Feb 2019 Charity & NFP Law Updates
On January 30, 2019, the Federal Court of Appeal released its decision in Ark Angel Foundation v Canada (National Revenue), in which the Court dismissed an appeal, with costs, regarding a notice of intention to revoke (the “Revocation Proposal”) the charitable registration of the Ark Angel Foundation (the “Foundation”). Two issues were raised in the appeal: 1) whether the Minister had erred in issuing the Revocation Proposal, and 2) whether the administrative process behind issuing the Revocation Proposal had breached the rules of natural justice and procedural fairness.
Of particular note, the Foundation’s operations were managed by Mr. Michael O’Sullivan, a director of the Foundation who was also a director of the three other charities – Ark Angel Fund, Humane Society of Canada Foundation, and Humane Society of Canada for the Protection of Animals and the Environment. All three of these charities had also been audited, and Humane Society of Canada for the Protection of Animals and the Environment’s charitable status was revoked for improper disbursement of benefits to Mr. O’Sullivan as a director and officer, as reported in the July/August 2015 Charity & NFP Law Update.
In this case, the court found that the Minister had not erred in issuing the Revocation Proposal, which stemmed from the Minister’s conclusion that the Foundation had failed to keep adequate books and records under subsection 230(3) of the ITA and failed to devote all its resources to charitable purposes. In particular, the Minister concluded that the records of consultation fees paid to Mr. O’Sullivan, a director of the Foundation who managed the operations of the charity, “fail[ed] to demonstrate what Mr. Michael Sullivan was consulting upon or how it related to the charitable mandate of the [Foundation].” The court acknowledged that subsection 230(3) did not specify the types of books and records required and a mere technical failure to comply may not justify a revocation of charitable status. However, the court stated that in the case of the Foundation, “the failure was significant”:
[…] the Foundation failed to provide any records that demonstrated what consulting services Mr. O’Sullivan provided for the fees he received. Although one of the invoices appears to give some detailed information by listing names of consulting projects, the Foundation failed to provide any support that the named projects were bona fide. Needless to say, a bald reference to consulting projects in an invoice that cannot be corroborated with other evidence does not satisfy the records requirement of the Act.
The court also stated that “if a charity’s books and records are insufficient for the CRA to assess whether the charity is in compliance with its obligations under the [ITA], this may be sufficient ground upon which to revoke the charity’s charitable status.” Further, the Court commented that “[i]n order to avoid the imposition of a sanction, a charity ought to do more than provide non-responsive submissions or simply deny that their records are inadequate.”
In finding that it was reasonable for the Minister to conclude that the Foundation had failed to devote all its resources to charitable purposes, the court accepted the Minister’s conclusion that the lack of proper documentation regarding the consultation activity of Mr. O’Sullivan meant that the Foundation could not “demonstrate by any means that no personal or undue benefits were conferred to the directors.” The Court noted that the Foundation was “non-responsive” in its submissions to the Minister, so it was “not unreasonable” for the Minister to conclude that such fees were incurred for a non-charitable purpose. Further, the court stated that “[t]he problem is that the information that was provided did not address the fundamental concerns that the Minister had.” As such, the Foundation failed to demonstrate that the Minister’s decision to issue a Revocation Proposal was unreasonable.
The court rejected all of the Foundation’s allegations of a breach of natural justice and procedural fairness as “wholly without merit.” The court held that: 1) the failure of the appeals officer to read certain documents was not a breach of procedural fairness as there was no evidence indicating that the appeals officer had missed any relevant documents; 2) the CRA only needs to “consider the submissions” presented by the Foundation and the Foundation is not owed a “full opportunity to respond;” 3) the Foundation could not rely on an incomplete tribunal record to vacate the Revocation Proposal because it could have rectified any deficiencies; 4) the Foundation had been informed of the case it had to meet; and 5) the Foundation had “not come close to satisfying this test [of bias]” with respect to the Minister’s conduct.
Charities should ensure that their recordkeeping practices are detailed enough to justify any activities or expenses that are made by the charity, as failure to do so may result in direct violation of subsection 230(3), and also in other non-compliance issues, such as the inability to demonstrate that all charity resources are being used for a charitable purpose. Further, charities must be proactive in responding to inquiries by the Minister by providing fulsome responses and information that directly addresses the concerns of the Minister.