Volume 11, No. 2 - January/Janvier 2008

Looking Back and Looking Forward 
By Arthur Drache, Drache LLP, Counsel to Miller Thomson LLP
Arthur Drache comments on events of 2007 and looks forward to possible developments for 2008. This article is a good summary of changes and developments at the Canada Revenue Agency Charities Directorate in 2007 and what we have to look forward to in working with the Charities Directorate in 2008.

CASE COMMENTS

Supreme Court of Canada Decision Permits Judicial Interference in Religious Disputes Charitable Gaming
By Terrence S. Carter and Derek B. Mix-Ross, Carters Professional Corporation
In a 7-2 decision released on December 14, 2007 the Supreme Court of Canada has held that the failure to perform a religious obligation may give rise to civil damages. In this article the authors comment on Bruker vs. Marcovitz 2007 SCC 54 where the Supreme Court upheld a decision of the Quebec Superior Court ordering a Jewish husband to pay damages to his ex-wife for withholding his consent to a religious divorce. The article discusses a number of challenging and troubling issues for religious institutions and individuals which are raised by the decision.

Tax Court Denies Application for Postponement of Suspension in International Charity Association Network (ICAN) v. HMR
By Kate Lazier and Andrew Valentine, Miller Thomson LLP, Toronto
In a recent decision, the Tax Court of Canada dismissed an application by ICAN to postpone a suspension of its tax receipting privileges. On November 21, 2007, CRA issued a suspension of ICAN’s authority to issue tax receipts on the basis that ICAN failed to maintain proper books and records and failed to provide records or provide access to records to the tax authority. This article discusses the court’s decision and comments on the usefulness of the decision as a precedent in these matters.

COLUMN
 
Canada Revenue Agency Notes
By Marni Whitaker, Lang Michener LLP, Toronto
This column summarizes recent announcements and developments at the Canada Revenue Agency, Charities Directorate.
 
SECTION NEWS

Message from the Chair
By Bill Pashby
Chair, Bill Pashby provides his report and looks forward to the upcoming events of 2008.

Upcoming Section Program – January 29, 2008 — Donation Tax Shelters and Flow-Through Shares 

Looking Back and Looking Forward

Arthur Drache*

This article originally appeared in the January issue of Not for Profit news.

The first issue of a new year seems the appropriate time to see where the sector has been and where it is going, at least in terms of dealing with the various parts of government, both federal and provincial.

Usually, the main “event” of the year for charities at the federal level is the Budget. This time around we received what we referred to as a poisoned chalice. Legislation to allow the tax-free transfer of appreciated publicly listed assets to private foundations was announced. This should have been a great achievement, but at the same time the notion of “excess corporate holdings” was introduced for private foundation which may require widespread asset divestiture. In November, there were some slight signs that Finance is having some second thoughts.

When the Notice of Ways and Means to implement the legislation was introduced on November 13, Finance Minister Flaherty said:

“As a result of consultations with private foundations, the Government intends to further review the excess corporate holdings rules in order to provide relief in respect of unlisted securities held on March 19, 2007 and to consider the treatment of corporations wholly owned by such foundations. Minister Flaherty indicated the Government is moving ahead with the legislation at this time, in advance of the conclusion of this review, in order to ensure that the new rules providing a capital gains tax exemption on the donation of listed securities to private foundations are enacted as soon as possible.”

We shall just have to wait to see what develops in 2008.

From an administrative point of view, there has been a considerable shift of personnel in the Charities Directorate. At the top, Terry de March has become the Director General, replacing Elizabeth Tromp. But there have been a number of other changes involving key positions. We have also been told that Carl Juneau will be returning to the Directorate after a lengthy secondment to Finance, though it is not as yet clear what his role will be.

There is much to be unhappy with vis-à-vis the Directorate. Audits have become more widespread and there is a much lower tolerance for deviations from policy. The main (but not sole) area of contention is the interpretation of the disbursement quota rules, particular with regard to third party fund-raising costs. There have been promises to review the current policy (which is much more restrictive than was the case when the legislation was first introduced) but so far nothing has happened. It is also clear that there is a huge problem for smaller charities which have interests outside the country and the traditional approaches of using agency agreements and joint ventures seem to draw inordinate administrative demands.

Matters seem to have been exacerbated (though the evidence remains anecdotal) by the fact the lower levels of the Directorate are poorly versed in either charity law or the appropriate Income Tax Act provisions. This leads to rejections of valid applications and requests backed up with refusals to reverse the original decisions even in the face of evidence that the decision was wrong. Of course, in due course if you move higher up the food change, you will eventually find somebody who is well enough versed in the law to do the right thing…after six or eight months.

As we noted in our October issue, the CRA’s own figures show that a greater percentage of applications for charitable status are being turned down. The CRA data also shows a slow-down in dealing with files. And where there has been an administrative revocation for failing to file the T-3010, the bureaucrats are forcing the applicants for reinstatement to jump through hoops like never before. And while the introduction of intermediate sanctions was heralded as a major policy breakthrough when the legislation was first announced, CRA seems loath to use the procedure…perhaps fearing what will happen when appeals are taken to the Tax Court where, under their rules, bureaucrats can be called as witnesses to justify their actions in each appeal.

On the court scene, there was little to report. The Supreme Court heard the AYSA case and came out with a mundane but correct decision. But of course, that might not have been needed had the Federal Court of Appeal used common sense when the case was first heard. The bad part of the judgement was the explicit statement that the Supreme Court had no interest in broadening the definition of what is charitable, with the ball being lobbed to Parliament which has consistently shown a lack of interest in the topic.

The Travel Just case was (properly in our view) refused the chance to go to the Supreme Court. The Redeemer Foundation case was accepted, and will be heard in February 2008.

Arguably, the brightest spots came at the provincial level. First, Alberta’s budget created a tax “bonus” for charitable donations, giving credits which are worth much more than what is theoretically appropriate. Then, both Newfoundland and New Brunswick appointed ministers to “represent” the third sector. And though the feds seem to have abandoned its poorly conceived “reform” of the Canada
Corporations Act, both Ontario and British Columbia are forging ahead with reforms proposals, though the nature of what the final product is remains to be seen.

All in all, we feel that 2007 was not a great year for the sector, though there were some bright spots.

So what about 2008?

We expect nothing for the sector in the next budget. There are many things which could be done, including going to a one-tier tax credit system or implementing some sort of regime for charitable remainder trusts. Our best guess, at this stage, is that nothing much will happen.

We are also pessimistic about the CRA. Compared to (say) the 2001-2003 period, where the Charity Directorate seemed to be in sync with the sectoral needs, our perception is that the bureaucrats view the charities as all potential “bad guys” and the new approach to audits and assessment of applications reflects the overall CRA approach, namely that taxpayers are untrustworthy cheats and audits are designed to prove that point. Charities are now operating in an “us” and “them” environment vis-à-vis the Directorate and frankly we don’t see a lot of improvement in attitude on the horizon.

There do not seem to be many cases wending their way to the courts, though, of course that can change. The only one which we know will be heard is the Redeemer Foundation case, which is essentially procedural. We expect the Federal Court of Appeal’s decision to be overturned, but even if that happens, it will have little impact on the vast majority of charities.

We cannot guess what may happen at the provincial level in 2008. With 10 provinces and two territories developing policies and bringing down budgets, it is almost impossible to foresee changes. But certainly if the 2007 pattern follows, there may be some pleasant if unexpected surprises.

We have to say that when we have delved into forecasting from time to time in years gone by, our success rate (like our success rate before the Federal Court of Appeal) has been nothing to brag about. We would like to hope that we are wrong on many of our thoughts about 2008 and that despite our pessimism, it will be a banner year for the sector. But we aren’t betting on it.

* Arthur Drache, Drache LLP, Counsel to Miller Thomson LLP.

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Supreme Court of Canada Decision Permits Judicial Interference in Religious Disputes

Terrance S. Carter and Derek B. Mix-Ross*

A. Introduction

In a seven-two decision released on December 14, 2007, the Supreme Court of Canada has held that the failure to perform a religious obligation may give rise to civil damages. In Bruker v. Marcovitz,[1] the Court upheld a decision of the Quebec Superior Court ordering a Jewish husband to pay $47,500 in damages to his ex-wife for withholding his consent to a religious divorce, despite contractually agreeing to do so 15 years earlier. This decision raises a number of challenging and troubling issues for religious institutions and individuals, which are discussed in detail below.

B. Background to the Decision

The case arose from a matrimonial dispute involving members of the Orthodox Jewish community who were married in 1969. In 1980, the parties instituted divorce proceedings and three months later entered into a separation agreement which provided, amongst other things, for the partition of property, child support and access. It also contained an undertaking by the husband to appear before rabbinical authorities to obtain a Jewish religious divorce, or a get. It was this undertaking which gave rise to a decades-long legal battle, culminating in this Supreme Court of Canada decision.

A get is a significant aspect of Jewish law. A wife can not obtain a get without her husband’s consent. Without a get, a woman remains the wife of her husband and she cannot remarry in the Jewish faith until the husband agrees to give it. When he does not, the wife is without religious recourse and is known as an agunah or “chained wife”. Any children she would have from a civil marriage would be considered “illegitimate” under Jewish law.

In this case, the couple’s relationship “deteriorated and became stormy” after signing the separation agreement, and the husband refused to grant her the get until 1995, 15 years later. As a result, the wife brought an action against the husband claiming $500,000 for “having been restrained from going on with her life, remarrying in accordance with the Jewish faith, and having children.”[2]

At trial, Justice Mass of the Quebec Superior Court held that once the husband signed the civil agreement, his obligation to appear before rabbinical authorities to obtain the get “moved into the realm of the civil courts”.[3] The contract was therefore valid and binding, even though its purpose was partly to compel a religious obligation. In finding that the husband’s failure to grant the get had direct consequences on the wife by depriving her “of the opportunity to marry within her community during this period,” Justice Mass ordered a total of $47,500 in damages.[4]

This decision was appealed to the Quebec Court of Appeal, where a unanimous court held that “the substance of the...obligation is religious in nature, irrespective of the form in which the obligation is stated,” and therefore the obligation is a moral one which is unenforceable by the courts.[5] Consequently, the Court of Appeal allowed the husband’s appeal, holding that “requiring [the husband] to pay damages in such circumstances would be inconsistent with the recognition of his right to exercise his religious beliefs as he saw fit without judicial intervention.”[6]

The wife appealed to the Supreme Court of Canada.

C. Decision of the Majority of the Supreme Court of Canada

Writing for the majority of the Supreme Court of Canada, Madame Justice Abella observed that there were two issues to be determined in the appeal:

1) Whether the agreement to give a get was a valid and binding contractual obligation under Quebec law; and

 

2) If the agreement to give a get was valid and binding, whether the husband could rely on freedom of religion to avoid the legal consequences of failing to comply with the agreement.

The preliminary issue that needed to be determined, however, was whether the wife’s claim was justiciable (i.e. capable of being determined by a civil court), since it was based on a religious, as opposed to a civil, obligation.

Justice Abella acknowledged the line of cases which held that courts should be reluctant to get involved in religious disputes. However, she went on to note that “[n]o case goes so far as to hold that even in cases based upon a civil obligation, where the Court is not required to determine matters of religious doctrine, the Court should be precluded from adjudicating disputes that involve obligations having a religious character.”[7]

In this case, Justice Abella concluded that the religious elements of the husband’s promise to provide the get did not “immunize it from judicial scrutiny,” as it was “negotiated between two consenting adults, each represented by counsel, as part of a voluntary exchange of commitments intended to have legally enforceable consequences.”[8] As a result, the obligation was appropriately subject to a “judicial microscope.”[9] The court then turned to the remaining issues raised on the appeal.

ISSUE 1: Whether the agreement to give a get was a valid and binding contractual obligation under Quebec law.

With respect to this first issue, Justice Abella held that “an agreement between spouses to take the necessary steps to permit each other to remarry in accordance with their own religions, constitutes a valid and binding contractual obligation under Quebec law.”[10] In coming to this conclusion, Justice Abella examined two of the three types of obligations recognized by civil law: moral obligations and civil obligations.

Moral obligations, it was observed, are “binding only as a matter of conscience or honour and…cannot be enforced by the State.”[11] The example provided was the duty of charity toward one’s neighbour. Civil obligations, however, can be enforced by the courts, such as the obligation of support between spouses. Although one would have thought that the exercise of a religious act is a moral duty, and thus unenforceable by the courts, the majority held that “there is nothing in the [Quebec] Civil Code preventing someone from transforming his or her moral obligations into legally valid and binding ones,”[12] which is precisely what the parties were deemed to have done in this case. Therefore, the husband’s undertaking to provide the get constituted an enforceable contractual obligation.

ISSUE 2: If the agreement to give a get was valid and binding, whether the husband could rely on freedom of religion to avoid the legal consequences of failing to comply with the agreement.

The husband argued that if such a contractual obligation existed, it was null and void as contrary to public order, since it operated to restrain the free exercise of his fundamental freedoms, including the freedom of religion and conscience. Justice Abella agreed that the object of a contract cannot be contrary to public order. In this case, however, it was held that the promise to grant a get did not violate the public order. To the contrary, the Court held that enforcing such an obligation would be consistent with “public policy values shared by other democracies.”[13]

With respect to the husband’s freedom of religion argument, Justice Abella held that the husband could not rely on freedom of religion to escape liability for failing to perform his obligation, because “any harm to the husband’s religious freedom in requiring him to pay damages for unilaterally breaching his commitment is significantly outweighed by the harm caused by his unilateral decision not to honour it.”[14]

Justice Abella queried whether the husband sincerely believed that granting a get would violate his religious belief or conscience, that the husband never offered a religious reason for refusing to provide a get, and that “his refusal to provide the get was based less on religious conviction than on the fact that he was angry at [his wife].”[15] As a result, the Court held that there was no “prima facie infringement of [the husband’s] religious freedom”.[16]

The Court went on to note, however, that even if the husband’s freedom of religion was infringed, this was “inconsequential compared to the disproportionate disadvantaging effect on [the wife’s] ability to live her life fully as a Jewish woman in Canada.”[17] In reaching this conclusion, the Court looked at the decisions of other countries in which agreements to provide a get were enforced. The Court also opined that the withholding of the get infringed the equality rights and dignity of Jewish women by denying them independence and the ability to divorce and remarry. As a result, the husband could not rely on the Quebec Charter to avoid the consequences of his legal commitment to provide the get, and the wife’s appeal was allowed.

D. Reasons of the Dissenting Justices of the Supreme Court of Canada

Justices Deschamps and Charron disagreed with the majority and wrote a dissenting opinion. Justice Deschamps, writing for the dissent, framed the case differently than the majority, and observed that the primary question before the Supreme Court was “whether the civil courts can be used not only as a shield to protect freedom of religion, but also as a weapon to sanction a religious undertaking.”[18] For the dissent, the answer to that question was a firm “no”.

Justice Deschamps observed that courts are to remain neutral where religious precepts are concerned. This neutrality allows them to legitimately act as arbiters “in relation to the cohabitation of different religions and enables them to decide how to reconcile conflicting rights.”[19] The dissent noted that “[i]t would be inappropriate to impose on them an additional burden of sanctioning religious precepts and undertakings.”[20] The majority, in Justice Deschamps’ view, crossed that line of neutrality in sanctioning, and thereby endorsing, the religious consequences of the husband’s delay in granting his consent for a get.

In the dissent’s view, the case turned on the issue of whether the wife’s claim was justiciable. Disagreeing with the reasons of the majority on this matter, Justice Deschamps concluded that the wife’s claim was not justiciable. Justice Deschamps noted that courts have long refused to intervene in religious disputes, unless some property or civil right is affected. Here, the wife was not arguing that any of her civil or property rights were being infringed. Indeed, she was not prevented from remarrying under civil law. It was only her religion which prevented her from doing so, and Justice Deschamps emphasized that courts should not involve themselves in such matters.

Justice Deschamps also reviewed the international case law cited by Abella J. and observed that the solutions adopted by other countries with respect to the granting of a get were quite varied and governed by their own internal private law rules. Justice Deschamps concluded that “[the cases] establish no principle of public law that is so persuasive that Canadian courts should alter their approach.”[21]

The dissent went on to analyze the contractual issues raised in the case, since the wife’s claim was advanced and decided by the majority on the basis of contract law. It was observed that, under civil law, “a contract which does not have as its object a juridical act envisaged by the parties at the time of its conclusion…was null.”[22] A juridical act was defined as one which was capable of “legal characterization” and “juridical consequences.”[23] In this case, the act in dispute was obtaining a religious divorce, which Justice Deschamps held was not recognizable in civil law:

Obtaining a religious divorce is not capable of legal characterization. The rabbinical authorities are not responsible for civil divorce in the way that certain religious authorities are for marriage. The act they perform or the judgment they render is not recognized in civil law. Neither the undertaking to consent to a religious divorce nor the religious divorce itself has civil consequences.[24]

As a result, the husband’s undertaking to appear before the religious authorities to obtain a get did not form a valid contractual purpose. Rather, it was a purely moral obligation based on a duty of conscience alone and which could not be enforced civilly, much like an undertaking to go to church regularly, or to a synagogue or mosque.

Finally, Justice Deschamps noted that, even if the obligation at issue was enforceable, determining the appropriate remedy would have been problematic. The damages claimed by (and awarded to) the wife were based on her observance of specific religious precepts. This was problematic, since religion had never been used “as a means of forcing another person to perform a religious act, nor have the courts been used to sanction the failure to perform such an act.”[25] The second area of concern for the dissent was that the Court was placing itself in a position of conflict. The court was awarding damages on the basis that children born in a subsequent relationship would have been regarded as illegitimate, even though Canadian law recognizes that all children are born equal, whether inside or outside of marriage. The Court was also awarding damages on the basis that the wife was not released from her marriage and could not remarry, despite the fact that she has been granted a divorce and was free to remarry civilly. Thus, Justice Deschamps held, in awarding these damages, the court improperly recognized a legal situation that was contrary to the rules of Canadian and Quebec family law, which the Court was constitutionally responsible for applying.

On this basis, the dissent held that the appeal should be dismissed, and that the husband’s freedom of religion argument did not need to be addressed.

E. Commentary

This decision raises a number of challenging and troubling issues. In this regard, the outcome of this particular decision was undoubtedly equitable in the circumstances. A husband was held accountable for breaching his promise to his wife and effectively preventing her from remarrying or having children in accordance with her religious beliefs. Indeed, the alternative to this outcome - allowing such an act to go unpunished - would seem manifestly unfair. However, the analysis employed by the majority of the Supreme Court of Canada in reaching this outcome raises some serious concerns.

At first glance, the decision is arguably limited in its application to its facts. The majority based its decision on the fact that the obligation in issue, albeit a religious one, was contained in a civil contract. Thus, the decision may be seen as having a limited scope and only applying to situations in which an individual has contractually agreed to perform a religious act. The majority also noted that it was not commenting on whether a husband could be compelled to provide a get in the absence of a written agreement. However, it would be difficult to successfully argue that compelling a Jewish husband to provide a get would unjustifiably infringe his freedom of religion, particularly in light of Justice Abella’s holding that “such a prima facie infringement does not survive the balancing mandated by this Court’s jurisprudence and the Quebec Charter.”[26]

Other comments relating to the religious issues in this case are equally problematic. For example, although the majority was quick to point out that it was not conducting “a judicial review of doctrinal religious principles,”[27] it in fact did exactly that. The majority condemned a Jewish man’s refusal to provide a religious divorce as “arbitrarily den[ying] his wife access to a remedy she independently has under Canadian law,”[28] and as constituting “an unjustified and severe impairment of a [Jewish woman]’s ability to live her life in accordance with this country’s values and her Jewish beliefs.”[29]

While this particular religious practice may not reflect generally acceptable societal standards, it is not the Court’s role to be an arbiter of which religious principles or doctrines are “fair” or obligatory. As Justice Deschamps observed, where religion is concerned, the state leaves it to individuals to make their own choices, and such decisions should not be regulated, interfered with, or sanctioned by the state. The husband’s refusal to grant a get did not affect his wife’s civil rights, as she was free to remarry and have legitimate children under Canadian and Quebec law. Only her religious rights were in issue, and she was free to accept the religious consequences of her husband’s refusal or to discontinue her membership in that particular religious community.

As the dissent observed, however, the majority of the Supreme Court of Canada overstepped its bounds by commenting negatively on a religious practice based solely on the religious consequences it had on adherents of that religion. In the words of Justice Deschamps, this interference was improper and “it is not up to the state to promote a religious norm”; that is a role that should be “left to religious authorities.”[30]

Justice Deschamps’ position has traditionally been observed by courts in this country. As recently as 2004, the Supreme Court of Canada held that:

[T]he state is in no position to be, nor should it become, the arbiter of religious dogma. Accordingly, courts should avoid judicially interpreting and thus determining, either explicitly or implicitly, the content of a subjective understanding of religious requirement, “obligation”, precept, “commandment”, custom or ritual.[31]

However, the case at hand represents a significant shift from that position, as the Supreme Court of Canada, for the first time, now seems prepared to involve itself in assessing the merits and fairness of religious doctrines. This approach is all the more apparent in the Supreme Court’s statement that its role under the Canadian Charter of Rights and Freedoms is to “ensure that members of the Canadian public are not arbitrarily disadvantaged by their religion.”[32]

This newly-mandated supervision over religion is alarming. How is the court to determine when a person is “arbitrarily disadvantaged by his religion”, particularly where the person’s decision to practice their religion is a voluntary one? Will the court interfere whenever it views a religious practice as discriminatory against a member of that religion? This development may seem to be a positive one in extreme cases; however, what about other situations? The Quebec Court of Appeal was concerned about this very issue, and in dismissing the wife’s claim in this case, it noted:

Manifestly, it is not the role of secular courts to palliate the discriminatory effect of the absence of a ghet on a Jewish woman who wants to obtain one, any more than it would be appropriate for secular courts, in an extra-contractual context, to become involved in similar disputes involving other religions where unequal treatment is the fate of women in terms of their access to positions in the clergy, or as we have seen recently in other contexts, the fate reserved for same-sex couples being denied the right to marry in religious ceremonies of some religious faiths.[33]

This passage was cited with approval by the dissenting justices of the Supreme Court of Canada, who themselves observed:

Civil rights arise out of positive law, not religious law. If the violation of a religious undertaking corresponds to the violation of a civil obligation, the courts can play their civil role. But they must not be put in a situation in which they have to sanction the violation of religious rights. The courts may not use their secular power to penalize a refusal to consent to a get, failure to pay the Islamic mahr, refusal to raise children in a particular faith, refusal to wear the veil, failure to observe religious holidays, etc. Limiting the courts’ role to applying civil rules is the clearest position and the one most consistent with the neutrality of the state in Canadian and Quebec law.[34]

This is the approach that has traditionally been followed by the courts. However, it was not the approach followed by the majority of the Supreme Court of Canada in this case. As such, it remains to be seen how this decision will be interpreted in future decisions. It may be limited in application to its own facts, and may only be employed to impose liability where a party contracts to fulfil a religious obligation. On the other end of the spectrum, it may be interpreted more broadly to justify further judicial interference with religious practices. It would seem that the majority’s reasons would certainly grant lower courts the flexibility to employ the latter approach, a development which should be of concern to people of communities of faith in Canada.

* Terrance S. Carter, B.A., LL.B., Trade-Mark Agent and Derek B. Mix-Ross, LL.B.

[1] 2007 SCC 54.
[2] Ibid. at para. 109.
[3] [2003] R.J.Q. 1189, at para. 19.
[4] Ibid. at para. 35.
[5] [2005] R.J.Q. 2482 at para. 76
[6] Supra, note 1, at para. 36.
[7] Ibid. at para. 43.
[8] Ibid. at para. 47.
[9] Ibid.
[10] Ibid.at para. 16.
[11] Ibid. at para. 49.
[12] Ibid. at para. 51.
[13] Ibid. at para. 90.
[14] Ibid. at para. 17.
[15] Ibid. at para. 69.
[16] Ibid. at para. 67.
[17] Ibid. at para. 93.
[18] Ibid. at para. 101
[19] Ibid. at para.102.
[20] Ibid.
[21] Ibid. at para. 155.
[22] Ibid. at para. 171.
[23] Ibid. at para. 174.
[24] Ibid.
[25] Ibid. at para. 74.
[26] Ibid. at para. 70.
[27] Ibid. at para. 47.
[28] Ibid. at para. 82.
[29] Ibid. at para. 93.
[30] Ibid. at para. 132.
[31] Syndicat Northcrest v. Amselem, [2004] 2 S.C.R. 551 at para. 50. Interestingly, this passage was cited by Justice Abella at para. 37 of her reasons.
[32] Ibid. at para. 19.
[33] Supra, note 5 at para. 76.
[34] Supra, note 1, at para. 184.

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Tax Court Denies Application for Postponement of Suspension in International Charity Association Network (ICAN) v. HMR

Kate Lazier and Andrew Valentine*

Facts and Decision

On January 3, 2008, the Tax Court of Canada dismissed an application by the International Charity Association Network (“ICAN”) to postpone a suspension of its tax-receipting privileges. CRA had audited ICAN in 2006-7, presumably suspecting that ICAN was operating solely as a part of a tax shelter program. On November 21, 2007, pursuant to section 188.2(2), the Minister of National Revenue suspended ICAN’s authority to issue tax receipts on the basis that (i) ICAN failed to maintain proper books and records, and (ii) ICAN failed to provide records or provide access to records to the tax authority. The suspension was for one year commencing on November 28, 2007. On December 3, 2007, CRA also issued a notice of intention to revoke ICAN’s charitable registration.

On November 23, 2007, ICAN filed a Notice of Objection to the suspension, and applied to the Tax Court under section 188.2(4) of the Income Tax Act for a postponement of the suspension pending the outcome of its Notice of Objection. ICAN argued that it had attempted to comply at all times with both the record-keeping rules, and with rules regarding cooperation during an audit. It claimed that it had responded to questions from the auditor and had made records available for review by CRA.

The Court held that an application for postponement requires that a charity satisfy the three-part test for interlocutory injunctions set out by the Supreme Court of Canada in RJR-MacDonald v. Canada (A.G.). The charity must demonstrate: (i) that there is a serious question to be tried; (ii) that it would suffer irreparable harm if denied the injunction; and (iii) that the balance of convenience favoured granting the injunction.

The Court found that ICAN had raised a serious question to be tried. The Court, however, was influenced by the seriousness of the claims made against ICAN and considered CRA to have a strong case. CRA’s affidavit noted that in 2006, ICAN had issued receipts totalling approximately $464 million and compare this to the United Way of Greater Toronto which issued receipts in 2006 totalling only $95 million. The decision of the Court drew further attention to the scale of ICAN’s operations in noting that CRA proposed to reassess 12,177 donors who participated in the program in 2005 and 22,674 donors who participated in 2006.

On the second issue, the Court held that ICAN had not proven that it would suffer irreparable harm if its receipting powers were suspended. It emphasized in particular a lack of supporting evidence from ICAN’s member agencies on how their ability to operate would be affected by ICAN’s suspension. Finally, on the third issue, the Court held that the balance of convenience favoured CRA. It stated that the public confidence would be harmed if CRA were unable to administer the charities provisions of the ITA and ensure compliance in the public interest. For these reasons, the Court dismissed ICAN’s application.

Analysis: An Unfortunate Precedent

The Court’s decision in ICAN sets an unfortunate precedent with respect to applications for postponement under s. 188.2(4). The Court interpreted the test for section 188.2(4) postponement orders so as to make it exceedingly difficult for charities to obtain what should be a relatively accessible order. This interpretation fails to appreciate the evidentiary constraints affecting charities, who must respond quickly to a notice of suspension in order to preserve their essential receipting abilities. Arguably, the decision is out of synch with the purpose for which section 188.2(4) was introduced.

Section 188.2(4) was introduced as a counterbalance to CRA’s suspension power in s. 188.2(2), which was introduced along with several other intermediate sanctions for non-compliance in the 2004 Budget. The purpose of these sanctions was to enable CRA to take a more nuanced approach to sanctioning non-compliant activities than was previously available under the former system, in which de-registration was the only penalty available. These measures were intended to provide forms of sanction that would encourage charities to correct any practices that were non-compliant with the ITA, but in such a way that would allow them to continue operating. De-registration was recognized as a severe penalty that should only be used as a last resort.

As a corollary to the new emphasis on corrective measures and discretionary sanctions, charities must be given readily accessible recourse when faced with such sanctions, particularly as the sanctions become more severe. This was emphasized by the Voluntary Sector Initiative Joint Regulatory Table, whose report was the foundation for the new sanctions. Postponement applications, as a measure of recourse against CRA’s relatively severe suspension power in s. 188.2(2), should therefore be construed broadly and made readily available to charities.

This point is underscored by recognizing the difficulties that charities face when applying for postponement under s. 188.2(4). A charity in an application for postponement is generally at a procedural disadvantage, given that it has limited time available to seek postponement before the suspension takes effect (seven days from mailing of the notice). Thus, it has only limited time to gather evidence and prepare a response to the substance of CRA’s allegations. Any decision on an application for postponement should be mindful of the limited time available to the charity to respond, and should temper the charity’s evidentiary burden accordingly. Unfortunately, this did not happen in ICAN.

The effects of this procedural difficulty seem to have been lost when one looks at the result in this case, as the Court’s decision appears to have been influenced by its assessment of the substantive issues put forward by ICAN and CRA. For example, despite finding that there was a serious question to be tried, the Court was clearly concerned over the seriousness of CRA’s allegations and the picture of ICAN’s activities painted in the affidavit of CRA’s auditor. Furthermore, in assessing whether ICAN had demonstrated that it would suffer irreparable harm, the Court emphasized the lack of evidentiary materials submitted in support of ICAN’s argument that its member agencies would suffer if ICAN’s receipting privileges were suspended. This raises concern that all CRA must do is make serious allegations of non-compliance, and on the strength of these allegations, it will be very difficult for the charity to meet the test for relief under section 188.2(4).

Furthermore, in assessing the balance of convenience, the Court appears to have misunderstood CRA’s constitutional role in finding that the public interest would be harmed if CRA were unable to enforce compliance with the Income Tax Act. CRA, as a federal agency, does not regulate the conduct of charities for the good of the general public. Its proper role as regulator of charities is confined to its role as a taxing authority. It is beyond CRA’s constitutional jurisdiction to attempt to protect the public interest by controlling charities’ behaviour or by restraining general abuses by charities. This role belongs to provincial authorities. Thus, the Court should not have based its decision on concerns about harm to the general public that would result if CRA’s ability to suspend were “handcuffed.”

For all these reasons, we view the decision in ICAN as an unfortunate development. A charity’s ability to issue receipts is vital to its ability to operate. A year-long suspension, in practical terms, spells death for most charities. It is thus crucial that charities be able to continue issuing receipts to have any chance of surviving, even if they are not ultimately de-registered. However, this decision suggests that charities may have considerable difficulty in staving off this fate if CRA decides to suspend their receipting ability. The decision in ICAN fails to appreciate that the purpose of s. 188.2(4) demands that postponement orders be readily obtainable to a charity faced with a suspension notice. It may be hoped that courts in the future will decide such applications along different lines.

As a final point, some attention should be given to the note concluding the case, in which Rip A.C.J. noted that a charity seeking to have its suspended receipting privileges restored, faces a lengthy delay before the situation can be resolved. He noted that section 188.2(4) deals with only a portion of the suspension, and that a charity’s only other option is to challenge the suspension by filing an appeal. The appeal process, as Rip A.C.J. noted, could take as long as a year before the appeal is disposed of, which is the length of the suspension. For these reasons, Rip A.C.J. suggested that Parliament should consider a summary procedure by which a charity would be permitted to contest a suspension.

We submit that precisely such a summary procedure has been developed by Parliament and should have been employed in this case. Once a charity has been mailed a Notice of Suspension under section 188.2(2), there will be a seven-day delay before the suspension begins. A charity should be able to file its notice of objection to the suspension, as well as its application for postponement within this seven day period. Given the seriousness of the effects of suspension on a charity’s ability to function, a preliminary postponement (usually for a month) should generally be granted, so as to give the charity time to prepare a full response to the suspension without the suspension having already taken effect. We suggest that this procedure is possible under the current legislation and would answer the concerns set out in Rip A.C.J.’s note.

* Kate Lazier and Andrew Valentine, Miller Thomson LLP, Toronto.

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Canada Revenue Agency Notes

Marni Whitaker*

Consultation on Proposed Guidelines for Researching a Charitable Activity CRA

Released on January 18, 2008, this draft policy summarizes the CRA’s position concerning the legal and administrative requirements a registered charity is expected to fulfill in order to conduct or fund research as a charitable activity. CRA is asking for comments on the draft policy by February 29, 2008.

Working with Federal, Provincial and Territorial Governments

CRA previously indicated it will work to improve jurisdictional collaboration and educate the public about making informed decisions when they make charitable donations. Consistent with that, CRA announced on December 5, 2007, that it had worked collaboratively with Ontario and Manitoba on recent publications for consumers. The information provided was designed to provide advice to protect the public against frauds and scams.

Really Simple Syndication (RSS) Feeds

On January 18, 2008, CRA announced it now offers RSS Feeds. RSS Feeds allow specific (new) content from CRA’s website to be sent directly to a news aggregator of your choice eliminating the need to check the Website for updates.

Notice of Suspension of Receipting Privileges

The CRA issued its first notice of suspension (one of the new intermediate sanctions) on November 29. It suspended the authority of International Charity Association Network to give donation receipts and its status as a qualified donee for a period of one year. The CRA stated that the charity had failed to maintain and/or provide, and failed to provide access to, books and records relating to its involvement with tax shelter arrangements. The news release referred to insufficient documentation relating to $26,372,685 in fundraising payments and $244,323,422 in charitable program expenditures. The charity applied to the Tax Court of Canada to have the suspension postponed, but was unsuccessful. The Tax Court of Canada decision is available in the “What’s New Section” on the CRA Website.

Consultations with Small and Rural Charities

On October 5, 2007, the CRA announced a series of consultations with small and rural charities. The workshops took place in October, 2007, in six locations across Canada. A panel of individuals from the charities, chaired by the CRA, was then to meet in November, to develop recommendations to be delivered by the end of December, 2007. The recommendations are to be aimed at improving services and reducing the administrative burden for small and rural charities.

Be an Informed Donor

On November 20, 2007, the CRA issued a news release under the above title about their efforts to help individuals protect themselves from fraud. Public notices were to appear in over 75 daily newspapers across Canada, as well as in foreign language publications. Potential donors will be advised to verify that any charity they wish to donate to be registered and to avoid getting involved in donation-related tax shelter schemes that promise tax savings greater than the donor's cost.

Registered Charities Newsletters

No Registered Charities Newsletters have been issued since No. 28 (Summer 2007).

More information on all of these items can be found at the CRA website at www.CRA-arc.gc.ca/tax/charities/whatsnew/menu-e.html.

* Marni Whitaker of Lang Michener LLP, Toronto.

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Message from the Chair

Bill Pashby*

The Charity and Not-for-Profit Law Section had a busy Fall. In addition to producing a newsletter, we had two lunch time programs. Professor Adam Parachin of the University of Western Ontario Law Faculty made an interesting presentation on November 20, 2007, about the common law and statutory interpretation of the word “gift”, in particular, Section 248(40) of the Income Tax Act. On September 27, 2007, Cliff Goldfarb, Vice Chair of the Section Executive made a thorough presentation on real property law issues faced by Charities and Not-for-Profit organizations. On January 29, 2008, a luncheon program presentation will be made by Terry Carter and Theresa Mann on tax shelters and flow-through shares as they relate to charities.

One area of law relevant to Section members which has been receiving some attention is the proposed amendment to the Ontario Corporations Act. Members of the Section have held several meetings on a joint basis with members of the OBA Business Law Section to respond to consultation papers made public by the Government of Ontario. This will continue into 2008.

Members of the Section Executive sat on various committees and had various consultations with Canada Revenue Agency last Fall with respect to the Income Tax Act and income tax practices for charitable organizations. Some new legislation has been produced and in the minds of many, some additional changes should be made.

I note that the Ontario Bar Association itself is embarking on a review of its governance. As the Chair of the Section, I am a member of OBA Council. I attended an all day meeting of Council on December 7, 2007, and found the discussion to be interesting. You are being kept informed about the issues in the weekly email you receive from the OBA.

The OBA Charity and Not-for-Profit Law Section will be producing its annual Charity and Not-for-Profit Law Symposium in conjunction with the CBA Section on May 7, 2008.

I would like to publicly thank all members of the Section Executive, particularly Barbro Stalbecker-Pountney who is in charge of our programs, Susan Manwaring and M. Elena Hoffstein who are spearheading our Charitable Thoughts newsletter, Terry Carter who is always vigilant with respect to income tax matters, and Cliff Goldfarb the Vice Chair, for their leadership on various issues during the last few months.

2007 was a very busy year for the Section and an interesting year for the lawyers and clients in the Charity and Not-for-Profit sector. 2008 presents some new challenges and opportunities for all of us.

Best personal wishes for health and happiness throughout the year.

* Bill Pashby, Borden Ladner Gervais, (416-367-6249).

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