Is the Sky Really Falling? Revenue Canada's Position on Donor Benefits and Christian Charities

Reference Number
CES - 005

Date
February 3, 1999

Introduction (opening remarks)

Over the course of the past year especially, the Canadian Council of Christian Charities has publicly expressed the concern that Revenue Canada was "out to get Christian charities". It raised a number of issues, some of which I propose to address here, and, convinced of the correctness of its views, it sought to raise public awareness about the issues through the media - notably through the Alberta Report and through Christian Week.

One general message that seemed to pervade the debate is that Revenue Canada had singled out religious charities for particular grief. I would be foolish to deny that we were auditing several religious organizations. But here are a few statistics: in February of 1998, there were in Canada 75,455 registered charities. Of those, 31,111, or approximately 41% were religious charities. In the circumstances, it is only fair and logical that a major portion of our audits should be directed toward religious charities. As well certain types of charities have ways of operating that are different from other charities, and it is understandable that when we choose a particular charity for audit, we are most interested in those aspects of the charity's operations where experience tells us we have found significant abuse in the past. This is purely a matter of efficiency. Sometimes we find abuse, sometimes we don't, and other times we find it elsewhere. To focus exclusively on random audits, without any audit leads whatsoever, would significantly reduce the effectiveness of an audit program and result in a proportionate increase in non-compliance.

We know for instance that certain charities are more likely to participate in art donation scams. As it happens, those aren't usually religious charities. Just so I don't get quoted out of context by some reporter lurking in the shadows, art donation scams are not rampant but they are not infrequent either, they involve significant amounts of money, and they have a significant impact on the affected charity, on the donor's taxes and on resulting state revenues. So for the sake of a sound tax administration, we have an interest in tracking them down. Are we singling out charities that issue receipts for donations of art? You bet we are. But is it because we hold a grudge against the type of art they like? Certainly not.

So it is not because charities are Christian, or French or because they deal with the environment that we audit. It is because our role is to see that people comply with the tax law.

Thankfully, other people in the Christian community were concerned enough about the rhetoric used in some of these publications, and they sought to get to the root of the problem.

I have been privy to a few calls from reporters on this general issue, and I would like to publicly answer some typical questions that are put to me as departmental spokesperson:

Is there a move afoot to withdraw the tax privileges available to religious charities?

1. No, absolutely not. I should add that if a move comes to disenfranchise religious charities, the impetus will not come from Revenue Canada, it will come from elsewhere. You should know for instance that the whole definition of charities is up for grabs at the moment, in the context of reports submitted to government by the Broadbent Panel and by the Kahanoff Foundation in particular. But as late as last Fall, I broached the subject with Finance officials, wanting to find out where the ugly rumour concerning religious organizations got started, and the Finance position at the time was that disenfranchisement of religious organizations was completely out of the question. The particular Finance official was as perplexed as I was as to the origins of this rumour.

Advancement of religion

2. How are religious organizations affected when their purpose is to educate their constituencies about a wide range of issues with political ramifications?

IC 75-23 and tax-assisted tuition fees for attending a religious school.

Paying a school for a child's tuition - religious or otherwise - is not a gift at law. Notwithstanding the law, Revenue Canada has had an administrative policy in place for a number of years that accepts a portion of a tuition fee payment as a gift, to cover the part of the tuition that deals with religious instruction. The policy is set out in Information Circular 75-23, and two methods of calculating the "gift" portion were established. These two methods were arrived at, bearing in mind that we wanted to prevent organizations from artificially inflating the gift portion of the tuition fee payment for instance, by doing some creative accounting and applying grants or donations from other sources to cover the secular part of the curriculum only. An Information Letter, further explaining the policy set out in the Circular has been sent to all registered charities that operate schools providing religious instruction, in the early 1980s or at the time of their registration - whichever came last. The letter specifies notably that the administrative policy applies only to payments made by parents directly to a school and disqualifies payments made for those purposes through other channels in an attempt to secure full tax receipting. Revenue Canada's policy goes beyond the law, and it goes as far as to subsidise religious instruction. It does not however go as far as to grant tax assistance for the entire cost of tuition.

Directed Donations

3. The more frequent use of the concept of detached and disinterested generosity coincides more or less with a change in a Revenue Canada Interpretation Bulletin, Gifts and Official Donation Receipts¹:

4. Paragraph 15(f) of the Bulletin currently reads:

A charity may not issue an official receipt for income tax purposes if the donor has directed the charity to give the funds to a specified person or family. In reality, such a gift is made to the person or family and not to the charity. However, donations subject to a general direction from the donor that the gift be used in a particular program operated by the charity are acceptable, provided that no benefit accrues to the donor, the directed gift does not benefit any person not dealing at arms' length with the donor, and decisions regarding utilization of the donation within a program rest with the charity.

Detached and disinterested generosity

5. A lot of concern has been expressed recently about the use of the phrase "detached and disinterested generosity" when explaining how a valid gift should be made. The concern arises from the use of the phrase in recent Revenue Canada correspondence addressing the concept of a gift, and stating that a gift should be made from detached and disinterested generosity.

6. This expression has been referred to by Revenue Canada for a long time, but it has been used more frequently in past years, mainly because we are concerned that certain charities are using ingenious interpretations of the legal concept of gifting to defeat the intent and the letter of the law, and obtain tax benefits where none should be had.

7. It is variously suggested, mostly at the instigation of the Canadian Council of Christian Charities, that the concept of detached and disinterested generosity is new, that it is a concept imported from Australian law, that it has been arbitrarily imported by Revenue Canada, and that it is not an accurate statement of the law.

8. In point of fact, the concept comes from British common law, of which both Canadian and Australian common law are direct descendants. Notably, in 1896, Lord MacNaghten - of Pemsel fame - dealt with the case of an art union, which gave its subscribers an engraving of a work of art and a chance to win an artwork in the form of a prize². Lord MacNaghten did not view the subscribers' contributions as gifts, and in deciding so, commented on the concept of an "annual voluntary contribution". He wrote:

"Apart from authority, the meaning of the provision would seem to be tolerably obvious. The first observation that must, I think, occur to any one who may be called upon to construe it is that the phrase, which the Legislature has adopted is an old and familiar acquaintance. In the public streets it meets the eye not unfrequently (sic) on the walls of schools and hospitals; it is to be found in the forefront of many charitable appeals. So used, it carries with it a meaning which nobody can mistake. It means that the institution on whose behalf the statement is put forward depends for its support on freewill offerings - on the generosity of persons acting from disinterested motives, and not looking for any return in the shape of direct personal advantage³."

9. What is detached and disinterested generosity? The concept is intertwined and overlaps the policy on directed donations that is specified in the Interpretation Bulletin. This is so, because it has to be interpreted in the proper context, not out of context.

10. The concept of detached and disinterested generosity was referred to in a line of Australian cases, Commissioner of Taxation v. McPhail, and Leary v. Federal Commissioner of Taxation, whose reasoning was cited with approval by Canadian courts. And in short, to constitute a gift,

"...it must appear that the property transferred was transferred voluntarily and not as the result of a contractual obligation to transfer it and that no advantage of a material character was received by the transferor by way of return."

11. The Court of Appeal in the Leary case went on to qualify the above statement by saying that a contractually binding promise to make a gift does not deprive it of its character. Similarly, the fact that a donor receives some return from a charity does not prove conclusively that there was no gift. Nevertheless, and in anticipation of those who would want to take this latter proposition to the limit, I hasten to point out that the Court's statement does not endorse the provision of a valuable return to the donor in any and all circumstances. The Court went on to say:

"The above-mentioned considerations indicate usual attributes of a gift, namely, that a gift will ordinarily be by way of benefaction, that a gift will usually be not made in pursuance of a contractual obligation and that a gift will ordinarily be without any advantage of a material character being received in return. I would add to those usual attributes of a gift, the attribute that a gift ordinarily proceeds from a detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses."

12. If an individual is afflicted with a particular disease, can that individual donate to a charity dedicated to eradicating that disease? Usually. But if the payment is made on the understanding that the "donor" will receive admission to a particular treatment centre, no.

13. Can an alumnus of a college or university make a donation to his or her alma mater? - Usually. But if the payment gives the alumnus' children the right to use the physical recreation facilities at the university, no.

14. Can members of cultural charities such as a symphony, a theatre or a museum, donate to such a charity when they attend the performances or exhibitions of that charity? Yes, they can, notably within the parameters set out in Interpretation Bulletin IT-110R3, Gifts and Official Donation Receipts.

15. Designating funds to a specific project of a charity is acceptable. The donor here may be interested in the project, but it is an interest in the sense of a curiosity, a concern, a personal identification with the goals of the project. A donation to a specific project is still dis-interested insofar as the donor's support is not primarily or substantially motivated by direct personal advantage. "Interest" - in this latter, unacceptable sense, is more akin to the right to have an advantage accruing from the donation.

16. The use of the concept of detached and disinterested generosity by the courts, and accordingly by Revenue Canada, is perhaps infelicitous, but it was intended to thwart those people who would use the concept of a charitable gift and the ensuing tax benefits to suit private and personal purposes, and would interpret the usual, more terse legal definition of a "gift" narrowly or broadly as the circumstances and those private purposes dictate.

17. Not to be thwarted by the courts' attempts, some organizations have gone on to give the words "detached and disinterested generosity" a wider emancipation than intended in the context. This wider meaning has been attributed to Revenue Canada as its new definition of charitable giving. The result has been to frighten and inflame the Christian community sufficiently to encourage it to contribute to a "legal trust fund". With all due respect to the organizations involved, to quote the phrase "detached and disinterested generosity" out of the context of the cases in which it is being applied is a gross misinterpretation⁴.

18. A "material" advantage is much more than an economic advantage. Material here is used in the sense of the existence of a logical and significant benefit accruing specifically back to the donor or to a person designated by the donor, that designation being made purely because of private and personal reasons not related to the charitable purpose at hand.

19. The tax advantage, which is received from gifts, is not normally considered a 'benefit' within this definition, for to do so would render the charitable donations deductions unavailable to many donors. (The Queen v. Friedberg, F.C.A. docket A-65-89, judgment dated December 5, 1991)

20. According to the courts, a Christian education of one's children is a material benefit and one which carries economic consequences (Zandstra - McBurney). This is an altogether different situation than making a general contribution to the Sunday School program or other church program that is not specifically tied to your children's eligibility to attend.

21. Does a request that each member pay according to his or her means make that payment a gift? The fact that a payment is voluntary and not made pursuant to a contractual obligation is irrelevant in determining whether it is a gift.

22. Will an employee of a charity be unable to make gifts to the charity that employs them? If it is a genuine, altruistic gift, there should be no problem. On the other hand, if it is for instance a condition of employment, or if it is given to flow money given to staff in Christmas bonuses back to the company, thereby allowing staff to at least claim a tax credit while keeping the company in the black, then the donors are not acting out of disinterest. In the first instance, they want a job, and in the second one, they are interested possibly in keeping their jobs, in getting a promotion, in keeping the company in the black, or in getting a tax credit⁵.

23. How about travel and living expenses?⁶ Does this not contravene the concept of detached and disinterested generosity? It is not the fact that you contribute at the same time as you volunteer that is damning. It is whether, for instance, you contribute to cover the cost of personal and discretionary expenses, as opposed to necessary ones.

24. To quote Sir Thomas More: "The law is there to get at the devil - if we do not apply the law, what will we do when the devil turns on us - behind which law will we hide?"

25. In tax law, form matters. If it were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. This is why Revenue Canada reacts to certain signs that tend to indicate whether we are in presence of a gift or not. These indicia are not always absolute. They tend to establish a presumption, which becomes stronger as the facts accumulate. On the donor's part, evidence of intention may be used on occasion to clarify dealings, but as the court suggested in the Friedberg case, this is not always determinative, and ex post facto evidence of a subjective intention is rarely successful in altering documentary evidence which clearly point in another direction⁷.

26. Here are some indicia that would suggest a payment is not a gift:

• The donor specifies beneficiary of gift, and the beneficiary is non-arm's length to the donor.
• Most donors in a program specify a beneficiary, and in most cases the beneficiary is non-arms' length to the donor.
• The beneficiary is non-arm's length to the donor and is being preferred as a result of the payment, to others equally eligible for assistance.
• The donor gives, or donated amounts increase only when a non-arm's length beneficiary is benefiting from the program and end or drop off substantially when the beneficiary leaves the program.
• Fund-raising solicitations stipulate that benefits to a donor or to a person connected to the a donor are conditional on the making of a gift.

27. Here are some indicia that suggest the payment is a gift. Again, they are not necessarily conclusive, but must be looked at in context:

• The organization has full discretion and control over the funds, and applies the funds for qualified expenses only. The particular use of the funds is not under the control of, say, the recipient missionaries. The key test is that the charity has full control over the funds so that it, and it only, can determine how it will carry out its charitable purposes.
• The donor does not stipulate in any way to whom the funds should be directed.
• Donations are not received pursuant to a commitment by the charity that they will be used for a specific or designated individual.
• The donors have had a pattern of constant giving to a particular program over the years, regardless of their involvement or that of close relatives.
• Money goes into a common pool, from which all beneficiaries receive equal support.

Conclusion (closing remarks)

28. Do not think for an instant that we are not sympathetic to the work of religious charities. At almost half the sector, religious charities do an incredible amount of work, not only in terms of moral teaching but by ministering to the sick and the homeless, and those stricken by disaster.

29. I hope to have provided you with some answers, or at least with a clearer insight. Unfortunately, the law as it is applied to different situations, often seems to point in opposite directions. It ultimately depends on where the facts point. The answers cannot always be categorical because the facts vary so much from one case to the other. Paying the charity for your travel costs and getting a tax receipt when you are out doing missionary work is not the same as paying the charity for your travel costs for a European trip with a substantial amount of free time that essentially amounts to a vacation. There is a dearth of regulation in Canada on this subject, but we may eventually find ourselves in unfortunate circumstances similar to American charities, where payments covering religious travel tours are receiptable only if the tour includes for instance a reading list, attendance of a qualified instructor, a maximum specified amount of free time per day and a minimum amount of hours of work or study, all of which the charity is required to fully account for.

30.If you have doubts, call us.

1. 1 IT-110R3, modified June 20, 1997. The paragraph formerly read: "Gifts directed to a person designated by a donor. A charity may not issue an official receipt for income tax purposes if the donor has directed the charity to give the funds to a specified person or family as opposed to a program. In reality, such a gift is made to the person or family and not to the charity. Donations made to charities can be subject to a general direction but decisions regarding specific beneficiaries of one of its established programs must be the exclusive responsibility of the charity."
2. 2 The Overseers of the Poor and Chapelwarden of the Royal Precinct of the Savoy in the County of London v. The Art Union of London, [1896] A.C. 296.
3. 3 Ibid., at p. 312.
4. 4 Wietse Posthumus, "Beware of Taxing Tactics by Corban and CCCC", in Christian Courier, November 13, 1998, pp. 12-13.
5. 5 Note the difference in context between this, and the general rule regarding tax credits referred to in the Friedberg case.
6. 6 Note that in the United States, a tax receipt for unreimbursed expenses is not allowed where a person other than the actual taxpayer performs the charitable service: Davis v. U.S., U.S.T.C. 88-2, 9594.
7. 7 The Queen v. Friedberg, F.C.A. docket A-65-89, judgment dated December 5, 1991.