The Sheldon Inwentash and Lynn Factor Charitable Foundation Case - public vs. private foundation

May 09, 2012 | By: .(JavaScript must be enabled to view this email address) Mark Blumberg
Topics: News, What's New from the Charities Directorate of CRA, Canadian Charity Law

The Federal Court of Appeal recently released a decision in The Sheldon Inwentash and Lynn Factor Charitable Foundation matter.  Essentially the question is whether a charity that has one trustee can be a public foundation or must it be a private foundation.  The Trust was given charitable status as a private foundation and the Trust appealed arguing that it should be designated a “public foundation”.  The court starts by discussing the standard of review that would be used and then analysed the relevant Income Tax Act provisions.  In terms of standard of review CRA argued that a decision on whether a charity is a private or public foundation is “mixed fact and law which is subject to review on the standard of reasonableness” as opposed to an “extricable question of law to be reviewed on the standard of correctness”.  The Court felt that some piece of the decision as to whether a charity is a private foundation could be a matter of law and then subject to the higher standard of correctness.  So the courts applied the higher standard of correctness to the CRA decision and then agreed with the CRA that they had acted correctly.  The court concluded that a charity with one trustee will be a private foundation as CRA had determined.  The decision also looks at the differential treatment of private foundations and discusses some of the history of why private foundations were treated differently than public foundations and concerns about private foundations.

“Can a charitable foundation with a single trustee be designated as a public foundation?
...
29]        The definition continues with the requirements that “more than 50% of the […] trustees […] deal with each other and with each of the other […] trustees […] at arm’s length”. Through this language Parliament has, in my view, signaled its intention that there must be more than one trustee (director, officer or like official) of a public foundation.

[30]        The first signal of Parliament’s intention is the reference to “more than 50% of the […] trustees”. Implicit in the reference to more than 50% of the trustees is that there be more than one trustee.

[31]        The second signal is the reference to the trustees dealing with “each other”. There must be more than one trustee for a trustee to be able to deal with another trustee.

[32]        The third signal is the requirement that the trustees deal with each other “at arm’s length.” Again, there must be more than one trustee for it to be able to have an arm’s length (or any) relationship with another trustee. Moreover, a single trustee is not at arm’s length from itself.

[33]        In my view, by the use of this language Parliament has precisely and unequivocally evidenced its intent that public foundations must have more than one trustee (or director, officer or like official). This means that the ordinary meaning of the words used should play the dominant role in the interpretation of the definition. For completeness, however, I will review the statutory context and purpose of the definition.

[33]        In my view, by the use of this language Parliament has precisely and unequivocally evidenced its intent that public foundations must have more than one trustee (or director, officer or like official). This means that the ordinary meaning of the words used should play the dominant role in the interpretation of the definition. For completeness, however, I will review the statutory context and purpose of the definition.

[34]        As stated above, a registered charity receives an important tax benefit under the Act in that it is not taxed on its income. Further, a registered charity is able to provide tax relief to its donors by issuing a charitable receipt which an individual donor may use to obtain a tax credit (section 118.1 of the Act) and a corporate donor may use to obtain a tax deduction (section 110.1 of the Act). This regime creates a potential for abuse if the registered charity and the donor are not at arm’s length.

[35]        The potential for abuse was recognized in the Discussion Paper: The Tax Treatment of Charities (Ottawa: Department of Finance, 1975). The Discussion Paper outlined the then current structure of charitable trusts and corporations and the perceived abuses that arose through self-dealing. The most common abuse was explained to be arranging investments and expenses to ensure that the charity had little income and paid out relatively small sums annually in comparison to its capital. This could be done in a number of ways, for example by investing in low-yield debt or equity of the donor’s business, by renting premises from the donor at high rent, or by lending money to family members at low rates of interest.

[36]        The Discussion Paper proposed the creation of both public and private foundations. The following specific proposals were made:

26.    To retain its status as a registered charity, a private foundation would be required to distribute to other charities or to expend in direct charitable endeavours the greater of 90 per cent of its annual income or 5 per cent of its capital, calculated at fair market value on December 31 of each year. Capital would be defined to ensure that fixed assets used in the normal operations of the charity, such as buildings and furnishings, are excluded.

[…]

28.    A percentage payout of capital is proposed for two reasons. It ensures that the abuses referred to above would be minimized because all capital would have to be employed to produce at least a 5 per cent return on the investment. Secondly, it means that in return for the very substantial tax concessions conferred on private foundations, society as a whole would receive at least a fixed minimum return annually.

29.    As mentioned in paragraph 15 a private foundation would not be able to carry on business activities of any type. This is already a rule which applies to all charities in one province of Canada. The definition of carrying on business would ensure that the mere holding of equity in a corporation would not be treated as carrying on business.

[37]        At the same time, the Discussion Paper proposed that charitable organizations and public foundations be allowed to carry on a business related to the primary charitable activity.

[38]        These recommendations substantially came into force with the implementation of the May 25, 1976 Budget.

[39]        By creating public and private foundations Parliament attempted to promote philanthropy, while at the same time trying to limit the potential for avoidance schemes.

[40]        Public foundations were not subject to the same restrictive rules as private foundations because Parliament made a policy decision that public foundations (i.e. foundations which receive donations from a wide variety of persons) would be less likely to enter into avoidance transactions with their donors.”


The full decision is at: http://decisions.fca-caf.gc.ca/en/2012/2012fca136/2012fca136.html

 

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