Source: http://www.icnl.org/research/journal/vol4iss4/cn_4.htm
Timestamp: 2019-04-23 02:32:58+00:00

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On March 1, 2002, the Federal Court of Appeal decided The Canadian Committee for the Tel Aviv Foundation v. The Queen, an appeal by the Committee of the revocation of its registration as a charitable organization by the Canada Customs and Revenue Agency. This case represents the first decision on the Income Tax Act (the “Act”) rules and the CCRA’s administrative position dealing with foreign activities by Canadian registered charities.
The Act provides that a charity which is registered as a charitable organization can donate up to 50% of its income to qualified donees (essentially other registered charities) and is required to spend the remainder of its assets and income on its own charitable activities. Since only an entity resident in and created or established in Canada is eligible to become a registered charity, it is therefore not possible for a Canadian charity registered as a charitable organization to make grants to a foreign charity.
However, the CCRA accepts that a registered charity is carrying on its own charitable activities when it does so through a foreign agent or as part of a joint venture arrangement (see CCRA Guide RC 4106 Registered Charities Operating Outside Canada ). Thus, it is often possible for a Canadian charitable organization to enter into a legal arrangement with a foreign charity whereby the foreign charity carries on some aspect of its activities on behalf of the Canadian charity.
I have criticized in the past the rules which prevent Canadian charitable organizations from making foreign charitable grants. While it is often possible to comply with the requirement for an agency or joint venture relationship, there are many Canadian charities who either make no attempt to comply or are unable to comply strictly (often because the foreign agent or joint venture partner views the requirements as silly and therefore does not provide the assistance required for the Canadian charity to be able to comply).
A Canadian registered charitable organization which makes a direct grant to a foreign charity can have its charitable registration revoked. This results in a tax being applicable to the charity equal to 100% of the value of its assets. While the de-registered charity can avoid the tax by transferring its assets to another registered charity, this is still a very harsh result.
The Canadian Committee for the Tel Aviv Foundation (the “Committee”) was an organization formed and registered in 1985 to promote education and relieve poverty and sickness in Tel Aviv by carrying on charitable activities in Tel Aviv through the Tel Aviv Foundation (an Israeli charity) acting as agent for the Committee.
Revenue Canada (the predecessor to the Canada Customs and Revenue Agency) audited the Committee in 1995 for its 1993 year. Revenue Canada threatened to de-register the Committee because the Committee had violated the terms of its written agency agreement with the Foundation since the Committee was unable to demonstrate control of funds expended by its agent and did not have proper reports from its agent. The 1995 audit itself followed an audit of the 1990 year of the Foundation which found a lack of documentation of overseas expenditures. To avoid de-registration as a result of the 1995 audit, the Committee undertook to Revenue Canada to “conform strictly to the requirements of Revenue Canada, including the specific provisions of the agency agreement, which is still in force and effect”. In 1999, the CCRA audited the 1997 year of the Committee and found the same record-keeping and control failures. The CCRA then issued notice of its intention to revoke the registration of the Committee.
The Committee responded unsuccessfully to the CCRA. It then engaged counsel and appealed its de-registration to the Court of Appeal. There were several grounds of appeal, some administrative and others substantive.
The administrative law grounds were essentially that the legislative scheme for revoking the registration of a charity violated the Bill of Rights because it denied a hearing and that there had been a denial of natural justice. The court rejected these administrative law grounds almost out of hand.
On more substantive tax issues, the Committee appealed on the basis that the CCRA should not have considered the terms of the agency agreement but should instead have considered whether or not the relationship between the Committee and the Tel Aviv Foundation met the legal test for agency at common law such that activities of the Foundation were, at law, activities of the Committee. The Court decided that, on the facts of the case, there was a violation of the requirement of the Act that a charitable organization carry on its own activities; since the Committee could not show that it had controlled or directed the activities of its agent, the activities were not carried out on its behalf.
The Court’s conclusion on agency is curious. Once a charity establishes that there is an agency relationship with a foreign charity, as a matter of the common law of agency, the activities of the foreign agent are activities that the Canadian charity carries on itself. If a requirement for direction and control by the Canadian charity is a good thing, it should be required by the Act, not simply adopted from the non-authoritative CCRA guide. However, given the findings of the Court on the record-keeping issue discussed below, perhaps the Court’s discussion of agency can be characterized as obiter.
The decision of the Court to approve the revocation of registration of the Committee can be supported at law by section 230 of the Act which requires (on explicit penalty of de-registration) that a registered charity keep at its Canadian premises sufficient books and records to enable it to show that its activities are charitable. In this case, the Committee did not keep at its premises any records related to the activities carried out on its behalf by the Foundation. The only reports made available to the CCRA were ones prepared after the audit had begun. As a result, the Committee was in violation of the Act at the time of the audit because it did not have the required records.
On the practical side, this case demonstrates that in order for foreign activities to be carried on through an agency arrangement, strict compliance with the law and CCRA’s administrative policy is necessary, including the keeping of appropriate records in Canada. Another lesson which can be learned from this case is that while the CCRA may sometimes agree not to de-register a charity which fails through inadvertence to comply with the tax rules, the CCRA will be much less patient with a charity which was warned about the same issue in a previous audit.
At a more theoretical level, the outcome in this case supports calls for a better appeal procedure for Canadian charity tax cases (essentially the administrative law grounds which I have not discussed). It should also lead to consideration of whether the current Canadian requirements for agency agreements or joint venture arrangements are appropriate in the context of international philanthropy. Surely it makes no sense to decide whether a particular exercise of international beneficence is appropriate on the basis of whether it was done in compliance with some particular agency agreement. Rather, the Canadian tax system could meet the same policy objectives (of requiring charities to show direction and control over their funds and of preventing fraud) by allowing foreign charities to become registered in Canada and therefore suitable recipients of grants from other Canadian registered charities.
* Robert Hayhoe is a Barrister & Solicitor at Miller Thomson LLP in Toronto, Canada. He also serves as Regional Coordinating Editor (North America - Canada) for IJNL. He can be contacted at rhayhoe@millerthomson.ca . A portion of this case note was published as “Keeping records key for Canadian charities using foreign agents” (2002), 22:7 The Lawyer's Weekly 9.
 Similar rules apply to charities registered as public or private foundations, although it is arguable that foundations may make foreign charitable grants in limited circumstances (the CCRA does not accept this position).
 R.B. Hayhoe, A Critical Description of the Canadian Tax Treatment of Cross-border Charitable Giving and Activities @ (2001), 49 Canadian Tax Journal 320.
 Two good recent practical legal discussions are: David Amy, “Foreign Activities by Canadian Charities” (2000) vol. 15, no. 3 The Philanthropist 41 and Terrance S. Carter, “U.S. Tax Exempt Organizations Commencing Charitable Operations in Canada and International Structuring” (1999) vol. 11 J. Tax. Exempt Org.
[t]he complaint sought declaratory and other equitable relief under the Solicitation for Charity Act and the common law power and duty of the Attorney General to protect the interest of the citizens of Illinois in charitable assets and funds solicited for charitable purposes. Specifically, the State sought a declaration that the Church was (or purported to be) a “charitable organization” that solicited funds for “charitable purposes” within the meaning of the Act, and that it therefore was required to register with the Attorney General and account for funds that it solicits from those purposes.
Upon the Attorney General’s appeal from this decision, the Supreme Court of Illinois reviewed the circuit court’s order granting the motion to dismiss. It also reviewed the circuit court’s determination that the Solicitation for Charity Act was unconstitutionally vague.
The Supreme Court of Illinois’ reasoning that the Act could survive Constitutional scrutiny began with the acknowledgment that the solicitation of funds is encompassed in the First Amendment’s guarantee of freedom of speech. As such, the court found that “[c]ontent neutral regulation of protected speech is subject to ‘an intermediate level of scrutiny.’” The court went on to ascertain whether the Solicitation for Charity Act is content neutral, stating that “[i]n determining whether a regulation is content neutral, the main inquiry is whether the state has adopted the regulation because of its disagreement with the content of the message sought to be conveyed.” “Government regulation of expressive activity is content neutral so long as it is " 'justified without reference to the content of the regulated speech.'" The court stated that the Solicitation for Charity Act’s registration requirement was universally applicable to any organization wanting to solicit funds in Illinois regardless of its “message,” and was in no way related to controlling the content of the speech. Therefore, the court found that the Solicitation for Charity Act was content neutral and subject to intermediate scrutiny.
“Intermediate scrutiny” requires the state to show that the law in question “(1) serves a substantial government interest and (2) is ‘narrowly drawn’ to serve that interest ‘without unnecessarily interfering with First Amendment freedoms.’” It was decided in 1976 that “[a] state or municipality undoubtedly has the power to protect its citizens from fraud by regulating solicitation of funds.” Thus the Act serves the “substantial government interest” of protecting its citizens from fraud. “[T]he Solicitation for Charity Act merely requires that entities subject to its provisions register and report certain specified information.” It does not require the obtaining of a permit or permission to be able to solicit in the state, only the registration of information and payment of the fifteen dollar fee; the purpose of these requirements is to protect the State’s citizens from fraud. There is no ability for the State to decide who may or may not solicit in the State; the Solicitation for Charity Act only requires that information be filed.
As for the definition of which organizations are required to register, the court found that, Illinois case law has a well-settled meaning for “charity”.
T[he supreme] [c]ourt, in construing the statutory term "beneficent and charitable organizations," noted that charity is a gift to be applied for the benefit of an indefinite number of persons, by bringing their " 'minds and hearts under the influence of education or religion, * * * by assisting them to establish themselves in life * * * or by otherwise lessening the burdens of government.'"
[t]he courts in [ Illinois] are in accord in applying a broad legal definition of 'charity' to include almost anything that tends to promote the improvement, well[-]doing and well[-]being of social man. Moreover, charitable organizations may include organizations whose primary purpose is not to provide money or services for the poor, the needy or other worthy objects of charity, but to gather and disseminate information about and to advocate positions on matters of public concern.
The court acknowledged “the terms at issue in this case are broad in scope [but it] fail[ed] to see how they could be more precisely defined.” Given the wide variety of organizations that the Solicitation for Charity Act is meant to cover, given that Illinois jurisprudence has well-settled definitions of the terms it contains, and given that other States’ judicial interpretations have not found “charitable organization” and “charitable purpose” to be unconstitutionally vague, the Supreme Court of Illinois decided that the Solicitation for Charity Act, and its application to the World Church could stand.
Due to the Supreme Court of Illinois decision that the Solicitation for Charity Act was not unconstitutionally vague, the court reversed the Cook County Circuit Court’s judgment and remanded the case back to that court for further proceedings. Attempts to obtain information from the office of the Illinois Attorney General in Cook County about what is currently happening with this case were unsuccessful as of this writing.
* Elizabeth A. Francis is a law student at the Catholic University of America. She expects to receive her JD in May 2003. She can be reached at Elizabeth_a_francis@hotmail.com.
 225 Ill. Comp. Stat Ann. 460.
 225 Ill. Comp. Stat Ann. 460/1(a) define Charitable Organization as “[a]ny benevolent, philanthropic, patriotic, or eleemosynary person or one purporting to be such which solicits and collects funds for charitable purposes and includes each local, county, or area division within this State of such charitable organization, provided such local, county or area division has authority and discretion to disburse funds or property otherwise than by transfer to any parent organization.
 225 Ill. Comp. Stat. Ann. 460/2 (West 2002).
 225 Ill. Comp. Stat. Ann. 460/1(a) (West 2002).
 Brief for Appellant at 1, Ryan v. World Church of the Creator, 760 N.E.2d 953 ( Ill. 2001) (No. 89780) (Citation omitted).
 People ex rel. Ryan v. World Church of the Creator, 760 N.E.2d 953, 955 ( Ill. 2001).
 Associated Press, Court to hear arguments over racist church’s status, Arizona Daily Wildcat Online, Mar. 22, 2001 available at http://wildcat.arizona.edu/papers/94/120/01_92_m.html.
 Sssociated Press, White Supremacist Loses Charity Ruling, The Washington Post, Nov. 22, 2001, at A02.
 World Church , 760 N.E.2d at 956.
 Village of Schaumburg v. Citizens for a Better Environment , 444 U.S. 620, 633, 100 S.Ct. 826, 834, 63 L.Ed.2d 73, 85 (1980).
 World Church, 760 N.E.2d at 956, quoting American Target Advertising, Inc. v. Giani, 199 F.3d 1241, 1247 (10 th Cir, 2000), quoting Turner Broadcasting System, Inc. v. Federal Communications Comm’n, 512 U.S 622, 642, 114 S.Ct. 244, 2459, 129 L.Ed.2d 661, 675 (1994).
 World Church, 760 N.E.2d at 956, quoting Ward v. Rock Against Racism, 491 U.S. 781, 791, 109 S.Ct. 2746, 2754, 105 L.Ed.2d 661, 675 (1989).
 World Church, 760 N.E.2d at 957 (Emphasis in original), quoting City of Renton v. Playtime Theatres, Inc., 475 U.S. 41, 48, 106 S.Ct. 925, 929, 89 L.Ed.2d 29, 38 (1986), quoting Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748, 771, 96 S.Ct. 1817, 1830, 48 L.Ed.2d 346, 364 (1976).
 World Church , 760 N.E.2d at 958.
 This result stands in contrast to the recent Supreme Court decision in Watchtower Bible and Tract Society of New York v. Village of Stratton, 122 S.Ct. 2080, 2090 (2002), where the Court held that the ordinance in question there did violate the First Amendment. That ordinance “prohibits ‘canvassers’ from going on private property for the purpose of explaining or promoting any ‘cause’ unless they receive a permit and the residents visited have not opted for a ‘no solicitation’ sign.” Id. The distinction between the two cases is that in World Church there was only a registration requirement, not a permit. Thus the decision in World Church should stand despite the Watchtower case.
 World Church, 760 N.E.2d at 957, quoting American Target, 199 F.3d at 1247, quoting Schaumburg 444 U.S. at 637, 100 S.Ct. at 836, 63 L.Ed.2d at 87-88.
 World Church, 760 N.E.2d at 957, quoting Hynes v. Mayor & Council, 425 U.S. 610, 616, 96 S.Ct. 1755, 1758-59, 48 L.Ed.2d.243, 251 (1976).
 World Church , 760 N.E.2d at 960.
 225 Ill. Comp. Stat Ann. 460/2(a).
 World Church, 760 N.E.2d at 961 (alterations in the original), quoting Congregational Sunday School and Publishing Society v. Board of Review, 290 Ill. 108, 112-13, 125 N.E. 7 (1919), quoting Crerar v. Williams, 145 Ill. 625, 643, 34 N.E. 467 (1893).
 World Church , 760 N.E.2d at 961, quoting (Emphases in original.) People ex rel. Hartigan v. National Anti-Drug Coalition, 124 Ill.App.3d 269, 274, 79 Ill.Dec. 786, 464 N.E.2d 690 (1984) (citation omitted).
 World Church, 760 N.E.2d at 961, quoting Crerar v. Williams, 145 Ill. 625, 643, 34 N.E. 467 (1893), quoting Jackson v. Phillips, 14 Allen 556.
 World Church , 760 N.E.2d at 962.
 State v. Watson , 433 N.W.2d 110 (Minn.App. 1988); Holloway v. Brown, 62 Ohio St.2d 65,403 N.E.2d 191 (1980).

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