Briefly Noted in July

By: Arthur Drache C.M., Q.C.

            At the end of June the Charities Directorate issued a newsletter[1] which had a couple of items worth noting.

 Carrying on Activities Outside Canada:

                On July 8 the Charities Directorate issued what will probably be its final version of a Guidance with regard to charities carrying on activities outside Canada.[2] The CRA with remarkable candour says:

                "This guidance does not have the force of law. It is intended to enable registered charities and applicants for charitable registration carrying on activities outside Canada to understand the CRA's interpretation of, and expectations related to, the provisions of the Income Tax Act concerning charitable registration. To establish whether an activity complies with the Income Tax Act, the CRA will have to examine the facts of the situation."

                This guidance updates and replaces Guide RC4106, Registered Charities: Operating Outside Canada. It is long and complex but "must reading" for anybody involved in out of Canada charitable activities. The caveat quoted above should give fair warning that this document is not the final determinant of what is and is not acceptable.

 Changed Web Addresses:

                   After July 14, 2010, if you use a current URL to access one of the Charity Directorate pages, you will receive an error message that the link is broken. However, for the menu pages and some pages, you will receive a message that the page has changed location, and you will be provided with the new URL.

                      After July 14, 2010, you will be able to update your bookmarks, browser favourites and links to our Web pages that you may have on your own Web pages, or in other printed material.

Charities and Giving landing page:
www.cra.gc.ca/charitiesandgiving

Charities:
www.cra.gc.ca/charities

Checklists for Charities:
www.cra.gc.ca/checklists

Donors:
www.cra.gc.ca/donors

Charities Listings (Search):
www.cra.gc.ca/charitylists

Federal No-Share Draft Regulations:

                Industry Canada has now issued drafted regulations for the new No-Share Corporations Act as part of an ongoing dialogue with the sector.

                The draft is long and technical but anybody who wants one last chance to comment on what will become the governing rules for federal non-profits, a review of these is essential.

Putting His Money Where his Mouth is:

                In June, warren Buffett and Bill Gates called upon America's billionaires (we're sure they'd include those in Canada and elsewhere) to donate half their fortunes to charity. Both of course have already themselves donated billions.

                Recently  Buffett took another step.

                He delivered his annual gifts of Berkshire Hathaway stock worth $1.9 billion to the five foundations to which he has promised the bulk of his $45 billion fortune.. Buffett made his gift of 24.5 million Class B shares of Berkshire Hathaway Inc. stock on July 1.

                  Most of the shares - 20.4 million - went to the Bill & Melinda Gates Foundation; the rest went to Buffett's own foundation and those run by his three children.

                  After making these gifts, the 79-year-old Buffett holds 350,000 Class A shares and 50.4 million Class B shares of stock in the company he runs.Buffett gives each foundation 5 percent of his remaining pledge annually in July in accordance with the plan he announced in 2006.

Service Clubs and Fraternal Societies

                 The newsletter referred to in the first item also gives some guidance on the issue of charitable registration of service clubs and fraternal organizations, the gist of which is that they cannot in themselves normally be registered because most have substantial private benefit aspects and carry on activities which are not charitable.

                 But there is nothing to prevent such organizations from setting up separate charities and of course many of the larger domestic and international organizations have done so.

                 A service club or fraternal society that has established a separate entity as a registered charity must ensure that the operations of the registered charity are kept separate from the operations of the service club/fraternal society itself. The registered charity and the service club/fraternal society are two distinct entities. A registered charity that does not comply with the provisions of the Income Tax Act may be subject to sanctions (penalties and suspensions) and/or revocation of its charitable status.

                 As a result of audits the Directorate has come out with some substantive suggestions as to what the problems often are and what steps can be taken to ensure compliance.

                Those who have an interest in linking a non-charitable club with a new charity should take a look at the newsletter.

Successful Suit Brought Against Accountant in Art Flip Case

                In a decision issued at the end of June in the Ontario Superior Court of Justice [3] an accountant was found liable to his clients for having advised their participation in an art flip tax shelter. The shelter has become known as the "Klotz" shelter, the name of an earlier group of individuals who appealed the valuation issue thought the tax courts and on appeals.[4]

                The defendant in this case was an accountant who recommended the Klotz art donation tax shelter program to his clients.  The tax shelter was ultimately reassessed by the Canada Revenue Agency and donors were allowed a donation equal to only their out-of-pocket cost to buy the art and not the higher appraised value.

                The main legal issue was whether the accountant was a fiduciary to his clients which would impose on him a very high duty of care., a much more strict approach than had the accountant been "merely" negligent.  The court held that the accountant was a fiduciary and breached his duty to his clients.  The Court held that he also received a commission of $7,500 from the promoter that he failed to disclose to his clients.  He was ordered to pay that commission to his clients as part of their damages.

                This decision raises a whole new set of issues relating to "flip" and other donation schemes now raising the stake for those professionals who were flogging the plans to clients and who were getting kick-backs.

                We expect that a lot of lawyers, accountants and their clients will be reading this decision with very great interest.