Link: Case Summary Document
Citation: Tax Court of Canada Campbell J
Acknowledgement:The Pemsel Case Foundation thanks The Australian Centre for Philanthropy and Nonprofit Studies for its contribution in the drafting of this Case Note.
Summary:
This was a case concerning the meaning of a ‘religious organization’ and a ‘congregation’ in section 143 of theCanadian Income Tax Act (the Act). The section had not previously been considered in Canadian case law. Section 143 is located in Division F of Part I of the Act, which is titled ‘Special Rules Applicable in Certain Circumstances’. It provides for separate tax treatment to those communal religious organizations that can bring their community within the statutory definition of ‘congregation’ contained in subsection 143(4) of the Act.
The appellant was the leader of a group calling itself Bountiful which had an established community in British Columbia, Canada. The group was an offshoot of the fundamentalist Latter Day Saints, and practised polygamous marriage. In question were assessments of income tax for the tax years 2000-2004 and 2006, amounting to about $2 million, plus penalties. If the position taken by the appellant was correct, and section 143 applied, it would have had far-reaching implications for not only the appellant, but also for all the members of Bountiful.
Section 143 operates to deem the existence of an inter vivos trust which would be superimposed upon the community of Bountiful. This meant that, for tax purposes, all of the assets and property of the congregation, or of any business agency of the congregation, would be deemed to be the assets and property of the deemed trust. Therefore, any income from property or business activities of the congregation would be deemed to be the income of the deemed trust. Since business agencies of the congregation would be deemed to have acted as agents of the deemed trust in all congregational matters, their income from business activities would also be deemed to be income of the trust.
If section 143 had applied in these appeals, the appellant’s tax burden would have been shifted to the other members of Bountiful. The company that earned the income (known as J R Blackmore and Sons Ltd) would be viewed as an agent of the community or an extension of the congregation, holding its assets, property and income for the benefit of the entire congregation and its members. Allocation of income across the qualifying membership in a community would have recognized the lack of personal ownership of property and assets, which would be in accordance with the intent and purpose of section 143, and would eliminate any potential for double taxation that would occur with assessments pursuant to subsections 15(1) and 6(1) of the Act.
However, to be within section 143, and therefore to succeed in the appeal, the appellant had to show that Bountiful could meet the definition of ‘congregation’ in section 143(4) of the Act. The definition has four components, being that the members of a community, society, or body of individuals, whether or not incorporated:
a) live and work together;
b) adhere to the practices and beliefs of and operate according to the principles of the religious organization of which it is a constituent part;
c) do not permit any of the members to own any property in their own right; and
d) require the members to devote their working lives to the activities of the congregation.
Her Honour said that the words used in the section were not clear and precise, so that from a statutory interpretation standpoint, she would be entitled to look at both the legislative history of the section, and cases on its previous incarnations in the Act involving the Hutterite communities of Canada.
Did the group ‘live and work together’?
The appellant contended that the members of Bountiful were separate and insular, shared properties, socialized together, educated themselves, had familial relationships which were at the direction of the head of the church, livelihood through community employers and worshipped to the exclusion of outsiders.
The respondent submitted that the Act is practical and not spiritual or theoretical, so that ‘living together’ required cohabitation in the same place at the same time, and ‘working together’ required working on common projects at the same place at the same time. The evidence disclosed that not all members of Bountiful lived and worked together in close proximity since the community was spread over properties throughout British Columbia, Alberta, and the United States. Their logging operations were in some cases over 500 kilometres from their base. In addition, some members of the community worked entirely outside the community, some operated their own businesses which were not commonly held, and some non-members were employed by the companies owned by the appellant.
This was to be compared with the Hutterite communities which had previously been held to be able to make use of the predecessor section to section 143. These communities were limited to 100 persons, and were entirely contained on a farm which provided their whole subsistence. They were completely separated from the outside world, shunned individualism and held all property in common.
Her Honour held that the members of Bountiful did not live and work together. They lived and worked in several different locations. Many worked outside the community. Property was not held exclusively in common. The group did not meet the standard required in the section (at [153]):
‘However, that does not mean that it is an impossible standard to meet and, because of the special tax treatment that can be afforded such a community that meets it, the interpretation to be applied must be narrow and well defined. If the standard is widened so that a community like Bountiful, where its members are spread out geographically in respect to both the living and working aspect, then arguably the meaning of “live and work together” would be reduced to a more general notion of “operating in an integrated way or fashion” or “living communally.” Such an interpretation would allow a geographical spread, like that of Bountiful, which goes directly against the intent of Parliament and the plain and ordinary meaning of the requirement to “live and work together,” which I have concluded should be assigned to it.’
Although the respondent’s interpretation of living and working together, which was based on the Hutterite model, was too narrow in Her Honour’s view, the appellant’s operations were much too widely dispersed.
Did the community of Bountiful adhere to the practices and beliefs of and operate according to the principles of the religious organization of which it is a constituent part?
This issue turned on whether Bountiful was part of a ‘religious organization’. Bountiful in fact stood alone in its particular beliefs. Its leader had been excommunicated from both the Mormons (who had banned polygamy in the 1890s) and from the Fundamentalist Latter Day Saints (FLDS), who practised polygamy, but with whom the appellant had disagreed over episcopal authority. Moreover, both the FLDS and Bountiful itself had suffered a split in 2002.
The respondent submitted that none of the Mormons, the FLDS or Bountiful on its own, were religious organizations. The term ‘religious organization’ is defined in the Act as:
‘religious organization’ means an organization, other than a registered charity, of which a congregation is a constituent part, that adheres to beliefs, evidenced by the religious and philosophical tenets of the organization, that include a belief in the existence of a supreme being.’
Expert evidence was taken. After reviewing the evidence, Her Honour held that the members of Bountiful were an independent group of Mormon fundamentalists who were not part of a religious organization (at [202]). Her reasoning was that (at [227]-[230]):
- Mormonism is not a religious organization of which Bountiful could be a part, because Mormonism is a religious tradition only (in the same way the Christianity is a religious tradition);
- The community of Bountiful could not be a part of the mainstream Latter Day Saints (LDS) Church, a religious organization, because the members of Bountiful did not follow the beliefs of the LDS Church. They practised polygamy which the LDS Church had disavowed.
- The FLDS Church was not a religious organization because the lines of priesthood authority within it had been broken when it separated from the mainstream LDS.
- At most, the community of Bountiful consisted of an independent group of fundamentalist Mormons who could not bring themselves within the parameters established for this part of the definition of ‘congregation’.
Did the community of Bountiful prohibit any of its members from owning any property in their own right?
The evidence was clear that this was not so, and therefore this aspect of the definition of ‘congregation’ could not be met by the Bountiful community. However, Her Honour found that some property was held in common, but not in the way envisaged by the Act (at [277]-[278]):
‘In summary, the facts do establish that Bountiful has developed its own unique relationship to property ownership. It encompasses a set of practices that are in opposition to what we think of as being in sync with ordinary capitalist norms. The members of Bountiful have permitted Winston Blackmore to provide directives respecting where they reside and the manner in which some of their personal resources are to be utilized within the community. However, this unique relationship to their property does not satisfy the strict test of paragraph 143(4)(c). The language in paragraph 143(4)(c) requires an explicit prohibition contained in either articles of incorporation, religious doctrine or practices, rather than an implicit prohibition gained entirely through a fact-based inquiry. This is in line with the principles of statutory interpretation and administrative efficiency. The community of Bountiful exhibits a “communal” approach to some aspects of their property, but it is not “communal” in the sense envisioned by the Act and, specifically, this provision; that is, Bountiful does not explicitly prohibit private ownership of property by all of its members, in either its practices or in its religious doctrine and principles or in any existing articles of incorporation.’
Did the community of Bountiful require its members to devote their working lives to the activities of the congregation?
Although the company was the primary community employer, it was not exclusively so. Members were in fact encouraged to find work elsewhere. There was no Hutterite-like obligation to devote all a member’s working hours to the agrarian work effort on an enclosed property, although Her Honour agreed that there was some expectation of devoting some work time to community activities (at [307]-[308]):
‘While members were, in fact, encouraged to work or obtain secondary education outside the community, there was a general expectation that, if individuals were part of the community, then one’s working life would include contributing towards the activities of the community by working in the Company activities. However, the text of component (d) implies that such a requirement must be explicit and ongoing. The Hutterite example…confirms this interpretative approach. The facts in these appeals do not support the existence of an explicit requirement, by the congregation, either within the community of Bountiful itself, the LDS Church, the FLDS Church or Mormonism generally, for members to devote their working lives to the activities of the community.’
Therefore, the definition of ‘congregation’ in the Act was not met by the Bountiful community, and the appellant could not take advantage of section 143 of the Act to shift his tax liability onto the community of Bountiful generally. The appellant was found liable for all the tax owing and for a gross negligence penalty of $148,983.
The case may be viewed at: http://www.canlii.org/en/ca/tcc/doc/2013/2013tcc264/2013tcc264.html
Implications of this case
The issues in this case dealt with section 143 of the Canadian Income Tax Act (the Act), which provides special tax treatment for religious communal congregations that operate within cultural and property norms outside the mainstream. To be eligible for this tax treatment, a community must satisfy all of the four tests set out in the definition of ‘congregation’ in the Act. Any community that meets these four criteria may seek specialized tax treatment. However, the community in this case did not meet any of the criteria because it was not a ‘religious organization’ as defined in the Act, and its members were too integrated into the community, despite their practice of polygamy.