Recent Canadian cases such the Tel-Aviv Foundation case, The Magen David Adom case and the Bayit Leplitot case, all decided in the last few years should be of particular interest to Canadian charities that operate outside of Canada. They all illustrate the importance of understanding and following the rules for Canadian charities operating abroad.
Recent Canadian cases such the Tel-Aviv Foundation case, The Magen David Adom case and the Bayit Leplitot case, all decided in the last few years should be of particular interest to Canadian charities that operate outside of Canada. I deal with the three cases below.
The Canadian Committee for the Tel Aviv Foundation v. Canada (2002 FCA 72)
The Tel Aviv Foundation Case deals with a Canadian charity set up to promote education and the relief of poverty in Tel-Aviv, Israel. The Canadian charity had an agency agreement with the Tel Aviv Foundation. In 1990 the Canada Revenue Agency conducted an audit which in which CRA noted its concern that there overseas expenditures were not being properly documented. In 1993 there was another audit where apparently the new Israeli management of the Tel Aviv Foundation was not aware of Agency Agreement. In 1996 the Tel-Aviv Foundation made undertakings to CRA to “conform strictly to the requirements of Revenue Canada, including the specific provisions of the Agency Agreement”.
In 1997 there was a further CRA audit – CRA was concerned with the following:
In 2002 the Canadian Federal Court of Appeal found against the Tel-Aviv Foundation and their charitable registration was revoked.
This case illustrates the importance of not only having the correct agreement with a foreign non-profit or charity but also in the importance of following the agreement. In order to follow the agreement, both the Canadian charity and the foreign agent must be aware of the agreement and understand it and be committed to implementing the agreement.
Furthermore, if there are going to be changes in the manner of how an operation or relationship is going to be carried out then the changes to the agreement must be documented in writing. One of the greatest challenges that charities face in operating abroad is in direction, control and supervision of agents abroad. Blumberg Segal LLP assists charities with these issues including sometimes meeting with representatives of the foreign agent to emphasize the importance of these requirements.
The case also reminds Canadian registered charities of the importance of operating within the Charity’s objects.
A final point, as illustrated in the Tel-Aviv Foundation case and the Magen David Adom case, discussed below, the CRA provides warnings about concerns with operations abroad and it is only after those warnings are not heeded over a protracted period of time do they typically go to the extraordinary step of deregistering a charity. As well, when a charity gives a written undertaking to ‘clean up its act’, presumably to avoid deregistration, then that charity will be held by the Courts to a higher standard, than another charity who has not been warned and provided such undertaking.
Canadian Magen David Adom for Israel and MNR (2002 FCA 323)
The Canadian Magen David Adom (hereafter “CMDA” or “Canadian Charity”) was set up to donate emergency medical supplies and ambulances directly to the people of Israel. CMDA appointed a Canadian representative in Israel to implement the program. In 1986 there was a CRA audit. In that audit the CRA raised two concerns, first that the funds were being given by CMDA to the US MDA for purchasing ambulances and were not being used directly by CMDA to purchase from General Motors the ambulances. Secondly, CRA was concerned that there was no written agency agreement between the Canadian Charity and a similarly named Israeli organization (Magen David Adom) and no control over how the ambulances are used once they are sent to Israel.
The CRA has a charitable goods policy, in which it allows certain limited types of good to be transferred to a foreign organization or given away without the need, in some cases, for a written agreement. Frequently cited examples include food in a famine situation, or prayer books. However, there are limits to the CRA’s charitable goods policy to the extent that the charitable goods may be used for non-charitable or private purposes. In those cases it is important that the charity impose controls on the use of the goods. CMDA was arguing that the transfer of the ambulances and equipment to Israel fell within the charitable goods policy. CRA was concerned that some of the expenditures, such as purchasing bullet proof vests, were more remote and therefore subject to being used for non-charitable purposes.
CRA was also concerned about expenditures funded by the Canadian charity including setting up a new magnetic punch card system for employees of the Israeli charity which ostensibly improved the operation of the Israeli charity. CRA was of the view that the punch card system was an administrative expense in terms of the T3010 Registered Charity Information Return and not a charitable program. Depending on whether an expense is part of a charitable program or an administrative expense affects the disbursement quota requirements of the Canadian Charity and in this case would result in a shortfall in the disbursement quota.
The CMDA acknowledged at one point that there is probably a need for an agency agreement, but does not enter into one with their agent, as the agent in Israel was not interested.
The CRA undertook further audits for the 1993, 1995, and 1996 years. The CRA again raised concerns about the lack of any agency agreement, persistent disbursement quota problems, and potentially non-charitable expenditures like bullet proof vests and telecom equipment. In fact, in one instance a CMDA purchased ambulance was transferred over to the Israel Defence Forces for their use.
The CRA also raised a public policy concern. As the ambulances were being used in Israel and the West Bank, the CRA was of the view that to some extent they were being used to support the permanence of Israeli settlements in West Bank. The CRA argued that such actions were contrary to Canadian foreign policy which opposed settlement activity as an impediment to creating peace in the region.
In 2001 the CRA issued a notice of revocation to CMDA. The Federal Court of Appeal ultimately dismissed the CMDA appeal and CMDA lost its status as a registered charity in Canada.
The Federal Court of Appeal agreed with the charity with respect to the public policy argument. The FCA found that there is no “definite and somehow officially declared and implemented policy” with respect to Israeli organizations operating in the West Bank and Gaza strip.
However, the Federal Court of Appeal found that:
A few weeks after the FCA decision CMDA and CRA worked out an agreement whereby CMDA would not lose their charitable status! What can be drawn from this case which reads more like a saga from 1986 to 2002? What was the financial and emotional cost and distraction caused by the decision by CMDA to operate as it did? Could the CMDA not have just agreed in 1986 to buy the ambulances from GM directly, as it subsequently did, and to have a proper written agreement and follow through with the agreement, as it subsequently must have agreed to do. It is important that those involved and who care about Canadian charities realize that there are rules for Canadian registered charities operating outside of Canada. Those rules are not too onerous and it is easier, less expensive, and less stressful to follow the rules than to argue, even eloquently, that those rules should not apply to your charity.
Bayit Lepletot, 2006 FCA 128 (March 28, 2006)
This case dealt with a Canadian Charity that had an agency relationship with a Rabbi in Israel who “presumably” exercised some control over an Israeli charity with a similar name to the Canadian Charity. The Israeli charity ran 3 orphanages. But, according to the Federal Court of Appeal, there is no evidence of the Rabbis’ control over the charitable works of the Israeli charity and the status of the Canadian Charity was revoked.
This case demonstrates the importance of having a written agreement with the correct party. An agent can carry on charitable work but it must be shown that the agent is actually carrying out the work. It is not sufficient for an agent to be part of another organization that does the actual charitable work. Although it is possible for an agent in certain circumstances to sub-delegate their authority in this case the Court found that there was also no factual basis for arguing that the Rabbi had delegated his authority.
If you are interested in the area of charities operating abroad you may wish to see other articles at http://www.blumbergs.ca including Canadian Charities Operating Outside Canada and Agency Agreements and you should certainly review the Canada Revenue Agency Guide RC4106 Registered Charities: Operating Outside Canada.
If you wish to read the full text of the above 3 Federal Court of Appeal cases dealing with Canadian charities conducting foreign activities then you can access them at Federal Court of Appeal Cases on Canadian Registered Charities Operating Abroad
As well you may want to review CRA Information Letters On Canadian Charities Operating Abroad or Conducting Foreign Activities.
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.