PUBLICATIONS & NEWS RELEASES
1. Finance Proposes Complicated Amendments to Trust Reporting Requirements
By Terrance S. Carter, Jacqueline M. Demczur and Adriel N. Clayton
As reported in earlier 2024 and 2023 editions of our Charity & NFP Law Update, trust reporting requirements under the Income Tax Act ("ITA") have been significantly expanded pursuant to detailed and complicated amendments introduced through Bill C-32, the Fall Economic Statement Implementation Act, 2022 ("Bill C-32"). Following the introduction of Bill C-32, administrative exemptions were announced by the Canada Revenue Agency (the "CRA") on November 10, 2023 and March 28, 2024. Further complicated amendments to the trust reporting rules have now been proposed pursuant to draft legislation published by the Department of Finance Canada ("Finance") on August 12, 2024 as Legislative Proposals Relating to the Income Tax Act and the Income Tax Regulations (Technical Amendments) (the "Draft Legislation").
This is an exceedingly complex area of the law. As a result, what follows constitutes only a very general overview of certain select aspects of the Draft Legislation that will be of interest to charities and not-for- profits ("NFPs"). For a more in-depth consideration of the Draft Legislation and its implications for charities and NFPs, readers are strongly encouraged to obtain advice from their legal and/or tax professionals.
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2. Corporate Update
Deadline for Ontario Not-For-Profit Corporations to Transition Under the ONCA is Fast Approaching The deadline for Ontario not-for-profit corporations to transition under the Ontario Not-for-Profit Corporations Act, 2010 ("ONCA") ends on October 18, 2024. This deadline is fast approaching.
The ONCA was proclaimed into force on October 19, 2021. As of its proclamation, the ONCA automatically applies to all non-share capital corporations under Part III of the Ontario Corporations Act ("OCA"). For the first three years after proclamation (i.e., until October 18, 2024), any provisions in their letters patent, supplementary letters patent, by-laws or special resolutions that are inconsistent with the ONCA would continue to apply and take precedence over any inconsistent ONCA requirements.
During these three years, corporations may undertake an optional transition process to amend their letters patent (by adopting articles of amendment) and to adopt ONCA-compliant by-laws to bring them intro compliance with the rules in the ONCA.
If no transition process is undertaken during this three-year period, commencing on October 19, 2024, any provisions in their letters patent, supplementary letters patent, by-laws, or special resolutions that are inconsistent with the ONCA will be deemed (subject to a few exceptions listed in subsection 207(3) of the ONCA) to be amended to comply with the ONCA. The problem with this deeming approach is that it will be difficult and confusing to determine which provisions are deemed to be amended and in what way they are to be deemed to have been amended to comply with ONCA.
It is now the end of August 2024. For those corporations that have not started the transition process, there may not be sufficient time to complete the transition process in time by October 18, 2024. While the good news is that failure to undertake or complete the transition process by this date would not result in the dissolution of the corporations, it would likely be difficult to live with the automatic deeming mechanism in the long run going forward. It would therefore be prudent for these corporations to speak with their legal counsel on the appropriate action to be taken as soon as possible to ensure compliance with the ONCA.
However, it is important to note that the October 18, 2024 deadline does not apply to share capital social club corporations under Part II of the OCA. These corporations have 5 years (i.e., until October 18, 2026) to continue out of the OCA and be continued under 3 options: (i) a non-share capital corporation under the ONCA, (ii) a co-operative under the Ontario Co-operative Corporations Act, or (iii) a share capital corporation under the Ontario Business Corporations Act. Although some social clubs have already completed their continuance, there are still many that have yet to do so. This continuance process is much more complicated than the transition process for non-share corporations explained above. With a little more than two years left, it would be prudent for these corporations to seek legal assistance to commence this process as soon as possible.
3. Legislation Update
By Terrance S. Carter and Urshita Grover
Draft Legislation Released to Amend the Income Tax Act
The Department of Finance Canada ("Finance") released draft legislation through Legislative Proposals Relating to the Income Tax Act and the Income Tax Regulations (Technical Amendments) (the "Draft Legislation") on August 12, 2024. The Draft Legislation was accompanied by the Explanatory Notes to Legislative Proposals Relating to the Income Tax Act and Regulations (Technical Amendments), released concurrently.
Among the many proposed changes to the Income Tax Act ("ITA") set out in the Draft Legislation is a proposal to amend paragraph 149.1(1.1)(d) to expand the exclusion of specified items from what constitutes a disbursement in meeting a charity's disbursement quota. Paragraph 149.1(1.1)(d) currently states that, for purposes of satisfying a charity's disbursement quota, "expenditures on administration and management of the charity" are not considered to have been expended on charitable activities carried on by the charity. The Draft Legislation proposes to include "fundraising" in the paragraph 149.1(1.1)(d) list of exclusions, such that expenditure on fundraising would not count towards satisfying the disbursement quota.
As well, the Draft Legislation proposes an amendment to subsection 188(1.1) of the ITA with respect to subsection 188(1.1), which imposes a revocation tax for charities. As a result of earlier amendments to subsection 188(1.2), which sets out provisions for a charity's wind-up period on revocation of the charity's registration, the Draft Legislation now proposes a consequential amendment to correct a cross-reference contained in subsection 188(1.1) referencing subsection 188(1.2).
Finally, of important note, the Draft Legislation proposes complicated amendments to the trust reporting rules. Further details on these amendments are discussed in Charity & NFP Law Bulletin No. 528.
4. CRA News
In August 2024, the Canada Revenue Agency (CRA) released a number of updates on its News and events for charities page, including the following, discussed below.
Compliance within the charitable sector web page
The Compliance within the charitable sector page has been expanded to include more detail on various issues and processes regarding compliance with the Income Tax Act. The page features an explanation of the difference between lower risk and higher risk non-compliance, the various intervention methods to support the compliance program (including graduated compliance measures such as education letters, compliance agreements and sanctions), and various CRA services (website, outreach program and client services) which charitable organizations can use to find answers to their questions. The page also includes an overview of the audit process for charities, including reasons why a charity could be selected for audit, how audits are conducted, what the post-audit process looks like, types of letters a charity may receive post-audit, and what recourse is available for charities regarding an ongoing or completed audit.
A significant update to the page is the inclusion of new compliance statistics. Now listed are the education and non-audit interventions per year from 2021-2024, as well as the outcome of completed audits.
Charities webinars – What you need to know about maintaining charitable registration
The CRA has announced an upcoming webinar, "What you need to know about maintaining charitable registration," with sessions on September 10 (two English sessions) and 12 (one English and one French session), 2024. The webinar will provide information and resources for maintaining charitable registration, with a particular aim to assist those new to charities or interested in CRA's digital services. The CRA encourages representatives of all registered charities and national arts service organizations to register soon, as space is limited.
For registration details, visit the CRA Charities webinars page.
Advisory Committee on the Charitable Sector
The CRA is inviting applications for the Advisory Committee on the Charitable Sector (ACCS), a forum where volunteers from the charitable sector provide advice to the Minister of National Revenue and the CRA Commissioner. New members, appointed for a two-year term starting January 2025, will help shape the regulatory environment for charities. The CRA encourages diverse applicants, and the call for applications closes on September 27, 2024.
For more details and to apply, visit the following link.
CRA Releases Updated Antiterrorism Checklist
On August 20, 2024, the CRA released a new, updated version of its longstanding antiterrorism checklist. For details on the new checklist, please see our AML/ATF Update.
5. Court Reinstates President of Not-for-Profit after Successful Oppression Application under Canada Not-for-profit Corporations Act
In the case of Carr v. O'Reilly released on August 8, 2024, Jennifer Carr, the President of the Professional Institute of the Public Service of Canada ("PIPSC"), brought an application under section 253 of the Canada Not-for-profit Corporations Act ("CNCA") alleging oppression. Ms. Carr was facing ongoing investigations by the Board into several complaints against her at the time of the application.
The Ontario Superior Court of Justice found that the "administrative leave" on which Ms. Carr was placed by the PIPSC's Board on April 10, 2024 was functionally equivalent to a suspension, which required the procedures set out in the governance documents of the not-for-profit corporation to be followed, including member authorization. The court held that the respondents' actions were oppressive and unfairly disregarded Ms. Carr's interests.
After reviewing the PIPSC's By-laws, Policies, and Ms. Carr's Service Agreement, the court found that the administrative leave imposed on Ms. Carr was equivalent to a suspension because it excluded her from all her duties and responsibilities as President for an indefinite time period. The suspension did not follow the necessary procedural protections outlined in PIPSC's governance documents, none of which made any reference to administrative leave. The court concluded that the respondents' actions were disciplinary in nature, despite being labeled as non-disciplinary, and were inconsistent with the required processes for suspension or removal of the President.
The court then reviewed the legal principles under section 253(1) of the CNCA, which provide the court wide discretion to grant an oppression remedy and are substantially the same as the oppression provision in the Canada Business Corporations Act. In accordance with the 2008 Supreme Court of Canada case, BCE Inc. v. 1976 Debentureholders, the court stated the following:
[36] There is a two-part inquiry for oppression: (i) does the evidence support the reasonable expectation asserted by the claimant; and (ii) does the evidence establish that the reasonable expectation was violated by conduct falling within the terms "oppression", "unfair prejudice", or "unfair disregard" of a relevant interest.
[...]
[39] Oppression connotes conduct that is "coercive and abusive" and "a visible departure from standards of fair dealing". Unfair prejudice involves conduct that is less offensive that oppression and that may admit of a less culpable state of mind, but that nevertheless results in unfair consequences. Unfair disregard involves "ignoring an interest as being of no importance, contrary to the stakeholders' reasonable expectations" [Citations omitted]
The court found Ms. Carr's expectations to be reasonable, which expectations included that the respondents not suspend her without making submissions, providing her with a right of appeal, seeking authorization of members at a Special General Meeting, and conducting the complaints process and any discipline of Ms. Carr's consistent with PIPSC's By-laws, Policies and the CNCA.
The respondents invoked the business judgment rule, asserting that their actions were reasonable and justified. In this regard, the court found that the respondents' decision to place Ms. Carr on administrative leave, which was functionally equivalent to a suspension, was oppressive, unfairly prejudicial, and disregarded her interests as President. The process lacked procedural fairness, failed to follow PIPSC's governance documents, and deprived members of their right to vote on her suspension. The court concluded that this decision was unreasonable and did not meet the standards of fair dealing.
The court concluded that the appropriate remedy for Ms. Carr was to quash the Board's motion placing her on administrative leave and to reinstate her immediately as President with all associated duties and rights. The court also prohibited the respondents from excluding her from her position without member authorization at a Special General Meeting, ensuring that any future resolutions adhere to the court's findings.
This decision emphasizes the importance of adhering to procedural fairness and the governance framework in managing internal disputes within not-for-profits.
6. Supreme Court Denies Leave to Appeal in Ongoing Religious Dispute
On July 18, 2024, the Supreme Court of Canada denied leave to appeal from the decision of the Ontario Court of Appeal in Birhane v. Medhanie Alem Eritrean Orthodox Tewahdo Church.
As reported in our October 2022 Charity and NFP Law Update concerning the original case involving the Superior Court decision, members of the church ("Applicants"), sought a court order requiring that a general membership meeting and election of the board of directors of the Medhanie Alem Eritrean Orthodox Tewahdo Church (the "Church", with the Church as an entity and the individual members of the board of directors constituting the "Respondents") take place. While the background facts of the case are complex, the more cogent facts are summarized below.
The Church was incorporated as a not-for-profit corporation under the Ontario Corporations Act ("OCA") in 1997 (although the OCA was replaced by the Ontario Not-for-Profit Corporations Act ("ONCA") on October 19, 2021). From 2000 to 2018 the Church held annual general meetings ("AGMs") and board elections every three years. However, no AGMs or director elections occurred in 2019 and 2020, the last elected board (elected in 2016 to take office starting on January 1, 2017) continued in office and were named as individual respondents in the action. In July 2021, over 90 members signed a petition asking that an AGM be called and that an election of directors be conducted, among other things. The board initially failed to respond. While the board later did call membership meetings, the manner and form in which the meetings were called and held were not in compliance with corporate law requirements, but instead reflected a number of irregularities and were not otherwise done in an orderly manner.
In the Superior Court case (decision released October 11, 2022), the Respondents took the position that the Court did not have the jurisdiction to determine the issues before it, claiming that the Applicants were members of a voluntary religious association (i.e. an unincorporated congregation) and were not members of the Church (a corporation incorporated under the OCA). Among other things, the Respondents argued that since voluntary religious associations are not governed by corporate statutes, the ONCA does not apply to the Church as a congregation. The Superior Court found these arguments did not make any sense when reviewing the background facts and history of the Church. The corporate records of the Church clearly reflected elections of directors by members of the Church corporation, with no evidence indicating there was ever any intention to distinguish between the Church (as a corporation) and an alleged unincorporated association.
At the Court of Appeal (decision released December 8, 2023), the Church and directors (now the "Appellants") raised four issues they alleged were errors in the Superior Court decision:
- The Application Judge's finding that the Church members (now the "Respondents"), by virtue of their membership in the Church congregation were also members of the incorporated Church entity and therefore had justiciable legal rights under the ONCA.
- The holding that the interpretation of the Canon Law Promulgation (which were canon law rules governing the AGM reflected in specific resolutions from the Church's governing diocese) was justiciable.
- The holding that the Respondents were not required to exhaust alternative remedies available within the Eritrean Orthodox Church, and that the Respondents nevertheless satisfied this requirement.
- Finding that the Appellant directors failed to satisfy their obligations as volunteer directors of the Church.
Regarding the first issue, the Court of Appeal found that the Superior Court reasonably inferred from the evidence that the Church is a single incorporated entity and that the Respondents are members of that entity (as there was an absence of evidence to support the claim there were two separate organizations, an unincorporated congregation and a corporation).
Regarding the second issue, the Court of Appeal acknowledged that while the local church is incorporated as a single entity and is subject to civil law obligations, canon law can still apply. The Court of Appeal highlighted the importance of respecting canon law in matters of church governance and the need for courts to avoid encroaching upon non-justiciable matters of religious doctrine.
The Court of Appeal found that the Superior Court's order conflicted with canon law in that it required the local church to hold the AGM in accordance with bylaws which may not be in line with applicable canon law requirements set out in the Canon Law Promulgation. The Court of Appeal therefore struck this condition and allowed the Church to hold a special or emergency meeting to vote on amending the bylaws to conform to canon law.
On the third issue, the Court of Appeal found that the Appellants had a legal obligation to hold an AGM in 2019 and conduct director elections, but they neglected this responsibility. As a result, the Respondents were within their rights to seek legal recourse through the civil courts. While it is generally expected that individuals aggrieved by decisions within self-governing organizations, particularly religious ones, should seek resolution through internal dispute mechanisms, the Appellants failed to provide sufficient evidence of such a mechanism. In the absence of this evidence, the Superior Court's order for an AGM was justified.
On the final issue, the Appellants argued that the Superior Court held them to an overly strict standard and should have been more lenient due to technical deficiencies reflected in the corporate records. They claimed they should be judged based on historical practices rather than strict administrative requirements. However, the Court of Appeal disagreed, stating that the Superior Court was entitled to draw adverse inferences against the Appellants for failing to provide evidence for their defences when such evidence, such as corporate records, if it existed, would have been in their control. The Court of Appeal stated that it was reasonable for the Superior Court to determine that corporate bylaws and canon law required an AGM to be held.
The appeal was partially allowed. The court-ordered AGM was ordered to proceed, but the conditions requiring compliance with the bylaws were removed. Instead, the Church was ordered to hold a special or emergency meeting to vote on amending the bylaws in accordance with canon law requirements. This meeting was to have a court-appointed neutral chair, agreed upon by the parties or appointed by the court if no agreement is reached. The Church was then ordered to hold an AGM in accordance with whatever bylaws result from the meeting.
The Court of Appeal decision confirms that courts must avoid "straying into non-justiciable matters of church doctrine when addressing matters of church governance." However, as Court of Appeal noted, it is settled law that the civil law "will nevertheless require religious organizations to uphold their obligations to their members in property and governance disputes".
In light of the Supreme Court of Canada's decision to deny the Church's leave to appeal, the Court of Appeal's decision remains unchallenged and is the law in Ontario. Although the decision is not binding outside of Ontario, it could provide persuasive value for parties in similar situations in other provinces and territories.
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