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Foreign Charities and the Changing Landscape of CRA Charity Audits

There has been a flurry of recent scrutiny and activity in the areas of foreign and domestic charities – few foreign charities remain on the list of qualified donees since the changes to the definition of “qualified donee” in the Income Tax Act, and the CRA’s Charities Directorate appears to have taken a keen interest in the political activities of certain domestic charities.

Donors and charities would be prudent to monitor these developments and obtain professional advice where necessary.

Foreign Charities

Before 2013, a “qualified donee” under the Income Tax Act automatically included those foreign charities to which the Canadian government had made a gift in previous years (within a certain timeframe). However, that changed when the definition of qualified donee was amended to include only those foreign organizations that have applied to the CRA for registration, which would be granted if the foreign charity received a gift from the Canadian government and the CRA was satisfied that the foreign charity is carrying on relief activities in response to a disaster, providing urgent humanitarian aid, or carrying on activities in the national interest of Canada.

The CRA website lists only one foreign charity that has been registered – The Bill, Hillary and Chelsea Clinton Foundation. The CRA website also lists those organizations that had received gifts from the Canadian government before the changes to the definition of qualified donee.

Political Activities and CRA Charity Audits

The foreign charity changes occurred around the same time the CRA Charities Directorate increased its “political activities compliance efforts”. In general, charities are restricted from engaging in or supporting political activities unless those activities are wholly subordinate to their other charitable purposes. The CRA’s administrative position is that a charity must devote less than 10% of its total resources in a year to political activities.

The CRA focus on charities and political activities sparked many media articles raising the issue of whether the CRA’s auditing practices were themselves inherently politically-motivated (see articles here, herehere and here).

Cathy Hawara, the Director General of the CRA’s Charities Directorate, has denied accusations that these charity audits were politically motivated (see Ms. Hawara’s speech to the CBA Charity Law Symposium on May 23, 3014). The CRA also publicly stated that recent audits of charities were intended to focus on all types of charities and not only those with certain political inclinations. Further, the CRA has recently published a Charities Program Update which (among other things) aims to increase the transparency of its audits in the charitable sector and provide guidance as to how audits for charities involved in political activities are conducted. However, at the same time, the CRA has publicly stated that it will not divulge the guidelines for political activity audits of charities.

The controversy surrounding the CRA’s audit selection process persists. On September 15, 2014 a letter signed by 400 academics was released, demanding that the CRA halt its audit of the Canadian Centre for Policy Alternatives (“CCPA”). This letter was sent in response to the release of a CRA document obtained by the CCPA pursuant to an access to information request wherein the CRA states the reason for audit as follows: “A review of the Organization’s website… suggests that the Organization may be carrying out prohibited partisan political activities, and that much of its research/educational materials may be biased/one-sided.”

In their letter, the academics counter that “critical policy analysis does not equate with political activism, nor is it ‘biased’ or ‘one-sided’.” They argue that there is legitimate concern that charities are now self-censoring to avoid aggravating auditors and this audit activity will stifle sound, effective, and legitimate research.

On October 20, 2014, the Broadbent Institute released a report that adds further momentum to the speculative argument that the CRA is less interested in compliance and more interested in politically-motivated retribution against government critics (see also here).

The report highlights 10 “right-leaning” charities that have apparently escaped CRA audit, despite making public statements that may indicate that such charities are carrying out political activities without reporting them. The report concludes by suggesting that an impartial inquiry into the CRA’s audits of charitable organizations is the only way to come to a clear conclusion on this controversial matter.

The message is clear. The CRA is increasing scrutiny on political activities in the charitable sector. Charities should take active steps to ensure that they are compliant with applicable legislation.

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Foreign Charities and the Changing Landscape of CRA Charity Audits

Federal NFP Corporations Act: What’s Next?

Companies incorporated under the Canada Corporations Act (Part II) were required to be continued under the new Canada Not-For-Profit Corporations Act on or before October 17, 2014.

Industry Canada has published a Q&A on the next steps for those entities that have not yet continued under the new Act.

A company that has not yet completed its continuance may do so after the deadline, provided that Corporations Canada has not dissolved the company.

Corporations Canada will be sending a “Pending Dissolution Notice” to a company that has failed to continue to inform the company that it has 120 days to transition. Companies that do not complete the transition before the end of the 120-day notice period will be assumed to be inactive and will be dissolved.

Registered charities that are required to be continued under the new Act should consider the steps required to advise the Canada Revenue Agency of the continuance and any changes to the charity’s constating documents.

Any company that intends to be continued under the new Act should consult a professional advisor about completing the continuance as soon as possible.

Federal NFP Corporations Act: What’s Next?

David: Charitable Tax Credit Allowed for Amounts Paid for Inflated Donation Receipts

Where a taxpayer receives an inflated donation receipt, may the taxpayer claim a charitable donation credit for the cash amount of the gift?

According to the Tax Court of Canada in David v. The Queen (2014 TCC 117), in the absence of any extraordinary circumstances, the answer to that question will be yes.


In David, the taxpayers paid certain amounts to a tax return preparer as cash donations to a registered charity. In exchange, the taxpayers received donation receipts from the charity in amounts the Minister claimed were ten times greater than their cash donations. The taxpayers subsequently claimed charitable donation tax credits under subsection 118.1(3) of the Income Tax Act (Canada) (the “Act”) based on the inflated donation receipts.

The Minister disallowed the full amount of the donation tax credits claimed by each taxpayer. The taxpayers appealed the Minister’s reassessments on the basis that at least a portion of the credits should be allowed.

Decision of the Tax Court of Canada

The Court determined on the evidence that the amount that each taxpayer paid as a donation to the charity was 10% of the face value of their donation receipt.

The Minister argued that the donation amounts were not true “gifts” and could not therefore give rise to a claim for charitable tax credits by the taxpayers. The basis for the Minister’s argument was that the amounts were paid on the expectation of receiving a benefit: an inflated charitable donation receipt.

The Court disagreed, stating that “the issuance of an inflated tax receipt should not usually be considered a benefit that negates a gift”. However, there may be extraordinary circumstances that should be taken into consideration. Accordingly, the Court concluded that the taxpayers were entitled to claim a charitable tax credit in respect of 10% of the face value of their donation receipts. The Tax Court did not consider the Minister’s argument that the taxpayers lacked donative intent as it was not raised in the Minister’s pleadings. The Court ordered the cancellation of the penalties (if any) imposed against the taxpayers.


David is a helpful decision for taxpayers whose claims for charitable donation tax credits have been entirely disallowed by the Canada Revenue Agency (“CRA”) on the basis that the provision of an inflated donation receipt vitiates a gift. As of the writing of this article, the David decision had not been appealed to the Federal Court of Appeal. If appealed, the Court of Appeal may clarify the law on gifts, donative intent and inflated donation receipts. For example, in reaching its conclusion, the Tax Court relied on the Federal Court of Appeal’s decision in The Queen v. Doubinin (2005 FCA 298), in which the Court of Appeal held that the issuance of an inflated tax receipt was not a benefit that negated the taxpayer’s gift. In Doubinin, the taxpayer had no knowledge of any wrongdoing and there was no expectation of a benefit when he made the donation. It is not clear whether or how much weight the Tax Court in David placed on these facts or if these facts are examples of “extraordinary circumstances” that should be considered by a court.

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David: Charitable Tax Credit Allowed for Amounts Paid for Inflated Donation Receipts

A pointed observation by the Federal Court of Appeal on the CRA’s approach to proposed legislation

The recent Federal Court of Appeal decision of Edwards v. The Queen (2012 FCA 330) includes an interesting observation dealing with the Canada Revenue Agency’s policy with respect to proposed legislation.

In Edwards, the taxpayer was involved in a charitable donation scheme. Essentially, the taxpayer was able to obtain a charitable donation tax credit in an amount greater than his outlay or gift. The taxpayer was one of approximately 8,000 taxpayers that had been reassessed, and Edwards was the lead case for eight other appeals.

In the Tax Court, the taxpayer brought a motion for an adjournment of the hearing pending the enactment of proposed amendments to the Income Tax Act. The proposed amendments would be retroactive to when they were first announced. They may have allowed the taxpayer to claim all or a portion of the denied credit.

The CRA had been applying the proposed amendments as if they were law. However, the CRA refused to apply the amendments in the taxpayer’s case. The CRA took the view that the rules did not apply in his situation. As this was an administrative position on proposed amendments rather than law, the taxpayer could not challenge this decision.

The Tax Court denied the taxpayer’s adjournment request (2012 TCC 264).

The Federal Court of Appeal held that the motions judge made no error in denying the application for adjournment. At the time of the hearing of the motion it was not clear if the amendments would be enacted. However, the amendments were subsequently included in a bill to amend the Income Tax Act that received first reading on November 26, 2012. The Federal Court of Appeal found that this new information was a sufficient basis for reversing the motions judgment and granting the adjournment.

In obiter, Justice Evans noted that “there seems something fundamentally unfair in the CRA’s administration of proposed amendments to the Income Tax Act for the past ten years as if they were already law.”

Another example is proposed section 56.4. It has been in draft form since 2005. The proposed rule governs the tax treatment of restrictive covenants. As a matter of existing statute and case law, until proposed section 56.4 is enacted, it is arguable that restrictive covenants should receive the tax treatment described in case law such as the decision of the Federal Court of Appeal in Manrell v. the Queen (2003 FCA 128).

However, advisors and clients – mindful that the proposals will likely become law with retroactive effect – instead find themselves complying with legislative proposals that change over time and impose compliance burdens that are not clear. Proposed section 56.4 includes election provisions referencing prescribed forms that have not actually been prescribed. Taxpayers must satisfy themselves that they have provided sufficient supporting information, a matter over which the CRA retains discretion.

Sometimes the administration of proposed law for long periods of time becomes itself the subject of legislative proposals. For example, for close to a decade there were proposed changes to section 94.1, which deals with certain offshore investments. Ultimately, the proposed changes were withdrawn. Ironically, this has caused the need for new proposed legislation to provide a mechanism for relief for taxpayers who had complied with the unenacted original proposals.

Worse still, taxpayers and advisors must sometime rely only on press releases describing proposed legislation in arranging their tax affairs. For example, recent changes to rules respecting “stapled securities” were announced on July 20, 2011, with intended effect for some taxpayers one year from that date. The proposed legislation itself was released mere days after the intended effective date on July 25, 2012. To echo Justice Evan’s comments there seems to be something “fundamentally unfair” about the proposed laws a taxpayer must comply with being released days after compliance must begin.

It is hoped that the rather pointed remarks by Justice Evans lead to a review by the Department of Finance and the Canada Revenue Agency of this unsatisfactory state of affairs.

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A pointed observation by the Federal Court of Appeal on the CRA’s approach to proposed legislation

Tax Court of Canada Allows Charitable Gift Treatment for Taxpayer’s Cash Contribution: Berg v. The Queen

On November 19, 2012, the Tax Court released its decision in Berg v. The Queen (2012 TCC 406), which dealt with donative intent in the context of a donation scheme involving inflated charitable donation receipts. The Tax Court held that, although the taxpayer received documentation reflecting a valuation about nine times greater than the fair market value of the donations, the cash contributed by the taxpayer could effectively be segregated from the rest of the scheme and, thereby, constitute a “gift” for purposes of subparagraph 118.1 of the Income Tax Act.


In 2002 and 2003, Mr. Berg purchased 68 timeshare units, for which he paid $375,950 in cash and the remainder via low-interest financing. The taxpayer subsequently donated the units, and the recipient charity issued donation receipts for amounts approximately nine times higher than the fair market value of the units. The taxpayer claimed the inflated charitable donation tax credits. The CRA reassessed and disallowed the claimed charitable gifts of $2,420,000 for 2002, $1,786,000 for 2003 and $718,380 for 2004, including the portions paid by the taxpayer in cash for the units.

The only issue before the Tax Court was whether the cash paid was a “gift” and therefore eligible for the charitable donation tax credit.


The taxpayer argued that since he provided value for the units, and received no benefit from the charity (other than the credits themselves), the cash payments had to constitute a gift. The Crown argued that the inflated receipts conferred an additional benefit to the donor, thereby negating the donative intent of the taxpayer entirely. The Tax Court distinguished Marechaux v. The Queen in the Tax Court and Federal Court of Appeal on the basis that the Crown had conceded in this case:

[35] . . . that the Transaction Documents were pretenses and thereby not legally effective documents. Legally, no tangible or potential benefit to the Appellant, beyond the camouflage afforded by the Inflated Gift Receipts which were needed to enhance the purported gift value beyond the Cash Donation Amounts, can be ascribed to the Transaction Documents which, on admission by the Respondent, gave rise to no legal rights, obligations or benefits.

The Tax Court concluded as follows:

[48] . . . to the extent the Cash Donation Amount related to the Transferred Units, the Appellant was impoverished by, paid valuable consideration for, intended to give, and conveyed the Transferred Units which were, in turn, received by the Charity. Whatever opprobrium may be ascribed to the Donation Program, legally the Cash Donation Amount has met the legal test of a charitable gift. In the absence of some other benefit received beyond the Inflated Tax Receipts, no legal authority suggests donative intent as defined by the case law relevant to section 118.1 of the Act has been vitiated or nullified to the extent of the value of the Cash Donation Amount.


The Tax Court concluded that the taxpayer intended to donate to the charity, even if he was motivated by the possiblility of receiving an inflated tax receipt. This decision takes seriously the words of the Federal Court of Appeal in The Queen v. Friedberg in which it was held that a “gift is a voluntary transfer of property owned by the donor to a donee, in return for which no benefit or consideration flows to the donor.” In certain circumstances, including those found in this case, one may be able to effectively segregate the “gift” amount from the “non-gift” amount provided that the requisite degree of intent is found in connection with the former.

It is not known whether the Crown will appeal the Tax Court’s decision to the Federal Court of Appeal.

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Tax Court of Canada Allows Charitable Gift Treatment for Taxpayer’s Cash Contribution: Berg v. The Queen

Canada Revenue Agency Toronto Centre Tax Services Office Describes Current Audit Issues

At today’s Canada Revenue Agency Toronto Centre Tax Professionals Group Breakfast Seminar (November 14, 2012), the CRA provided an update on a number of current audit issues.

The CRA was represented by Sal Tringali, Regional Technical Advisor of Aggressive Tax Planning, and James McNamara, Manager of International Taxation and Aggressive Tax Planning Audit Division from the Toronto Centre Tax Services Office. The discussion was moderated by Jacques Bernier (Baker McKenzie LLP) and Rachel Gervais (BDO Canada LLP).

The audit issues highlighted by the panel included the following:


  1. Recapture input tax credit
  2. ITC allocation % – mixed supplies
  3. Financial services
  4. Imported supplies
  5. Reinsurance/loading
  6. Loyalty reward points
  7. VDP – Related parties

Income Tax

  1. Artificial capital losses
  2. Loss trading
  3. Surplus strips
  4. Offshore bank accounts held by individuals
  5. Donation arrangements
  6. International transactions
  7. S. 85 rollovers
  8. RRSP appropriations
  9. Tax-free savings accounts (TFSA)

Additionally, the CRA made the following comments:

    • The CRA’s access to/requests for accountants’ working papers remains a “hot topic”. Generally speaking, the CRA will first ask the taxpayer for information/documents, after which the CRA may request information/documents from the taxpayer’s accountants. The CRA’s objective is to perform high-quality audits, and access to complete information is required to do so.
    • The CRA reminded taxpayers of its recent announcement that the CRA will not assess a taxpayer’s return where the taxpayer has claimed a charitable donation and the alleged gift is made as part of a donation arrangement. The delay in assessing the return could be two years or more (see Jamie Golombek’s recent article on the subject).
    • The CRA has appealed the Tax Court’s decision in Guindon v. The Queen to the Federal Court of Appeal. In light of the Tax Court’s decision, the CRA is currently considering its options in respect of the assessment of third party penalties.
    • The CRA has considered the application of third party penalties in 185 cases. In 71 of those cases the penalty was applied, resulting in the imposition of $79 million of penalties. In 50 cases the penalty was not applied, and 64 cases are ongoing.
    • The CRA will continue to revoke e-file privileges where a tax preparer is subject to a penalty, even where a penalty against a single tax preparer may result in the revocation for his or her entire firm.
    • The CRA referred to the recent Supreme Court decision in GlaxoSmithKline v. The Queen and stated that it intends to follow the new OECD guidelines on transfer pricing and the hierarchy of pricing methods. The CRA said that it did not expect to release any formal communication to the public on this issue, but Information Circular IC 87-2R “International Transfer Pricing” may be updated to reflect this position.

UPDATE: After the seminar, the CRA informed us that it intends to follow the guidance in the recently updated OECD Guidelines and will be issuing a Transfer Pricing Memoranda (TPM) on the matter to the public. This TPM will reflect a recently released internal Communique on the same subject and will be made available in the near future.

    • The CRA clarified that Tax Earned By Audit (“TEBA”) remains a metric for measuring ”tax at risk”, but it is not used to measure the performance of an auditor. Rather, the CRA measures the performance of auditors based on six major elements: (i) planning the audit, (ii) conducting the audit, (iii) applying the appropriate legislation/policy, (iv) the end product of the audit, (v) professionalism in the audit, and (vi) timeliness of completion of the audit.
    • The CRA plans to convene face-to-face meetings with approximately 160 large businesses (i.e., annual sales over $250 million) as part of the CRA’s large business audit project. The CRA will continue to risk-assess all large businesses/entities annually.
    • The CRA intends to clear a backlog of approximately 1,300 audit files so that it may assess the most recent taxation year and the immediately preceding taxation year for most businesses by 2015-16.
    • The CRA reiterated that issues that arise during the audit process should be raised with the auditor, after which it may be appropriate to involve the auditor’s team leader. If the issue cannot be resolved at that level, it would be appropriate to raise the issue with the auditor’s manager or the assistant director of audit at the particular TSO.

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Canada Revenue Agency Toronto Centre Tax Services Office Describes Current Audit Issues

Public Foundation or Private Foundation? The Sheldon Inwentash and Lynn Factor Charitable Foundation v. The Queen

On February 29, 2012, the Federal Court of Appeal (“FCA”) heard oral argument in The Sheldon Inwentash and Lynn Factor Charitable Foundation v. Her Majesty the Queen (FCA Court File No. A-235-11). Pursuant to subsection 172(3) of Income Tax Act (Canada) (the “Act”), an appeal of the Minister of National Revenue’s decision to refuse charitable registration is made directly to the FCA.

The Appellant trust appealed the Canada Revenue Agency’s (the “CRA”) decision to refuse to register the Appellant as a “public foundation” within the meaning of subsection 149.1(1) of the Act. The Appellant was instead registered as a “private foundation” (For an excellent, if slightly out-of-date, discussion on the difference between private and public foundations, see Cindy Radu, “Public/Private Foundations – Issues and Planning Opportunities” in “Personal Tax Planning,” (2009), vol. 57, no. 1 Canadian Tax Journal, 119-142).

The definition of “public foundation”, as currently enacted, reads in part (underline added):

public foundation” means a charitable foundation of which,

(a) where the foundation has been registered after February 15, 1984 or designated as a charitable organization or private foundation pursuant to subsection (6.3) or to subsection 110(8.1) or (8.2) of the Income Tax Act, chapter 148 of the Revised Statutes of Canada, 1952,

(i) more than 50% of the directors, trustees, officers or like officials deal with each other and with each of the other directors, trustees, officers or officials at arm’s length, and

(ii) not more than 50% of the capital contributed or otherwise paid in to the foundation has been so contributed or otherwise paid in by one person or members of a group of such persons who do not deal with each other at arm’s length


Main Issue

The main issue on appeal is whether a trust with a single trustee can meet the “more the 50%” test in paragraph (a)(i). The basis for the CRA rejecting the Appellant’s application to register as a private foundation was that as there is only one trustee (being a registered trust company), which does not satisfy the requirement in subsection 149.1(1) of the Act that more than 50% of the directors, trustees officers or officials deal at arm’s length with each other.

The Appellant takes the position that the CRA has incorrectly interpreted the definition of public foundation. In short, the Appellant contends that the CRA is in error with respect to its position that a trust with a single trustee can never meet test in subparagraph (a)(i) of the definition.

The Appellant notes that the Interpretation Act, R.S.C. 1985, c I-21, as amended, provides that words in the plural include the singular (and words in the singular include the plural) and that Parliament could have easily drafted the legislation governing public foundations to provide for a minimum number of trustees, not dissimilar to the specified investment business and personal service business definitions which require a corporation to employ “more than five full time employees”. In the Appellant’s view, where a single, professional and arm’s length trust company is the sole trustee of a trust, the trust can still be public foundation pursuant to the definition in subsection 149.1(1), especially in light of the policy behind subparagraph (a)(ii), which the Appellant submits is to prevent the use of tax-exempt charitable donations for private gain.

The Appellant also contends that the CRA has not taken a consistent position on the application of this provision. Published CRA statements indicate that a trust requires at least three trustees in order to meet the test in subparagraph (a)(i). However, the Appellant points out that the CRA has approved as public foundations trusts with only two trustees. This position, according to the Appellant, cannot be reconciled with the CRA’s position on the “more than 50%” threshold, as two trustees by definition cannot satisfy such a requirement any more than can a trust with a single trustee.

The Crown’s position is that the definition of public foundation is clear and unequivocal, and should therefore be interpreted strictly in accordance with the Supreme Court of Canada’s decision in Placer Dome Canada Ltd. v. Ontario (Minister of Finance)[2006] SCR 715. A purposive approach, as suggested by the Appellant, cannot be used to supplant clear statutory language where there is no ambiguity.

Other Issues

The rule in subparagraph (ii) is commonly referred to as the “Contribution Test”. Pursuant to draft legislation released on July 16, 2010, the Contribution Test will be replaced by a rule whereby a foundation cannot be controlled by a person (or a group of arm’s length persons) who contributed more than 50% of the capital to the foundation (the “Control Test”). This legislation, once enacted, will have retroactive application to years after 1999.

According to the Crown’s Memorandum of Fact and Law, the CRA also refused to register the Appellant as a public foundation because, in the Crown’s view, both the Contribution Test and Control Test are not met. Interestingly, the Crown did not advance any argument on this final point in its written submissions, except to say that given the uncertainty that the proposed legislation will become law, the Appellant cannot seek registration on the grounds that it satisfies the Control Test. It is also interesting to note that the position taken by the Crown is contrary to the public position announced by the CRA by way of news release dated July 11, 2007 that it would administer the Act as though the Control Test applied.

The appeal was heard by a three-member panel of the FCA comprised of Madame Justice Eleanor Dawson, Madame Justice Johanne Trudel, and Mr. Justice David Stratas. Judgment was reserved.

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Public Foundation or Private Foundation? The Sheldon Inwentash and Lynn Factor Charitable Foundation v. The Queen