Category Archives: 168

Revocation of Charitable Status

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Revocation of Charitable Status 

Public Television Association of Quebec v MNR2015 FCA 170

The Minister of National Revenue (“MNR”) proposed to revoke the registration of Public Television Association of Quebec’s as a charity pursuant to Income Tax Act (“ITA”) subsection 168(1) for failure to comply with the requirements prescribed in subsection 149.1(1). Specifically, for failure to devote all of its rescues to its own charitable activities (and alternatively, for making gifts to a person other than a qualified donee).

The Appellant brought an appeal pursuant to ITA subsection 172(3). The Federal Court of Appeal (“FCA”) dismissed the appeal on the basis that the ground put forward by the MNR are sufficient for revocation, and the Appellant having failed to show that the MNR’s decision was unreasonable.

What was lacking were details of decisions that demonstrate control and direction in the communications and internal documents, and that the contractual methods of control were in fact exercised (including minutes of board meetings) of the Appellant (see paras 46-54).  In other words, the charity failed to demonstrate that it functioned in reality in the manner that its legal obligations and structure appeared to suggest it functioned.

ANALYSIS

The FCA began by setting out the statutory framework:

  • Definition of “Registered Charity” in subsection 248(1) – refers to the meaning assigned to  “Charitable Organization” the term in subsection 149.1(1);
  • Definition of “Charitable Organization”in subsection 149.1(1) – requires that all the resources of the organization be devoted to the charitable activities carried on by the organization itself; and
  • Definition of “Qualified Donee” in subsection 149.1(1) – a person that is registered with the MNR and is a registered charity.

The MNR sent notice to the Appellant, under paragraph 168(1)(b), of the intention to revoke its registration for continued non-compliance with the requirements of the ITA for registered charities. This was the first ground of revocation.  The second ground for revocation was for making a disbursement by way of gift to a non-qualified donee pursuant to paragraphs 149.1(2)(ii).

The Appellant’s was audited for its fiscal periods ending in 2005 and 2006, and the auditor concluded that the only activities for the period was the purchase of a program package from a US charity for fairing on certain TV channels (paras 17-18).  The issue revolved around whether the Appellant exercised control and direction over the programs it sponsored/purchased.  The Tax and Charities Appeal Directorate framed the issued in these words (para 22):

In order to comply with the provisions of the Act, a charity must maintain ongoing direction and control over its resources and its charitable activities. This means that the charity must take decisions concerning significant issues related to its ongoing activities and maintain a record of the steps taken, as part of its books and records, to allow the Minister to verify that the charity’s resources have been used for its own activities. Where the charity conducts activities through an intermediary, it should be in a position to establish by credible evidence that the activities are, in fact and in law, carried on by the charity itself. We refer you to the CRA’s Guidance “Using an Intermediary to Carry out a Charity’s Activities within Canada” […]. [emphasis original]

Although the agreement between the Appellant and the US charity stated that the Appellant would retain control and direction over what programs it supported with its funds, the CRA was of the view that the Appellant failed to demonstrate that the provisions of the agreement were in fact followed and respected (para 25):

While a broadcasting agreement and a fundraising agreement exist between PTAQ and Vermont Public Television (VPT), it has not been demonstrated that the provisions of the two agreements were followed and respected. No documentary evidence has been provided to demonstrate that PTAQ is monitoring the cost of the broadcasting activities, the donations received and the fundraising, and that it is ensuring that all of this is, in fact, its own activities. VPT is only informing PTAQ on how much donations were received, what is the cost of the broadcasting and the fundraising. PTAQ does not exercise direction and control over any of these activities. We maintain that all the activities are carried on by VPT and that PTAQ is only used to issue receipts for donations received by VPT from Canadian donors. [emphasis added]

Although a charity can conduct charitable activities through an agent, the charity must “be prepared to satisfy the Minister that it is at all times both in control of the agent and in a position to report on the agent’s activities”, with the onus being on the charity to prove the requisite control and direction – Canadian Committee for the Tel Aviv Foundation v Canada, 2002 FCA 72, paras 27, 28, and 40.  The charity must demonstrate that the agent is carrying on work on the charity’s behalf and must prove that the activities of the agent are that of the charity and not that of the agent – Bayit Lepletot v Canada (Minister of National Revenue), 2006 FCA 128, paras 5 and 6.

What was lacking were details of decisions that demonstrate control and direction in the communications and internal documents, and that the contractual methods of control were in fact exercised (including minutes of board meetings) of the Appellant (see paras 46-54).  In other words, the charity failed to demonstrate that it functioned in reality in the manner that its legal obligations and structure appeared to suggest it functioned.

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Injunctions to Stop CRA Action – Chabad 2013 FCA 196

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Injunctions against the CRA

Chabad v Minister of National Revenue, 2013 FCA 196

 At issue was the proper text to prohibit the MNR from issuing a notice of revocation in the Canada Gazette in respect of the applicant, and whether the text was met in this case.

FACTS

The applicant is a registered charity under the Income Tax Act. It operates a school for boys, and provides both secular and Jewish studies education.  The School provides subsidies for 80% of the boys, and funds the subsidies through fundraising activities. The CRA allows this for religious schools contrary to its policy for other charitable activities (see CRA Circular IC75-23 Tuition Fees and Charitable Donations Paid to Privately Supported Secular and Religious Schools).

The CRA determined that the applicant had failed to comply with requirements, and proposed that (pursuant to subsection 168(1) of the ITA) the applicant’s registration as a charity under the ITA be revoked.  One area of non-compliance is with a substantial number of in-kind gifts, whose existence and value could not be substantiated.

The Applicant seeks an order prohibiting the Minister from giving effect to the proposal by publishing a copy of the notice in the Canada Gazette pursuant to subsection 168(2).

ANALYSIS

As a procedural matter, the court stated that the appropriate procedure is NOT by way of judicial review, but rather an application under paragraph 300(b) of the Federal Courts Rules brought under paragraph 168(2)(b) of the ITA (see International Charity Association Network v. Minister of National Revenue, 2008 FCA 62).  Since the Minister did not suffer any prejudice from the procedural irregularity, the court did not set aside the originating document under section 57 of the Rules, but rather dealt with the motion on its merits (using section 55 of the Rules to vary a Rule in special circumstances).

To extent the time period during which the MNR cannot publish a notice of revocation under paragraph 168(2)(b) is set out in RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R 311 and is the same test for a stay or an injunction (see International Charity Association Network v. Minister of National Revenue, 2008 FCA 114; Millennium Charitable Foundation v. Minister of National Revenue, 2008 FCA 414).  The Court formulated the test for an application under 168(2)(b) as:

i.      First, a preliminary assessment must be made of the merits of the objection made or proposed to be made under subsection 168(4) of the Act to ensure that there is a serious issue to be determined. The threshold here is a low one. It suffices that the objection is not frivolous or vexatious. A prolonged examination of the merits of the objection is neither necessary nor desirable.

ii.      Second, it must be determined whether the party seeking the extension will suffer irreparable harm if it were refused. The only issue to be decided at this stage is whether the refusal to grant the extension could so adversely affect the applicant’s interests that the harm could not be remedied in the event that the objection or the subsequent appeal to this Court is successful. Irreparable harm refers to the nature of the harm suffered rather than its magnitude. It is harm which cannot be quantified in monetary terms or which cannot be cured, usually because the applicant cannot normally collect damages from the Minister resulting from the revocation of its registration under the Act.

iii.      Third, an assessment must be made as to whether the applicant would suffer greater harm from the granting or refusal of the extension than the Minister. The factors which may be considered in the assessment of this “balance of convenience” test are numerous and vary with each case. Public interest considerations may be considered within this balancing exercise.

The ‘serious issue to be tried’ test is a low threshold which the MNR accepted in this case.

The ‘irreparable harm’ test was where the MNR contended.  General assertions of harm are insufficient to establish irreparable harm (Gateway City Church v. Minister of National Revenue, 2013 FCA 126).  Also, the loss of the ability to issue tax receipts is not per se proof if irreparable harm (see Choson Kallah Fund of Toronto v. Minister of National Revenue, 2008 FCA 311).  Irreparable harm cannot be inferred, but must be proven using clear and compelling evidence (see Imperial Chemical Industries PLC v. Apotex Inc. (C.A.), [1990] 1 F.C. 221; A. Lassonde Inc. v. Island Oasis Canada Inc. (C.A.), [2001] 2 F.C. 568 ; Haché v. Canada (Minister of Fisheries and Oceans), 2006 FCA 424).

The Court noted that although the applicant had $10 Million in assets and operating expenditures of $1.6 Million, these assets were illiquid and require time to orderly liquidate.  The notion of irreparable harm is closely related to the remedy of damages – in this case, even if successful, the applicant would (except in exceptional circumstances) not be able to claim damages from the MNR as a result of the revocation of its status.

The court thought that this was similar to injunction cases involving the Charter, where damages are not the primary remedy (see RJR-MacDonald), and the proceedings will (often) be determined under the ‘balance of conveniences’ test.   However, in this case, given that many of the students rely on the partial or full subsidy to attend the school, the unexpected financial hardship on the students and their families demonstrated irreparable harm.

The ‘balance of convenience’, in light of the substantial cost to taxpayers and the need for the CRA to ensure no abuse of the benefits granted to charities, the balance weights heavily in favour of the public interest and the MNR.  Absent “consideration of any harm not directly suffered by a party to the application”, the court would not have found the balance of convenience to favour the applicant.  Therefore, the balance was shifted in favour of the applicant because of the unexpected hardship on the students and their parents.

The Court granted, on a one-time basis only, a prohibition against the MNR issuing a notice of revocation in the Canada Gazette, for 6 months to allow for an orderly liquidation of the applicant’s assets.

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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