NOT-FOR-PROFIT LAW UPDATE

Transcription

1 SPRING 2010 NOT-FOR-PROFIT LAW UPDATE --IN THIS ISSUE I. BUDGETING FOR A SURPLUS MAY BE DANGEROUS Natasha Miklaucic II BUDGET: LOOSENING THE CONSTRAINTS ON REGISTERED CHARITIES Brian Cohen III. ASSOCIATIONS BEWARE: COMPETITION ACT AMENDMENTS WILL AFFECT YOU Eric Dufour IV. ONTARIO HST: WHAT EVERY NOT-FOR- PROFIT ORGANIZATION AND CHARITY NEEDS TO KNOW Camille Kam V. DO EMPLOYERS OWE TERMINATION OR SEVERANCE PAY TO CASUAL STAFF? Susan Sorensen VI. SNAPSHOTS OF INTERESTING RECENT LEGISLATIVE CHANGES Anna Naud I. BUDGETING FOR A SURPLUS MAY BE DANGEROUS Natasha Miklaucic, nmiklaucic@blgcanada.com A. SUMMARY OF TECHNICAL INTERPRETATION Canada Revenue Agency ( CRA ) recently released a technical interpretation (the TI ) on paragraph 149(1)(l) of the Income Tax Act that sets out CRA s position on the following tax issues surrounding non profit organizations ( NPOs ). Competing with Taxable Entities An NPO is allowed to engage in any activity as long as the purpose of the activity is anything other than making a profit. Thus, an NPO can compete with taxable entities without jeopardizing its tax exempt status. The activities can be purely commercial and need not have any social or altruistic component. Intentionally Earning a Profit is a Problem Any intention to make a profit will subject the profit or income earned to taxation regardless of how the profit is to be used. For example, an NPO is not allowed to intentionally engage in profit generating activities to fund future capital projects or support its VII. THE FINAL WORD not for profit objectives. If an NPO is unable to execute its not for

2 2 SPRING 2010 profit activities without relying on profits from its other activities, the NPO will likely not qualify for tax exempt status. An NPO is permitted to make a profit, however, provided that the profit is unanticipated and incidental to the activities of the NPO in fulfilling its not for profit purposes. Moreover, holding excess funds beyond that required for operating expenses and earning income from such funds will not in itself subject an NPO to taxation. CRA will look to the purpose of holding such funds and other related factors. B. ANALYSIS OF TECHNICAL INTERPRETATION CRA indicated that profits earned must be both incidental and generally unanticipated. The TI may represent a significant change from CRA s prior rulings. In the TI, CRA indicated that profits earned must be both incidental and generally unanticipated. The latter appears to be a new condition that could significantly reduce the number of entities that will be tax exempt since even a routine and ancillary activity where profit is anticipated will now be contrary to paragraph 149(1)(l). For example, placing undisbursed operating funds in a savings account, or holding security deposits pursuant to property leases, are likely routine activities in which most NPOs engage to support their not for profit activities. These are also activities that an NPO can expect or anticipate will likely involve earning some interest income. Thus, since interest income is anticipated, the profit earned will be taxable.

3 3 NOT-FOR-PROFIT UPDATE However, in the TI, CRA also provided an example where earning interest income from reasonably accumulated funds is acceptable as long as the intent was not to earn profit even though such income might otherwise be considered anticipated profit. If unanticipated profit means profit that is not expected or anticipated, the example given would not make sense since even putting money in a savings account will always yield some interest income. Consequently, the only acceptable places to put the accumulated funds would be in a non interest bearing account or in a safe, which is not what the example was suggesting. It may be more logical and reasonable to suggest that profit will be unanticipated if it was not generally intended or if earning a profit was not the preponderant purpose. On this interpretation, the TI is not a departure from prior rulings and interpretations. Regardless, more clarification and guidance is needed from CRA on the exact meaning of unanticipated profit before a determination can be made on the exact impact of the current technical interpretation. Firstly, with respect to earning income from holding excess funds, an NPO should be aware that income from property the definition of which includes money is taxable if the NPO s main purpose is to provide dining, recreational or sporting facilities. Secondly, while an NPO cannot have an objective of earning profit to fund its not for profit activities, it may be permissible to engage in activities that generate revenue to cover deficiencies in the NPO s not for profit activities, provided that the revenue generating activities are operated on a cost recovery basis. C. PROVINCIAL LEGISLATION AND THE INCOME TAX ACT CRA is of the opinion that incorporation under federal or any provincial legislation governing not for profit organizations does not necessarily mean that the corporation will be considered a tax exempt NPO for tax purposes since the requirements to be incorporated as a not for profit corporation under current legislation differ from the Income Tax Act. An NPO must still separately satisfy the requirements of In addition, there are certain nuances absent from the TI that merit further discussion. paragraph 149(1)(l).section 149.1(5) of the Act.

4 4 SPRING 2010 II BUDGET: LOOSENING THE CONSTRAINTS ON REGISTERED CHARITIES Brian Cohen, , Registered charities in Canada, regardless of their size and objects, must meet numerous requirements to gain access to the tax benefits contemplated in the Income Tax Act (Canada) (the ITA ). These requirements are often burdensome, especially for smaller and rural charities. The concept of a disbursement quota was introduced in 1976 to assist in ensuring that a charity devote its resources to charitable purposes. The disbursement quota ( DQ ) is the amount a charity is required to spend on charitable activities (or on payments to other qualified donees). It has been calculated as an amount equal to the aggregate of (i) 80% of the charities receipted donations of the previous year, (ii) 80% of the amounts received from other charities; and (iii) 3.5% of its capital assets not used in charitable programs or administration, if such assets exceed $25,000. Failure to meet the DQ can result in a charity losing its charitable status for income tax purposes. In the March 2010 federal budget, the Minister of Finance correctly noted that the DQ as currently drafted can impose an unfair burden on small and rural charities that derive most of their revenues from receipted donations, while charities that have a wide range of revenue resources presumably have little difficulty in meeting the DQ. In response to the foregoing and related issues, the Government has proposed new rules that aim at loosening some of the constraints that the existing rules impose on registered charities. Among the proposed new rules are: (i) the elimination of the definitions of capital gains pool, enduring property, and specified gift, each of which deals with items that needed to be taken into account for purposes of calculating the DQ for each year; and (ii) the modification of the DQ formula. The proposed amendments also increase the asset limit of the capital accumulation component of the DQ (the 3.5% part of the analysis) from $25,000 to $100,000. In order to balance the situation, the Government is proposing to strengthen existing anti-avoidance provisions (in addition

5 5 NOT-FOR-PROFIT UPDATE to the recent Fundraising guidelines) that apply to those transactions that were entered into for the sole purpose of delaying or avoiding the application of the disbursement quota, by imposing a penalty equal to 110% of the amount of the expenditure that was avoided or delayed. Further, the Minister may revoke the registration of a charity that has received a gift from another charity with which it does not deal at arm s length, unless such charity spends, before the end of the following taxation year, an amount at least equal to the total amount of the gift. Alternatively, t he transferring charity will be able to elect that the amount transferred will not count towards satisfying its disbursement quota, in which case the recipient charity would not be subject to the immediate disbursement requirement under the anti-avoidance rules. Finally, it is proposed that a registered charity will have the possibility of accumulating property for a particular purpose provided Ministerial approval is received. Any property so accumulated or income earned in respect of such property will not be computed in the calculation of the DQ for the year. If passed into law, these new rules will make it easier for certain charities to operate without the worries created by the administrative burden of the DQ requirement. Nevertheless, all charities, big or small, should be aware of the newly strengthened anti-avoidance rules mentioned above when entering into transactions, as well as the rules surrounding receiving gifts from other charities with which they do not deal at arm s length, in order to avoid surprising penalties or revocation of their registered charitable status.

6 6 SPRING 2010 III. ASSOCIATIONS BEWARE: COMPETITION ACT AMENDMENTS WILL AFFECT YOU Eric Dufour, , A. INTRODUCTION In 2009, Parliament passed major amendments to the Competition Act (the Act ) that are far reaching and represent the most significant changes to the agreements between competitors to fix prices, allocate markets or control supply. B. CONSPIRACY OFFENSE CAME INTO FORCE MARCH 2010 Act since it was introduced in The most notable amendments to the Act include: While Parliament has decriminalized some conduct, it has toughened the Act s criminal decriminalizing many of the pricing provisions, including price maintenance, price discrimination and predatory pricing; provisions in other areas. The most profound amendment in this regard is the creation of the per se criminal conspiracy offence, which came into force in March introducing administrative monetary penalties for cases of abuse of dominance of up to $10 million for a first offence and $15 million for subsequent offences; Previously, conspiracies under the Act only gave rise to criminal liability if they unduly prevented or lessened competition. This was a very onerous burden for the prosecution to increasing penalties for conspiracies, bid rigging and deceptive marketing practices, including misleading advertising; and bear. Under the new per se conspiracy provision, the question of undueness is not relevant. A per se offence is an offence where the conduct in question is illegal irrespective of introducing a two track regime for addressing agreements between competitors which will include a per se criminal conspiracy offence with respect to its impact or consequences. As such, under the new per se criminal conspiracy offence, the prosecution must simply show intent to enter into one of the three prohibited types of

7 7 NOT-FOR-PROFIT UPDATE agreements and knowledge of its terms the agreement s effect is irrelevant. or abets an agreement that falls within the ambit of the new conspiracy provision may be liable under the Criminal Code for aiding or An ancillary restraint defence to a conspiracy prosecution is available. This defence applies if the accused can establish, on a balance of probabilities, that the alleged conspiracy is ancillary to a broader agreement between the abetting a criminal offence and/or counseling another to commit a criminal offence. As such, associations may face criminal liability if they participate in, facilitate or support an illegal conspiracy amongst its members. same parties that does not contravene the Act s conspiracy provisions, and is directly related, and gives effect to, the objective of the broader legal agreement. C. ASSOCIATIONS TAKE NOTE While the new conspiracy provision is focused on agreements between competitors, it is nonetheless important for associations to recognize that any person or entity who aids Trade and industry associations, by their very nature, bring together competitors in order to share common interests and to seek common solutions to common problems. Accordingly, associations are already potential hotbeds for illegal collusive behaviour. Associations must therefore be careful that their activities and meetings do not become forums for their members to fix prices, allocate markets or set supply or production.

8 8 SPRING 2010 IV. ONTARIO HST: WHAT EVERY NOT FOR PROFIT ORGANIZATION AND CHARITY NEEDS TO KNOW Camille Kam, , On July 1, 2010, Ontario will join Newfoundland and Labrador, Nova Scotia and New Brunswick in implementing the harmonized sales tax ( HST ). Whether you support the idea of HST or not, all organizations operating in Ontario must prepare for the sales tax reform or risk costly errors in the future. B. EXEMPT STATUS The federal government, recognizing the special role that PSBs play in society, has exempted most PSB goods and services. As a result, NPOs and charities generally will not be required to charge HST on many of the goods and services they supply, but NPOs and Ontario s Retail Sales Tax ( RST ) will be replaced by a single, value added sales tax and combined with the federal Goods and Services Tax ( GST ), resulting in the HST. For many not for profit organizations ( NPOs ) and charities, harmonization will introduce significant changes, the highlights of which are discussed below. A. FRAMEWORK charities will also not be eligible for input tax credits on purchases made to produce exempt goods and services. C. REBATES Though NPOs and charities will not be eligible to claim input tax credits in respect of the HST imposed on the purchases they make in producing exempt goods and services, they Not for profits and charities generally qualify as public service bodies ( PSBs ) for the purposes of the HST. As such, they will be covered by the HST rules pertaining to PSBs effective July 1, 2010, as well as by the transitional rules as they apply to PSBs for the period from October 14, 2009 to July 1, will be entitled to a 50% rebate of the 5% federal portion of the HST and an 82% rebate of the 8% provincial portion of the HST. Any rebates of the RST that NPOs and charities are currently eligible for will no longer apply as of July 1, 2010.

9 9 NOT-FOR-PROFIT UPDATE D. QUALIFYING V. NON- QUALIFYING NPOS Qualifying NPOs are NPOs that (a) receive government funding representing at least 40% of their total revenue in a fiscal year and (b) are eligible for rebates of the HST they pay in the manner outlined above. Non qualifying NPOs (i.e. NPOs that are not Qualifying goods and services. NPOs will generally be eligible to use the Special Quick Method of Accounting and charities will generally be eligible to use the Special Accounting Method for Charities. Charities can elect not to use the Special Accounting Method for Charities in very limited circumstances. F. MEMBERSHIPS NPOs) will bear the full burden of the HST to the extent they cannot claim input tax credits or other rebates that may be available to them. HST may apply to the proportion of a membership fee that can be allocated to a period on or after July 1, 2010 even if the E. STREAMLINED METHODS OF ACCOUNTING Certain accounting methods can be used to streamline how NPOs and charities can track the HST they collect from their customers, clients and members and the HST they pay for membership fee is invoiced or paid for before July 1, The rules respecting the application of the HST to membership fees charged by NPOs and charities are complex and advice should be sought from a professional in determining the tax status of such fees.

10 10 SPRING 2010 V. DO EMPLOYERS OWE TERMINATION OR SEVERANCE PAY TO CASUAL STAFF? Susan Sorensen, , A. INTRODUCTION B. THE PAST APPROACH Thanks to Bill 139, the Employment Standards Amendment Act (Temporary Help Agencies, 2009), employers may now owe termination or severance pay, in addition to other employment standards benefits, to their casual or elect to work employees. Bill 139 came into force in November Prior to Bill 139, employers could maintain rosters of casual or elect to work employees who could be called upon to work when the need arose, but who were not required to report to work when called. Such employees were offered no guarantee of any minimum number of hours of work and, often, worked only sporadically. If this type of employee was fired or laid off, Bill 139 was widely publicized but the thrust of the legislation was aimed at Temporary Help Agencies, a term not understood by most to apply to casual or elect to work employees. Nonetheless, the definition of temporary help agencies in the legislation is cast broadly and applies to any employer that employs persons for the purpose of assigning them to perform work on a temporary basis for clients of the employer. The term assignment employee has a similar, corresponding definition. As such, it is likely that many not for profit employers who employ casual or elect to work employee may be caught by the new rules. or if the employer simply stopped calling on him or her, in most cases no minimum amount of notice of termination or termination and severance pay was payable. Thus, the relationship between a casual employee and the employer was highly informal and flexible. C. THE FUTURE Bill 139 appears to have changed this. In fact, Bill 139 creates a situation where an assignment (or causal) employee is deemed to have been laid off in any week where he or she is not called or assigned to perform work for the employer. And, in the event that the employee

11 11 NOT-FOR-PROFIT UPDATE is terminated, Bill 139 requires that the employee receive termination and/or severance pay similar to that owed for permanent staff. have not been assigned work in the past 3 months or are not assigned work on a regular basis; So, given other rules in the Employment Standards Act, 2000, a casual employee who is not assigned work by the employer for a period longer than 13 weeks (the 13 weeks consider whether any of causal employees could or should be hired as permanent staff; and need not be consecutive) may be entitled to notice of termination, or termination and severance pay. aim to reduce their use of and reliance on casual staff. It is important to note that the new legislation is not aimed at fixed term contracts ( contract employees ) or independent contractors. Such relationships should be considered separately and may carry their own, unique legal considerations and pitfalls. D. SUGGESTED STEPS As a result of Bill 139, not-for-profit organizations who maintain rosters of casual or elect to work employees are encouraged to do the following: seek legal advice about the applicability of the legislation to their situation; review and assess their list of casual employees to determine how many

12 12 SPRING 2010 VI. SNAPSHOTS OF INTERESTING LEGISLATIVE CHANGES Anna Naud, , A. STATUS OF NEW CANADA NOT- FOR-PROFIT CORPORATIONS ACT The new Canada Not-for-profit Corporations Act (the Act ) received Royal Assent on June 23, 2009 but will only come into force once its Regulations are finalized. Once the Act comes into force, corporations currently incorporated under Part II of the will have three years to file articles of continuance or risk dissolution. Royal Assent on December 15, This Act either repealed or amended a large number of other Acts, providing increased flexibility to charities under these Acts. For example, it repealed the Charitable Gifts Act (which had, among other things, restricted charities from directly or indirectly owning more than a 10% interest in a business). It also amended the Charities Accounting Act to permit the Public Guardian and Trustee of Ontario to make inquiries about business interests held by charities. The Act seeks to modernize and clarify the rules governing the Federal non-share capital world. Major points of interest under the Act include: (a) a distinction between soliciting and non-soliciting corporations based on the source and amount of income received; (b) varying audit and reporting requirements based on annual revenue; (c) a codification of directors obligations; and (c) increased rights of members, including non-voting members.. B. MORE FLEXIBILITY FOR CHARITIES IN ONTARIO THE GOOD GOVERNMENT ACT, 2009 The Good Government Act, 2009 (Ontario) received The Charities Accounting Act was also amended to permit the holding of excess real or personal property by a charity so long as such property is used to benefit the charitable purposes. Additionally, the Good Government Act, 2009 amended the Religious Organization Lands Act to permit religious organizations to enter into leases of land for more than forty years. C. VIOLENCE AND HARASSMENT IN THE WORKPLACE - THE OCCUPATIONAL HEALTH AND SAFETY ACT Employers have until June 15, 2010 to become compliant with the new changes to the

13 13 NOT-FOR-PROFIT UPDATE Occupational Health and Safety Act that came into effect with the passage of Bill 168 on December 15, These amendments impose new duties on employers to address violence and harassment in the workplace in the form of policies, programs, risk assessments, and the provision of information to workers where a person has a history of violence. An employer that contravenes the Occupational Health and Safety Act risks receiving penalties such as fines and imprisonment. D. EMPLOYERS MAY BE LIABLE FOR CELLPHONE USE BY DRIVING EMPLOYEES THE COUNTERING DISTRACTED DRIVING AND PROMOTING GREEN TRANSPORTATION ACT, 2009 The Countering Distracted Driving and Promoting Green Transportation Act, 2009 (Ontario) came into force on October 26, 2009, prohibiting any person in Ontario from being distracted by electronic devices such as cellular phones and televisions while driving. Employers should note that this Act may affect them as well. A Virginia court in Yoon v. Wagner ruled against the employer of a driver who accidentally killed a teenager while using a hand-held cellphone to conduct business at the time of the accident. Canadian employers, even if their employees do not drive in Ontario, should contemplate creating and enforcing safe driving policies that include parameters regarding acceptable use of portable technologies while driving. Employers should also consider purchasing equipment for their employees, or providing monetary allowances to their employees to purchase equipment, that will enable such employees to drive safely in accordance with applicable legislation. E. THE VALUE OF AN APOLOGY THE APOLOGY ACT, 2009 The Apology Act, 2009 (Ontario) came into force on April 23, As a result of this Act, a party can issue an apology to another party without having such apology considered an admission of fault or liability. An apology will also not affect any insurance or liability coverage or be admissible in any civil proceeding initiated by the party receiving the apology. The Apology Act, 2009 joins the apology acts passed by British Columbia and Manitoba legislature in 2006 and 2008, respectively. The apology acts reflect the belief that many lawsuits can be avoided or the effects of lawsuits can be mitigated if a party feeling

14 14 SPRING 2010 wronged receives a recognition of wrongdoing and a proper acknowledgment of remorse from the alleged wrongdoer. Potential consequences of offering an apology however continue to exist and therefore parties contemplating saying I m sorry should seek legal counsel before doing so. F. THOUGHTS ON BRITISH COLUMBIA S SOCIETY ACT? SPEAK NOW! The Ministry of Finance is reviewing British Columbia s Society Act, which applies to not-forprofit entities in that province. The Ministry seeks to identify issues, priorities, and objectives during its review, which is in its first consultation phase. The public is encouraged to provide comments. VII. FINAL WORD A. OUR GROUP Borden Ladner Gervais LLP is Canada s largest law firm with full service offices in Vancouver, Calgary, Toronto, Waterloo Region, Ottawa and Montreal. We have a Group established specifically to provide legal advice in an accurate, timely and cost effective manner to not-for-profit organizations and charities. Each of our offices has specialists who have expertise and experience dealing with not for profit organizations and charities. Our clients in the not for profit sector require legal counsel from a law firm that is available when needed, and has expertise in charity law, employment law, trade marks, income tax, HST, real property tax, corporate law, by laws, incorporation, governance, technology, litigation, contract law and other areas of legal specialization. B. KEEPING YOU CURRENT Through our Not For Profit Law Update and Alert Newsletters and our seminars, we keep our clients and friends in the not-for-profit sector informed of changes in the law as they apply to their organizations. C. OUR LAWYERS PARTICIPATE We are pleased that many lawyers in each of our offices volunteer their personal time and skills by fundraising for, by sitting on boards

15 15 NOT-FOR-PROFIT UPDATE and committees of, and volunteering on the front lines with, healthcare organizations, social service groups and other community based, national and international charities. We usually profile one of our lawyers who has done stellar service to the community. This time we are pleased to let you know about the activities of one of our recently retired partners: Kenneth Bagshaw. Ken Bagshaw was chief legal officer for the Vancouver Organizing Committee for the 2010 Olympic and Paralympic Winter Games (VANOC). Ken was one of the key players when Ladner Downs, the venerable Vancouver firm, joined four successful law firms in Calgary, Toronto, Ottawa, and Montreal to create Borden Ladner Gervais LLP, Canada s largest law firm. As chief legal officer of VANOC, Ken oversaw a group of 11 lawyers supported by several law firms. This team advised VANOC s 52 departments that had an operating budget of $1.8 billion and a capital budget of $590 million, and used 1,500 full-time employees, 2,000 parttime employees, and 22,000 volunteers. We are very proud that one of our partners was chosen to undertake this challenging, interesting, and high profile position. D. DISCLAIMER The Not-for-Profit Law Update Newsletter is prepared as a service to management and directors of non share capital corporations known to the lawyers of Borden Ladner Gervais LLP. It is intended to inform those engaged in this important and growing sector of current issues and developments in law affecting not for profit organizations. It is not intended to be a complete statement of the law, nor to contain any opinions of our firm on any subject. Although we endeavour to ensure its accuracy, no one should act upon it without a thorough examination of the law after the facts of a specific situation are considered. You are urged to consult your legal adviser in cases of specific questions or concerns. This newsletter has been sent to you courtesy of Borden Ladner Gervais LLP. We respect your privacy, and wish to point out that our privacy policy relative to newsletters may be found If you have received this newsletter in error, or if you do not wish to receive further newsletters, you may ask to have your contact information removed from our mailing lists by phoning BLG LAW1 or by ing subscriptions@blgcanada.com.

16 SPRING 2010 E. NOTES Members of Borden Ladner Gervais Not-for-Profit Group National Steering Committee include: Toronto Office Victoria Prince Tel: (416) Fax: (416) Vancouver Office Sean Muggah Tel: (604) Fax: (604) Calgary Office Ruth Spetz Tel: (403) Fax: (403) Ottawa Office Sylvie Lalonde Tel: (613) Fax: (613) Montréal Office Michael Patry Tel: (514) Fax: (514) EDITOR Bill Pashby Tel: (416) Fax: (416) Borden Ladner Gervais LLP Lawyers Patent & Trade-mark Agents Calgary 1000 Canterra Tower 400 Third Avenue S.W. Calgary, Alberta, Canada T2P 4H2 tel: (403) fax: (403) Montréal 1000 de La Gauchetière Street West Suite 900, Montréal, Québec, Canada H3B 5H4 tel: (514) fax: (514) Ottawa World Exchange Plaza 100 Queen St., Suite 1100 Ottawa, Ontario, Canada K1P 1J9 tel: (613) legal fax: (613) IP fax: (613) Toronto Scotia Plaza, 40 King Street West Toronto, Ontario, Canada M5H 3Y4 tel: (416) fax: (416) Vancouver 1200 Waterfront Centre 200 Burrard Street, P.O. Box Vancouver, British Columbia, Canada V7X 1T2 tel: (604) fax: (604) Waterloo Region Waterloo City Centre 100 Regina Street South, Suite 220 Waterloo, Ontario, Canada N2J 4P9 tel: fax: IP fax: Borden Ladner Gervais LLP Borden Ladner Gervais LLP is an Ontario Limited Liability Partnership Printed in Canada