Hutterites, she states that with aspects of religion touching on many facets of day-to-day life, and there being a host of religious practices in contemporary society, some conflict with generally applied law and regulations in Canada is inevitable.
Justice McLachlin then acknowledges the importance of the perspective of the religious claimant in asserting his or her rights, but states “this perspective must be considered in the context of a multicultural, multi-religious society where the duty of state authorities to legislate for the general good inevitably produces conflict with individual beliefs.“ So an absolute prohibition of actions that curtail an individual’s religious freedoms based merely on a bare assertion of an impact on religious practice is untenable.
In the result, the Court ruled that the limit of the Hutterite Brethren’s freedom of religion was justified under s. 1 of the Charter. The judgment further stated that the conflict between the Hutterite’s religious objection to having their photograph taken and the mandatory requirement for a photograph on driver’s licences could be resolved by the group hiring drivers from outside the faith.
All this is important because, like having a driver’s licence, registration as a charity is a privilege not a right – and sometimes the exercise of religious freedom can affect how organizations that want the benefits of status as a registered charity carry out their work. Where a charity operates in a way that is in keeping with faith tenets but may be illegal or contrary to public policy, it is potentially subject to de-registration or other sanctions.
In Canada, this issue arose when concerns were raised over whether churches would be required to conduct same-sex weddings when the federal government moved to legalize civil same-sex marriage. Religious groups won a special provision in the Income Tax Act exempting them from de-registration or other penalties applied because of their refusal to condone such marriages.
But beyond same-sex marriage, numerous tenets and practices associated with religion are challenging to reconcile with contemporary Canadian norms and values. Both traditional faiths and those more recently recognized in Canada have faced criticism in this regard.
England began wrestling with this problem earlier this year when the Charity Commission ruled against an attempt by two Catholic adoption agencies to amend their objects to permit discrimination against homosexual couples in recruiting prospective parents. Such a provision in their objects is key to the agencies winning an exemption under Equality Act regulations that permit discrimination that is sufficiently linked to their public benefit. Without the exemption, the agencies would be in violation of the law and subject to deregistration.
In response to the threat to their status, agencies have either broken ties with the Catholic Church or ceased recruiting prospective parents. An appeal to the Charity Commission decision is pending at the time of writing.
Here, the Hutterite ruling suggests that, absent further legislative reprieves, the future holds the prospect of religious groups facing a choice between yielding to legitimate public policy imperatives and relinquishing their status as registered charities and the accompanying privileged tax treatment. Stay tuned.
*Peter Broder is General Counsel at The Muttart Foundation in Edmonton. The views expressed in this article, which first appeared in LawNow magazine, do not necessarily reflect those of the Foundation.
Commercial Activities and Other Issues Involving Non-Profit Organizations
Theresa Man*
On November 5, 2009, CRA released a technical interpretation (2009-0337311E5) clarifying its position on various issues involving non-profit organizations (NPOs) defined under paragraph 149(1)(l) of the Income Tax Act, such as whether NPOs can earn a profit or engage in commercial activities, and whether CRA maintains a list of NPOs.
On the question of whether an NPO can compete against taxable entities, CRA responded, after referring to the BBM case (BBM Canada v. Canada (Minister of National Revenue), 2008 TCC 341), that the Income Tax Act does not prohibit an NPO from engaging in certain types of activities, including commercial activities, and therefore it is permissible for NPOs to compete against taxable entities.
In relation to the question of whether an NPO can earn a profit, CRA’s view is that an NPO can earn a profit provided that it is unanticipated and incidental to carrying out the NPO’s exclusively not-for-profit purposes. CRA is of the view that an NPO cannot intentionally earn a profit, even though the profits are used to fund the activities of the organization, because it does not matter what the profit is used for.
CRA also expressed its view that incorporation under federal or provincial not-for-profit corporate legislation does not necessarily mean that such corporation would qualify to be an NPO under the Income Tax Act, because the requirements under the corporate legislation and the Income Tax Act are different. Lastly, CRA indicated that it does not maintain a list of NPOs, since they are not required to register with CRA.
*Theresa Man is a Partner at Carters Professional Corporation, tman@carters.ca, (519) 942-0001 ext 225.
**This article first appeared in Carters Profession Corporation’s Charity Law Update November 2009. Reprinted with Permission.
In Remai, e. AS Executrix of Estate of F. Remai v. The Queen, 2009 FCA 340, a decision released November 19, 2009, the Federal Court of Appeal (FCA) upheld an earlier decision of the Tax Court of Canada (TCC). Mr. Remai owned 100% of the shares of a management company, which paid him management fees in the form of interest bearing promissory notes. Prior to his death, he donated two of these promissory notes to his private foundation. The foundation thereafter sold the notes to Sweet Developments Ltd., a corporation controlled by Mr. Remai’s nephew. Sweet carried on business activities for and with Mr. Remai and was involved in partnerships with corporations owned and controlled by Mr. Remai. CRA reassessed Mr. Remai’s terminal return and disallowed the deductions on the basis that the sale of the notes was not executed at arm’s length and, therefore, the notes were non-qualifying securities as defined under subsection 118.1(18) of the Income Tax Act (“Act”). CRA also took the position that the sale of the notes constituted an avoidance transaction that resulted in a misuse or abuse of the provisions of the Act pursuant to the general anti-avoidance rule (GAAR).
The estate appealed the assessment to the TCC, which allowed the appeal. The FCA found that the Tax Court judge did not err when he found that (i) the disposition of the promissory notes by the Foundation to a third party was an arm’s length transaction; and (ii) the disposition was not a misuse of provisions of the Income Tax Act, and thus was not caught by GAAR. With respect to the application of the GAAR, the parties agreed that the sale of the promissory notes by the Foundation to Sweet was an avoidance transaction because it was entered into primarily for tax avoidance reasons. However, the FCA agreed with the Tax Court judge’s conclusion that to allow the tax benefit claimed by the taxpayer would not frustrate the legislative purpose of the provisions relating to non-qualifying securities. According to the FCA, the rationale behind disqualifying certain gifts from a charitable tax credit is because of the practical difficulty of assessing their fair market value. Paragraph 118.1(13)(c) of the Income Tax Act allows these non-qualifying securities to be redeemed if sold to a third party in an arm’s length transaction, because the price paid by the third party indicates the fair market value of the security. The sale of the promissory notes by the Foundation to Sweet was consistent with this purpose. Therefore, the GAAR did not apply to disallow the charitable tax credit.
C.D. Howe Paper Proposes a Canadian Charities Council
Arthur Drache*
For most lawyers who are involved in charity work it has been apparent for fifteen or twenty years that the CRA (and before it, Revenue Canada) is an inappropriate vehicle for making decisions about charitable status. Many have looked longingly at jurisdictions such as England and Wales which has an independent Charities Commission which has no link to the tax authorities. It is no coincidence that a slew of other common law jurisdictions such as Singapore, New Zealand and Scotland have in recent years opted for a similar model.
On a number of occasions papers have been written and conferences have been held which looked at replacing the CRA’s jurisdiction over charities with something else, be it a “tribunal” or a “charity commission.” Each attempt failed miserably, not just because of bureaucratic turf protection but because of constitutional issues.
Now, Adam Aptowitzer, a lawyer with Drache LLP, under the auspices of the prestigious “think tank”, the C.D. Howe Institute, written a provocative paper entitled Bringing the Provinces Back in: Creating a Federated Canadian Charities Council. After reviewing the history and the problems inherent in the status quo Aptowizer suggests a format by which the constitutional issues can be dealt with producing the long sought for means of taking charity jurisdiction away from the CRA.
Aptowitzer, proposes reforming the system through the creation of a federal-provincial “Canadian Charities Council” that would assume from the CRA responsibility for i) registering charities, ii) advancing the common law definition of charity, iii) regulating non-tax-related aspects of the charity system, iv) adjudicating disputes regarding areas under the Council’s jurisdiction, and v) ensuring compliance with the rules the Council creates. Involving the provinces, as the Constitution intended, and encouraging their cooperation with the federal government will result in a system that will comprehensively regulate the sector for the benefit of both charities and the public, he says.
The following excerpt gives a flavour of the concept.
As the federal government’s jurisdiction to govern the sector rests on shaky legal ground, perhaps the most viable option in terms of creating a standardized set of charity regulations is a hybrid system, in which charity regulation and registration would be the responsibility of a new joint federal-provincial body, but the tax provisions would be retained in the ITA. All but the registration provisions in the ITA would be repealed, and registration under the ITA would be both contingent and automatic upon registration as a charity by a “Canadian Charities Council” composed of representatives of each province and the federal government.
This Council would be structurally similar to the CRA’s Board of Management. The CRA Board of Management oversees the organization and management of the CRA and sets out policies related to resources, services, property, personnel, and contracts. This Board is composed of 15 members appointed by the federal cabinet but 11 of whom are nominated by the provinces. Most of these representatives are from the private sector.
Notably, while the Board is answerable to Parliament through the Minister of National Revenue (although see below for our comments on this point in respect of a charity council), it has no access to confidential taxpayer information and is not involved in the actual application of the ITA or its policies. Similarly, the Council here would not be involved in individual cases but would oversee the public service machinery necessary to properly administer the sector.
Such a Council would require each province to pass legislation investing the Council with the authority now invested in the provincial attorneys general to regulate charities in their province. In return, each province would be entitled to appoint a representative to the Council at its discretion. It is anticipated that the province would choose an appointee from the charitable sector and in this way the input of the sector could be solicited while maintaining provincial participation.
Finally, given the often overwhelming importance of front line experience in regulating the sector, the federal government should retain the authority to appoint at least one representative of the sector to the Council. It should be noted that while the Council would not involve itself in individual cases, the authority to do so would devolve from the participation by the provinces on the Council. Thus, the references below to the ‘Council’ should be taken as references to the Council in its jurisdictional capacity but not necessarily the actual council of representatives.
The provincial delegation of authority to the Council, would not breach the Supreme Court’s ruling in the Nova Scotia case, as the provinces would be delegating, not to the federal government, but to an independent council. As Monahan and Roth note:
Of course, it would be theoretically possible for the Provinces to delegate their jurisdiction over charities to a national charity commission. If this were a practical possibility, there would be a strong case in favour of transferring to such an agency the entire Federal jurisdiction over charities as well, including the power to make the initial determination on application for registration.
The Council could operate so that any province that did not want to participate would not be required to do so. However, since registration under the ITA would be contingent on registration by the Council, and as the Council could not register charities in a non-participating province, charities in an uncooperative province would not be registered for federal income tax purposes. While somewhat heavy handed, this should be sufficient incentive to induce provincial participation; it also has the merit of being an attractive argument from a technical point of view. Moreover it would help standardize the definition of charity across the provinces, encourage a national standard in charity regulation, harmonize the administration of the sector over the entire country, and provide greater legitimacy for regulatory laws than currently exists.
Of course, if none of the provinces opted in (or if they quit the Council en masse), Parliament would always retain the right to reintroduce legislation in the ITA as a requirement of registration. Clearly, this worst-case (and current) scenario would happen only if the provinces made a concerted effort to avoid exerting the constitutional authority they already have.
Aside from shouldering their constitutional responsibility in this sector, however, the Provinces should be motivated to become involved because of their interest in ensuring that charities, which perform so many duties that would otherwise add to the financial responsibility of provincial governments, are being created and administered properly.
Furthermore, since, on every donation, each province (above a minimum threshold) foregoes tax revenue generally equal to the highest marginal tax credit in that province, one would expect the provinces to want to ensure such funds were spent properly.”
Obviously, we chatted with Aptowitzer during the period he was writing this paper and suggested that the notion of cooperation on charity regulation between the federal government and the provinces was “pie in the sky”. But who might have foreseen recent developments that after seventy years of talk, the feds and most provinces have come together to effectively create a federal securities commission, albeit under another name.
This shows that even pie in the sky might someday be available … if there is enough will. When it comes to charity regulation, it is not certain that the will is present.
Aptowitzer has produced a very interesting new approach to long-standing legal and constitutional issues which have an impact on charity regulation. All those who have struggled to find a solution to the problems inherent in the tax collector making fiscal decisions of a social nature will find the paper compelling reading.1
*Arthur Drache practices at Drache LLP and is Associate Council at Miller Thomson LLP, 613-233-2675, adrache@drache.com.
**First published in the Canadian Not-for-Profit News. Reprinted with permission.
On December 3rd, Bill 212 was passed by the Ontario Legislature. As a result, on receiving Royal Assent, the Charitable Gifts Act will be repealed, removing provincial restrictions on ownership of shares by charities. At the same time the Charities Accounting Act will be amended to remove restrictions on the ownership by charities of real estate. The only requirement is that these assets must either be used directly in the charitable activities of the organization or invested pursuant to the prudent investor rule. This finally puts Ontario in the same position as the rest of Canada. Our Section was instrumental in achieving this very important result and we will continue to work on a number of other initiatives we have identified, including a provincial charity fundraising act.
Our second luncheon program, which was held on November 17, 2009, was a presentation by Jill McAlpine and Susan Manwaring on the topic of structuring endowment funds. On January 12, 2010, Sara Oates and Brenda Lee-Kennedy from Price Waterhouse Coopers will be speaking about the new CICA financial statement rules which are coming into effect for non-profits and charities. Section members who missed one of our programs or want to hear them again can now download an MP3 recording of our luncheon programs from the OBA website.
Our Section is participating in the OBA’s 2010 Annual Institute on Tuesday, February 16, from 10 am to 1 p.m. The program is titled “Charity and Not-for-Profit Law – Doing Good, While Avoiding Legal and Liability Problems: A Primer for Lawyers on Advising and Sitting on Non-Profit Boards and Charities”. Visit the website for more information and to pre-register: www.oba.org/institute2010
We invite you to visit our website, where you may find more information about the Section, our programs, copies of our submissions and past issues of this newsletter. I know that our editor is always happy to receive contributions from our members and the deadline to submit articles for the next newsletter is February 19, 2010. We very much encourage you to attend our programs in person or via teleconference. Please feel free to get in touch with me for any questions or suggestions that you may have about our Section and our programs.
The New CICA Accounting Standards and Not-for-Profit Organizations
Date: Tuesday, January 12th Time: 12:00pm - 1:30pm Location: OBA Conference Centre, 20 Toronto Street, Toronto
As public companies move towards International Financial Reporting Standards and private enterprises await finalization of a new set of Canadian Generally Accepted Accounting Principles, not-for-profit organizations are waiting to learn how their accounting and financial reporting requirements will be amended. Join us to hear Sara Oates, a partner in the audit and assurance services group at PricewaterhouseCoopers, who practices exclusively in the not for profit sector, and learn more about how current and anticipated changes in standards will affect your clients.
