Remuneration and the Income Tax Act
Arthur Drache, January 17, 2009
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| One of the striking developments we have noticed at late vis a vis the Charities Directorate is the breathtaking ability of some of the officers to make purported statements of law which have absolutely no grounding in cases or statute. And this is often the case where there are written CRA guidelines which say the complete opposite. |
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| Twice in the past few months we have seen letters which suggest that it is contrary to statute to pay officers and directors. These letters came from different offices, one using the issue to deny a registration and one using it to threaten a revocation of charitable status. |
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| There is of course a common law provision applicable to payments to charity directors but this is a matter of provincial jurisdiction, not federal. Additionally few provinces interpret this rule strictly, Ontario being the main exception. |
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| The Income Tax Act does deal with this issue because it is outside the federal constitutional purview. It does of course have some minor jurisdiction by way of the requirement that a charity meet its disbursement quota but this is not aimed at remuneration issues but rather that charitable disbursement issues. |
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| Both letters stated that the Income Tax Act forbids payments to director and trustees. Both quote the Act, saying that a charity cannot allow any part of its income to be payable to, or otherwise available for, the personal benefit of any proprietor, member, shareholder, trustee or settlor. |
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| The interpretation which has been in place for decades is that the term "income" means net income after all proper disbursements are made.which would include salary and other remuneration. The same provision is found in paragraph 149(1) (l) dealing with non-profit organizations. |
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| "non-profit organizations -- a club, society or association that, in the opinion of the Minister, was not a charity within the meaning assigned by subsection 149.1(1) and that was organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, no part of the income of which was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof unless the proprietor, member or shareholder was a club, society or association the primary purpose and function of which was the promotion of amateur athletics in Canada;" |
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| In section 149.1, the definition of charitable organization which, in the context of this issue is the same as for other charities states: |
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| "charitable organization" means an organization, whether or not incorporated, |
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| (b) no part of the income of which is payable to, or is otherwise available for, the personal benefit of any proprietor, member, shareholder, trustee or settlor thereof" |
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| These kinds of clauses are known by the third sector around the world as "non-distribution" clauses designed to ensure that dividends and similar distributions cannot be made by a charity or an NGO or a public benefit organization. They are definitely not there to prevent legitimate and reasonable remuneration even to directors and trustees. |
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| It is important to note that the CRA in Interpretation Bulletin IT-496R deals explicitly with this issue. The Bulletin deals with non-profit organizations but as the statutory wording is identical, should also apply to charities. Paragraph 12 says: |
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| "Certain types of payments made directly to members, or indirectly for their benefit, will not, in and by themselves, disqualify an association from being tax-exempt under paragraph 149(1)(l). Such payments include salaries, wages, fees or honorariums for services rendered to the association, provided the amounts paid are reasonable and no more than those paid in arm's length situations for similar services. Also included are payments made to employees or members of the association to assist them in covering their expenses to attend various conventions and meetings as delegates on behalf of the association, provided attendance at such conventions and meetings is to further the aims and objectives of the association. In addition, campaign expenditures of a political party (other than payments to a candidate that are not reimbursements of reasonable expenses), which often result in an indirect benefit for a candidate, are not the type of personal benefit contemplated by paragraph 149(1)(l) that would cause the party to be denied exemption under that paragraph." |
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| This makes abundantly clear the fact that the limitation on income being personally available does not include payments made for services rendered so long as they are reasonable. Given that the charity and the non-profit provisions are in the same legislation and have identical wording, it would take a very perverse mind to say that this interpretation as set out in It-496R does not apply to charities. |
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| Now we don't know if the two letters we saw are flukes, written by junior officers who are inadequately trained or whether this is the thin edge of a very dangerous wedge which the Charities Directorate is trying on for size. Whatever the case, if a charity you advise or one which you are involved with gets a letter with this sort of assertion, the purpose of this article is to arm you with the rebuttal. |
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| We hope this issue just quietly goes away but if it does not and at some stage litigation ensues, a key element will certainly be that the Charities Directorate has exceeded the federal constitutional mandate with regard to regulation of charities and we trust that senior courts will confirm that view. |
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