GUILT BY ASSOCIATION AND THE RELATED BUSINESS RULES

By:  Adam Aptowitzer

Many people are aware that charities can engage in related business only where the business activity is (in the CRA's view) both related, and ancillary, to the organization's charitable activities. On the other hand, charities can engage in any business activity so long as 'substantially all persons employed by the charity in the carrying on of that business are not remunerated for that employment' (i.e. volunteers).

We recently came across a situation in which the charity had substantial real estate holdings. The reasons for its holdings were varied but in all cases it required the aid of various professionals and contractors to help with the acquisition and maintenance of the buildings.  For example, the organization hired a lawyer to help with the real estate transfer documents, hired accountants to help keep track of the monies and hired contractors of various types to help in the fit-ups and maintenance of the building.

Eventually, the charity was revoked for failure to file and upon its application for re-registration the CRA raised the issue that the organization was engaged in an unrelated business activity because it had engaged the services of these employees. In other words, it considered the use of the lawyer, accountant and contractors as people who were paid for their employment. But the words 'employment' and 'employee' are loaded terms in tax law and as a result they have specific definitions. While the drafters of those definitions may not have contemplated their use for the related business rules, the fact is that the definition does apply here as well.

Fortunately for charities the typical lawyer, accountant and contractor fall outside of the usual tax law meaning of employee and so paying professionals for their work would allow the organization to fall within the exemption for a business run substantially by volunteers. Nevertheless, the related business rules are quite complicated and being run by volunteers is not carte blanche to conduct its activities as one wishes despite the fact that the wording of the law would lead one to believe that this is true. As it is, we would recommend that any charity engaging in such activities would consider consulting with counsel how to best structure any business arrangement.