Charities - A top ten list
The Federal Court of Appeal, in a 1996 two-to-one judgment, allowed
the appeal of Vancouver Regional FreeNet against Revenue Canada's
refusal to register it as a charity. The case is a good opportunity
to examine the legal meaning of charity and to review some myths
associated with charities.
The Case
Freenets have started throughout Canada as community-based, volunteer
networks that provide free access to selected internet resources.
The legal question is whether doing so is charitable. Two judges
in Vancouver Regional FreeNet Association likened a freenet to
a library. They noted the starting point for consideration is
the Charitable Uses Act of 1601. The judges also referred to
the 1891 decision of the British House of Lords: Commissioners
for Special Purposes of Income Tax v. Pemsel. This
case confirms that there are only four categories of activities
considered legally charitable: relief of poverty, advancing education,
advancing religion, and activities beneficial to the community
as a whole. It is the fourth group that causes most of the problems.
What is beneficial to the community?
In Vancouver Regional FreeNet, the Court held that by analogy
a freenet was like a library and considered a charitable activity
when the Charitable Uses Act was passed. But the minority
judgment recounts the other side of the case: because there is
no statutory definition of charity, the courts have a supervisory
role in determining what is charitable. Analogies are not the
way to make the determination. What was charitable in the past
is not necessarily charitable now. The courts need to consider
the essential charitable nature of the organization on appeal.
And in doing so a prime concern is whether all the activities
will be charitable.
The contrasting judgments in Vancouver Regional FreeNet provide
a capsular view of the (unsatisfactory) legal meaning of charity.
Until there is a statutory definition (unlikely, as it is unworkable)
or a statutory body to interpret the meaning of charity on a
case by case basis like the charities commission Britain (improbable,
as it is a low priority for government), this case provides as
clear guidance as we can expect.
To brighten the light, we present our top ten list of myths about
being and becoming a charity with quick answers based on current
law and administrative practice.
The List
No. 1 We Do Good Work
Not good enough. All good work is not charitable. It must be
legally beneficial to the community.
No. 2 It's Just An Application
No. Being a charity is a privilege and the supporting documentation
must prove the case that the organization will legally operate
in a way the law recognizes as charitable.
No. 3 It's Our Right
There is no right to charitable status. Revenue Canada, relying
on its interpretation of numerous cases, can grant status only
where the organization is legally a charity.
No. 4 It Can't Take That Long
There is a backlog of up to a year. Revenue Canada is short-staffed
and has recently changed its administrative practice of pre-clearing
objects. A full application must be made, and it is not unusual
for the acknowledgement to take three months or more.
No. 5 We Can Save The Donations
Once registered as a charity, the rules under the Income Tax
Act apply. This year a charity is required to spend 80% of
the money for which it gave out receipts last year. If a charity
wants to accumulate money, it must make a special application.
No. 6 But We Need To Raise Money
A worthy purpose on its own does not qualify. And only charities
can give receipts that qualify for tax credits.
No. 7 Everybody Benefits
This is a variation on good works and worthy causes and the answer
bears emphasis: only some activities that are of benefit to a
broad range of people qualify as charitable.
No. 8 It Will Help Us With Sales
There are a number of rules about charities carrying on a related
business. But making money is not a charitable purpose. If an
organization tries a business activity, it must be careful it
doesn't go over the line between permissible charitable activity
and prohibited commercial activity.
No. 9 There's A Lot of Things We Need To Do
Again, and at the risk of repetition - good works are not necessarily
charitable.
No. 10 We Can Just Give Out Receipts While We Wait for
Registration
This is a form of gambling not worth the payoff. Revenue Canada
refuses many applications. And often those applications cannot
be corrected. Donors are disappointed; money may have to be returned;
the problems are not worth the price.
Laird Hunter is a lawyer with the firm Worton & Hunter
in Edmonton, Alberta
