Link: Case Summary Document
Citation: [2013](Federal Court of Appeal, Canada, Mainville, Pelletier, Gauthier JJA.)
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 is an appeal brought by Prescient Foundation (Prescient) pursuant to paragraph 172(3) of the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) (the Act) from the confirmation by the Minister of National Revenue (the Minister) of a proposal under subsection 168(1) of the Act to revoke the registration of Prescient as a charity.
The Minister relied on four independent grounds to sustain the revocation of Prescient’s registration:
- it participated in a tax planning arrangement for the private benefit of others;
- it transferred an amount of $574,000 for a share purchase that was in fact a non-charitable gift to a non-qualified donee arising from the tax planning arrangement;
- it made a gift to a non-qualified donee in the form of a $500,000 transfer to a non-profit organization in the United States; and
- it failed to maintain adequate books and records.
Prescient disputed all grounds in this appeal.
Prescient was incorporated on 18 March 2004 as a corporation without share capital under Part II of the Canada Corporations Act, R.S.C. 1970, c. C-32. On 19 May 2004 it was registered as a charity under paragraph 149(1)(f) of the Act, and it was designated a charitable public foundation.
Three activities of Prescient’s were in contention:
- A series of transactions relating to the sale of a farm (the farm sale transactions) in British Columbia which involved other charities and third parties and took place in February and March of 2005. The Minister subsequently revoked Prescient’s registration as a charity on the ground that the farm sale transactions were part of a tax planning arrangement for the private benefit of certain taxpayers.
- The Minister also took the view that, as part of these transactions, a purchase of shares by Prescient resulted in a $574,000 non-charitable gift to a non-qualified donee.
- On 22 December 2005 Prescient transferred $500,000 as a donation to the DATA Foundation (DATA), a non-profit organization resident in the United States and recognized by the American authorities as exempt from taxation pursuant to section 501(c)(3) of the US Internal Revenue Code, U.S.C. 26. It is on that basis that the Minister revoked the appellant’s registration on the ground that it had made a gift to a non-qualified donee.
A Canada Revenue Agency (CRA) audit of Prescient’s activities took place in April 2008 during which several areas of non-compliance were found. The auditor recommended revocation of Prescient’s registration as a charity. A notice of intention to revoke Prescient’s registration pursuant to subsection 168(1) of the Act was sent to it on 23 December 2010 by the Director General of the Charities Directorate of the CRA. This letter set out a detailed explanation of the grounds supporting the notice. Prescient objected pursuant to subsection 168(4) of the Act, and a decision on that objection was reached on 20 April 2012, proposing to confirm the intention to revoke. The formal notice of confirmation of revocation was issued on 4 June 2012, which resulted in this appeal.
The Court said that the standard to be applied in reviews of this type was established (at [12]):
‘In an appeal from a decision of the Minister confirming a proposal to revoke a registration of a charity brought pursuant to paragraph 172(3) of the Act, extricable questions of law, including the interpretation of the Act, are to be determined on a standard of correctness. On the other hand, questions of fact or of mixed fact and law, including the exercise of the Minister’s discretion based on those facts and the law as correctly interpreted, are to be determined on a standard of reasonableness…’
There were extricable questions of law raised in this appeal including whether a charitable gift to a non-qualified donee is a valid legal ground to revoke a registration. The court thus dealt with the DATA transaction first, saying that the only question arising from Prescient’s financial contribution to DATA was whether the Minister could revoke its registration for having made a contribution to a foreign charity. After reviewing the legislative provisions, including some amendments to the Act which were never passed by the federal legislature, the court held that (at [30]-[31]):
‘Though the CRA holds that registered charities cannot make gifts to foreign charities that are not qualified donees, that position is not grounded in an enforceable legislative enactment. The Minister reiterates, at para. 85 in his memorandum of fact and law, his position that, to qualify as charitable, a charitable public foundation must not only operate exclusively for charitable purposes, but must also only disburse funds to a qualified donee. However, the Minister offers no authority for that proposition, nor does he refer to any enforceable statutory requirement providing for such a restriction. In this case, the Minister has revoked the registration of Prescient invoking a ground that is not reflected in enforceable legislation. In effect, the Minister applied to Prescient the ground of revocation provided for in paragraph 149.1(3)(b.1) of the Act, a provision which was not in force at the time the decision to revoke was made, and which, I repeat, is still not in force.’
On the issue of the farm sale transactions, the court agreed with the Minister that the impugned transactions were not for charitable purposes. The transactions were for tax avoidance purposes (at [38]):
‘The special advantages extended to charities under the Act are meant to assist them in pursuing their charitable purposes. Under subsection 149.1(1) of the Act, charitable foundations must thus be operated exclusively for charitable purposes. Prescient broke that important rule through its participation in the Farm Sale Transactions. By so doing, it ignored the fundamental purpose of the special advantages provided to charities under the Act. In the light of the egregious nature of the Farm Sale Transactions and of Prescient’s participation therein, it was reasonable for the Minister to revoke Prescient’s registration under the Act.’
Although charities, including Prescient, did obtain money in the form of commissions through the farm sale transactions, their primary purpose was not charitable.
Were there inadequate books and records kept? The CRA took the position that Prescient had contravened section 230 of the Act by failing to maintain complete and sufficient records allowing the CRA to verify the information contained within its registered charity information returns and financial statements. The facts showed that Prescient did not maintain records relating to the impugned transactions (at [55]-[56]):
‘In light of this, it was reasonable for the Minister to conclude that Prescient did not maintain adequate records. That being said, was it also reasonable for the Minister to conclude that Prescient’s registration should be revoked for that reason alone? Though Prescient was remiss in maintaining proper records of the Farm Sale Transactions, the CRA auditor was nevertheless supplied with a considerable amount of information concerning these transactions which allowed her to understand both their scope and their nature. In my view, it would not have been reasonable for the Minister to revoke Prescient’s registration on that basis alone. On the other hand, Prescient’s failure to maintain adequate records and books of account showing that its contribution to DATA was made to an American charity, coupled with its failure to voluntarily and promptly disclose this fact to the auditor, constitutes a very serious matter. Thus, both failures, taken together, are sufficient, in the circumstances of this case, to conclude that the Minister acted reasonably in revoking Prescient’s registration on the ground that it had failed to maintain adequate books and records.’
Therefore, as there were proper grounds to support revocation, the Minister was correct to revoke Prescient’s registration as a charity. The appeal was dismissed with costs.
The case may be viewed at: http://decisions.fca-caf.gc.ca/en/2013/2013fca120/2013fca120.html
Implications of this case
The most interesting question in this appeal was the contribution by Prescient to DATA, a nonprofit organization contemplated by section 501(c)(3) of the U.S. Internal Revenue Code. Its principal mission is to alleviate poverty and illness in Africa. Prescient had submitted that the Minister erred in law by revoking its registration on the ground that its $500,000 transfer to DATA was not a gift to a ‘qualified donee’ under Canadian law. Prescient first noted that a registered charity qualifies as a ‘qualified donee’ under paragraph (b) of the definition of that term set out in paragraph 149.1(1) of the Act. Prescient further submitted that, by operation of paragraph 7 of Article XXI of the Canada-U.S. Tax Convention and of subsections 3(1) and (2) of the Canada-United States Tax Convention Act, 1984, S.C. 1984, c. 20, a gift by a resident of Canada, such as Prescient, to a U.S. charitable organization, such as DATA, was to be treated, for the purposes of Canadian taxation, as a gift to a registered charity within the meaning of the Act. Since a registered charity is a ‘qualified donee’ under the Act, Prescient concluded that the Minister was thus bound to treat its gift to DATA as one made to a ‘qualified donee’.
The Court did not consider this argument since it concluded under the alternative ground argued by Prescient that the gift to DATA was not a ground for revocation. Thus, the court avoided deciding the key question of the impact of the Canadian-U.S. tax treaty on the ability of Canadian registered charities to give funds to section 501(c) organizations.