Decision Date: May 4, 2012
Link: Case Summary Document
Citation: [2012] FCA 136 (Canadian Federal Court of Appeal, Dawson, Trudel, Stratas 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.


Under Canadian law, the Income Tax Act, RSC 1985, c 1 (5th Supp) (the Act) divides registered charities into two categories: charitable organisations and charitable foundations. A charitable organisation is an organisation that devotes all of its resources to charitable activities that it carries on itself (section 149.1(1)).

A charitable foundation is a trust or corporation that operates exclusively for charitable purposes (section 149.1(1)). Charitable purposes include the disbursement of funds to qualified donees (section 149.1(1)). Charitable foundations are divided into two categories: public foundations and private foundations, with private foundations being subject to more detailed and restrictive rules than public foundations. This case arose because the Minister of National Revenue (the Minister) designated the appellant’s foundation as a private foundation.

The appellant, The Sheldon Inwentash and Lynn Factor Charitable Foundation (the Foundation), is an inter vivos trust that was settled by Mr Sheldon Inwentash for the purpose of making gifts to Canadian registered charities. It is a charitable foundation as defined in section 149.1(1) of the Act, and a registered charity as defined in section 248(1).

The appellant has a single trustee, Cidel Trust Company Ltd (the Trustee). The Trustee is registered under the Alberta Loan and Trust Corporations Act, RSA 2000, c L-20. All, or substantially all, of the capital contributed to the Foundation was contributed by Mr Sheldon Inwentash, his wife Ms Lynn Factor, and/or entities controlled by them.

Section 149(1)(f) of the Act provides that no tax is payable under Part I of the Act on the taxable income of an entity when that entity is a registered charity. The term ‘registered charity’ is defined to include ‘a charitable organization, private foundation or public foundation […] that is resident in Canada and was either created or established in Canada’ and has applied for and received registration as a charity (sub-section 248(1)).

‘Private foundation’ is defined in section 149.1 of the Act to mean ‘a charitable foundation that is not a public foundation’. ‘Public foundation’ is also defined in section 149.1 of the Act. However, that definition is subject to alteration by the federal Parliament of Canada under amending Bill C-33 Income Tax Amendments Act, 2006 which would make it a requirement that 50% or more of directors, trustees or similar officials of a public foundation must deal with each other at arm’s length; and that a public foundation cannot receive a majority of its funding from a person or a group of persons who control the foundation in any way; or make up more than 50% of the directors, trustees or other official of the foundation. The object of the amendments to the definition of public foundation was to reduce the risk of a public foundation self-dealing with its donors.

These amendments have not yet been enacted into law. However, on 11 July 2007, the Canada Revenue Agency (CRA) announced that regardless of the amendments not yet having passed the parliament, the CRA would give effect to the changed definition of public foundation. This would imply that there should be more than one trustee for a public foundation, so that the appellant foundation could not be a public foundation.

On 29 July 2008, the Minister notified the appellant that it qualified for tax-exempt status as a registered charity and was designated as a private foundation. The appellant objected to its designation as a private foundation and filed submissions in support of that objection. By letter dated 10 March 2011, the CRA advised the appellant that, for the reasons given in the letter, it intended to confirm the decision to designate the appellant as a private foundation.

The CRA afforded the appellant a further opportunity to make further representations. The reasons given by the CRA were:

1.    The appellant had only one trustee. Therefore it could not meet the first requirement in the definition of public foundation that ‘more than 50% of the directors, trustees officers and like officials must deal at arm’s length with each other and with each of the other directors, trustees, officers and like officials’.

2.    The appellant could not meet the second requirement in the current definition because more than 50% of its capital was contributed by persons who do not deal with each other at arm’s length.

3.    The appellant could not meet the second requirement in the proposed definition because Mr Inwentash and Ms Factor have de facto control of their Foundation.

The question on appeal was whether a public foundation could have one trustee.

On the basis of statutory interpretation, the court held that there was a clear intention of parliament that there should be more than one trustee. The court also looked at the statutory context and purpose of the definition of public foundation.

The definition referred to ‘more than 50%’ of trustees, and their dealings with ‘each other’ at ‘arm’s length’. All of these words pointed to the intention that there should be more than one trustee. Her Honour Dawson JA said (at [33]–[34], and [42]):

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. 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….

By increasing the number of arm’s length trustees the risk of a public foundation self-dealing with its donors is reduced. Put another way, the requirement that there be more than one arm’s length trustee provides greater assurance that a public foundation will not be used for tax avoidance purposes.

Although there was some commentary from the court concerning the confusing approach adopted by the CRA to this definitional issue, this was found to be not determinative of the meaning of a provision of the Act. Therefore, it was held that a public foundation in Canada cannot have only one trustee, and that the Minister’s designation of the appellant Foundation as a private foundation was correct.

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Implications of this case

By creating public and private foundations as different entities, the Canadian government was attempting to promote philanthropy, while at the same time trying to limit the potential for tax avoidance schemes. Public foundations are not subject to the same restrictive rules as private foundations because the Canadian government 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.