On May 1st, 2013 the Federal Court of Appeal issued its judgment in the Prescient Foundation[1]. The case itself was notable not simply because of the decisions rendered by the Court on the questions in issue, but also (and perhaps primarily) because of the standard of the review analysis conducted by the Court. Those us who have appeared before the Federal Court of Appeal know that the standard of review can in fact decide the case and so of all the issues decided by the Court this might perhaps have the greatest long term impact on future litigation in the charities area.
Aside from the standard of review, the substantive questions brought to the court included some that have long been in need of Court direction and so this case promised to be a landmark case for charities. The first substantive question was whether or not the Foundation had participated in a tax planning arrangement for the benefit of others; the second was whether it had transferred an amount that was in fact a non-charitable gift; third whether it had made a gift to a non-qualified donee in the United States and fourth whether it failed to maintain adequate books and records.
The tax planning arrangements were rather complicated and dealt with the purchase and sale of certain farm assets through the Foundation. The Court agreed with the Minister that the sale transactions were not to the benefit of the charities; but rather to use the tax exempt status of the charity in order to shield the sale from any tax consequences. As the facts of the situation are rather unique we will not take the time to review them here. However, it does seem clear that it is important to illustrate the reasons for such transactions are primarily to benefit the charity rather than some motive which might be imputed to it.
The second question put to the Court seems to have been designed to elicit an answer to one of the more intriguing questions in interpreting the Canada – US Tax Treaty (specifically Article 21). The treaty on its face says that gifts to any organization in the United States which would qualify for registration as a charity here in Canada receive the same tax treatment as those donated to Canadian organizations. (The same principle applies in reverse). Accordingly, a Canadian registered charity could ostensibly make a donation to a U.S. 501(c)(3) organization and expect that the transfer would be considered a transfer to a qualified donee. Nevertheless, despite the rather obvious reading of the provision, the CRA has taken the position that for purposes at least of transfers from one charity to 501(c)(3) organizations in the United States this clause does not apply.
One of the issues in the Prescient Foundation appeal was that the organization had transferred funds to an American organization and claimed that such a transfer was allowable under the tax treaty. On the other hand, the CRA’s argument was that the transfers were not allowed because of certain provisions in the Income Tax Act that have been proposed but not enacted. Relying on the Court’s decision in Edwards[2] the Court held that the CRA could not rely on provisions which had not yet been legally enacted. And so, because the legal basis for the revocation fell away, the Court found for the Foundation, but did not comment on the interpretation of the treaty. This is most unfortunate because the CRA’s apparent interpretation of the treaty would seem to contradict the plain meaning of the provision and many in the charity sector are waiting for a definitive ruling on the CRA’s position.
The final substantive issue dealt with whether the organization had sufficient books and records. Those lawyers who practice in the sector know that it is common for the CRA to allege that there are insufficient books and records to justify the organizations filings. This is an easy allegation for the CRA to make because there can always be more paper than an organization already retains. The court made, what is in the context of previous charity cases, a remarkable statement when they held that it must be reasonable for the CRA to request the particular books and records, and revocation must be a reasonable response to the lack of such records. For those of us who have seen far too many allegations of insufficient books and records – regardless of what actually exists – this common sense approach represents a stunning victory for the sector, even if the Court decided the revocation of the Foundation’s registration was proper.
Again as we suggested above, perhaps the issue which will have the longest impact relates to the courts musing on the standard of review. As would be understood by those who are students of the Federal Court of Appeal, decisions are often seen to take a deferential note to the Charities Directorate. One of the reasons for this is because appeals from specialized tribunals are given some level of deference because of the specialized nature of the issues which are being resolved. It has always struck us that the issues which come from the Charities Directorate are in fact issues of law and a deferential attitude is inappropriate. The Federal Court of Appeal in the Prescient Foundation case made it clear that the decisions of the Charities Directorate must be viewed on a standard of correctness which means that at least in theory there should be no deferential attitude to the decisions made by the Directorate. It will be interesting to see how the Prescient Foundation gets cited into the future at least on this point if not all the others.
[1] Prescient Foundation v. M.N.R. 2013 FCA 120 available here.
[2] We wrote about the Edwards v. The Queen 2012 FCA 330 decision here.
Adam Aptowitzer
Drache Aptowitzer LLP
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