It was a busy year for charities in 2006. Although Canadian FundRaiser has covered most of the developments reviewed here by Terrance Carter of Carters Professional Corporation and M. Elena Hoffstein of Fasken Martineau DuMoulin, they have encapsulated them conveniently to make a ready reference for readers’ files. We present them as a series of three articles; this third covers recent case law affecting charities.

1. Meaning of charity and gift:

a) On March 24, 2006, the Tax Court of Canada released a decision concerning gifts, Benquesus et al v The Queen. In 1997, Mr. Benquesus transferred funds to a charitable foundation in Ontario. In a letter from Mr. Benquesus to the foundation accompanying the funds, he indicated that he was transferring the funds on behalf of his four children as interest-free loans, and that should the children require the funds, the foundation was to repay it. The letter further indicated that should the children forgive the loans, the foundation should then treat them as donations.

In 1999, the children forgave part of the loan and charitable receipts were issued to the children by the foundation for the amounts forgiven. In reassessing the children’s tax returns, CRA disallowed the children’s charitable donation tax credits claimed for the forgiven loans. At issue was whether the father gifted the funds to the children, leaving it up to them to decide how much to donate to the foundation, or whether the father made the donations himself and transferred the donation credits to his children.

After reviewing the three requirements for a valid gift at common law (ie an intention to donate, acceptance of the gift by the donee, and delivery of the gift to the donee), the court found that all three requirements were met and found that Mr. Benquesus did gift the funds to the children and that it was up to the children to decide how much to donate to the foundation.

b) On April 5, 2006, in A.Y.S.A. Amateur Youth Soccer Association v Canada Revenue Agency, the Federal Court of Appeal released a decision with respect to the refusal of an application to register the appellant as a charitable organization. The purposes of the organization were to promote amateur youth soccer and offer youths the opportunity to develop pride in their ability and soccer skills.

The appellant’s main argument focussed on the language in the Ontario court decision, Re Laidlaw Foundation, which held that the promotion of amateur sport involving the pursuit of physical fitness is a charitable purpose. The appellant argued that since the common law in Ontario recognizes the promotion of amateur sport as a charitable purpose and the proposed activities are confined to Ontario, the law of Ontario should apply to the determination of its charitable status.

The FCA held that there was no need to have recourse to the common law of Ontario since the ITA provides for the tax status of the appellant, which precludes the possibility of its being registered as a charitable organization. In providing for the status of a registered Canadian amateur athletic association in 1972, “Parliament must have been taken to have been aware that no association which has, as its main purpose, the pursuit of amateur sport, could qualify as a charity under the common law, and hence, under the Act.”

The scheme of the ITA precludes the possibility of an amateur sport organization being registered as a charity, and only permits the separate registration of Canadian amateur athletic associations where they operate on a nation-wide basis. On September 21, 2006, the Supreme Court of Canada granted leave to appeal. At the time of writing, the appeal has not been inscribed for hearing.

c) On October 24, 2006, the Federal Court of Appeal ("FCA") released its decision in Travel Just v Canada Revenue Agency, which represents an important decision concerning what is considered to be charitable at common law. This case involved the refusal by CRA to register a charity with the object “to create and develop model tourism development projects that contribute to the realization of international human rights and environmental norms.” The FCA concluded that the organization’s objects were “vague and subjective” and were not sufficiently analogous to purposes already recognized by the courts under the fourth category of charity: other purposes beneficial to the community. In addition, the language left open the possibility of the organization’s financing and operating luxury holiday resorts, activities with a strong commercial and/or private benefit aspect.

The FCA also indicated that there was no evidence of a connection with Québec, noting that the issue of whether an organization is charitable for the purposes of the ITA is likely a public law concept rendering the private law of Québec irrelevant, thus avoiding a decision on this issue.

2. Regulation of charities:

a) In All Saints Greek Orthodox Church v Minister of National Revenue, a decision released on March 22, 2006, the Federal Court of Canada considered an application by CRA for an order authorizing it to require that the Church furnish a list of all persons who made donations to it of comic books and trading cards. CRA had already obtained the information during the course of an audit of the charity but for it to be able to use the information in the context of a tax avoidance investigation related to donors, CRA would need to be granted a court order pursuant to section 231.2 of the ITA. While the court order was granted to CRA, since CRA had already used the names provided to it in the context of the charity audit to reassess many of the donors without initially advising the court of this fact, the Federal Court penalized CRA by ordering solicitor and client costs.

b) On March 28, 2006, in Bayit Lepletot v Minister of National Revenue, the Federal Court of

Appeal considered whether a Canadian charitable organization was carrying on its own charitable activities when it funded an orphanage in Israel of the same name through an agent. The agent requested funds from the appellant, who approved the request, transferred the funds to the agent, and then the agent disbursed them to the orphanage. The FCA noted that the agent was part of the “Directorate in residence” of the orphanage and that he presumably exercised some control over its operations, but that there was no evidence as to what extent. Moreover, there was no evidence that he exercised any control over the activities of the orphanage in his capacity as agent of the appellant. The FCA affirmed the position that CRA has taken over the years with respect to agency relationships: it must be shown that the agent is actually carrying on the charitable works of the Canadian charity and the activities of the agent must be subject to the Canadian charity’s control.

c) On April 20, 2006, the Supreme Court of Canada dismissed an application for leave to appeal

(without reasons) from the Federal Court of Appeal decision in Klotz v Canada, which had affirmed the Tax Court of Canada’s ruling in connection with donation tax shelter valuations. At trial, Associate Chief Justice Bowman found that the best evidence of fair market value was the very transaction through which the taxpayers purchased art from the promoter.

Mr. Klotz was one of 660 people who acquired limited edition prints which were immediately donated to prescribed colleges and universities under the ITA. The average cost of the prints was $300, yet the receipt that was issued was based on an average fair market value per print of about $1,000, which the Tax Court of Canada found to be unrealistic. The FCA agreed with the Tax Court Judge in finding “that the best evidence of the fair market value of the prints was the price paid by the taxpayer – that is $75,000.”

d) On October 10, 2006, in Redeemer Foundation v Minister of National Revenue, the Federal Court of Appeal considered the process CRA must follow to obtain the names of donors during the course of an audit of a registered charity. After having audited a charity that operated a “forgivable loan program”, CRA obtained from the charity, upon a verbal request, donor information with which CRA contacted the donors to advise them that they would be reassessed to disallow the donation tax credits claimed for their donations to the charity.

After providing the list of donors to CRA, the Foundation brought an application in the FCA for judicial review of the auditor’s request on the basis that the auditor should have followed the process provided for in subsection 231.2(2) of the ITA requiring prior judicial authorization.

The initial decision of the FCA declared that the actions of the auditor were unlawful and ordered that the reassessments of the donors be vacated. This decision was appealed by CRA, and the FCA overturned the initial decision on the basis that there were other provisions in the ITA authorizing the auditor to make the request that he did and to use that information for the purposes of subsequent tax assessments.

Specifically, subsection 231(2) of the ITA requires charitable organizations to maintain certain records, including duplicates of all receipts, and section 231.1 of the ITA authorizes an auditor to examine the organization’s books and records. The FCA concluded that if an auditor is entitled to obtain the information and compile the list of donors by his own examination of the books and records of the organization, there is no reason for the auditor to have to resort to the process established in subsection 231.2(2) of the ITA.

e) Since the first wave of anti-terrorism legislation was declared in force in late 2001, its impact has loomed large over Canadian charities and their foreign operations. The case of Mohammad Momin Khawaja, the first person to be charged under the core “terrorism” provisions in Part II of the Criminal Code, presented essentially the first chance to review this controversial law judicially. In R v Khawaja, Mr. Justice Rutherford of the Ontario Superior Court of Justice struck down a portion of the definition of “terrorist activity” in the Code that dealt with purpose and motive. The decision, released on October 24, 2006, was met with mixed reviews by anti-terrorism legal commentators, some of whom initially heralded the case as a powerful blow to draconian legislation. However, the impact upon Canadian charities, which are particularly vulnerable to the sweeping “facilitation of terrorist activity” provision in section 83.19 of the Code, is not encouraging. The decision offers charities little relief from their susceptibility to unintentional contravention of the law. Because the court decided to uphold the legislation notwithstanding its result, there are significant risks that a charity involved in conducting aid or humanitarian programs in a conflict area could unwittingly be found still to have facilitated a terrorist activity.

3. Freedom of religion

a) In a decision rendered on March 2, 2006, the Supreme Court of Canada sent a strong message that Canada’s public education institutions must embrace diversity and develop an educational culture respectful of the right to freedom of religion. In Multani v Commission scolaire Marguerite-Bourgeoys, the Court confirmed the right of an orthodox Sikh student to wear his ceremonial dagger at school. The Court concluded that the Canadian Charter of Rights and Freedoms establishes a minimum constitutional protection for freedom of religion that must be taken into account by the legislature and by administrative tribunals. Safety concerns must be unequivocally established for the infringement of a constitutional right to be justified. As such, the Court gave new guidance to administrative bodies dealing with Charter issues, declaring that administrative bodies must apply the principles of constitutional justification when a Charter right has been infringed.

Concluding comments

The year 2006 brought a number of significant changes to charitable organizations which will be of particular concern for their directors and officers, as well as for their legal counsel. The number of legislative changes, CRA policy initiatives and rulings that have occurred during 2006, as well as the release of numerous significant decisions from the courts, underscore how complicated the law pertaining to charitable organizations has become in Canada. It is therefore important for board members, executive staff and their professional advisers to keep abreast of developments in the law as they occur.