Entities that make taxable supplies are entitled to claim input tax credits. An "exempt" supply however is not a taxable supply as they are not eligible for credits. Registration for G.S.T. purposes however is still required unless you are deemed to be a "small supplier." In 1996 if supplies due or paid in four calendar quarters immediately preceding the current quarter did not exceed $30,000.00 (exclusive amounts paid out from games of chance or prizes or have gross revenues of less than $75,000.00) you were a small supplier. Threshold tests are performed quarterly and zero related supplies are included. This status is not available to a non-resident. These limits were increased to $50,000.00 quarterly and $250,000.00 for gross revenues on April 23, 1996. Goodwill is also excluded in the valuation. Each division of a corporation is eligible for the small supplier threshold of $50,000.00 if it can be separately identified by reference to its location or nature of its activities and maintains separate books and records and accounting. An exception to charities allows for receipt of $250,000.00 or less in gross revenue in either of its two previous fiscal years. Under this test a charity is not required to determine which of its supplies are taxable and which are exempt. There is no blanket exemption for non-profit organizations unless it qualifies under general exemptions or the supply is an exempt supply. Registered charities are exempt unless they appear in Section II, Schedule V of the Act. This does not extend to supplies of real property, Zero rated services or property, property or a service made by the charity, non-capital property used in commercial activities, and commercial activities of the charity.
A new streamlined accounting method will be introduced for charities under which they will continue to charge G.S.T. on taxable supplies, but will only be required to remit 60% of the tax collected on those taxable supplies.
As a result, they will no longer be required to relate input tax credits to those supplies or to allocate expenditures between taxable and exempt supplies.
In addition to retaining 40% of the G.S.T. thus collected, they will be entitled to a rebate of 50% of the G.S.T. paid in respect of all expenses incurred. Note, however, that G.S.T. collected on the sale of capital or real property must still be remitted in full, and similarly, G.S.T. paid on capital and real property used primarily in taxable activities will be eligible for full input tax credit.
Charities may file an election to opt out of this new system if they make zero-rated supplies or if 90% or more of their supplies are taxable. In these cases, it might be punitive to use the new simplified accounting system, and therefore they are given the choice not to.
The full price of admission to a fundraising event will now be exempt where a portion of the price qualifies as a donation for tax purposes. Presently, only the "donation" portion is exempt. This method was applicable as of January 1, 1997.
A charity or non-profit organization may obtain a rebate equal to a prescribed percentage of non-creditable tax charged. The prescribed percentage is 50%. Non-profit financial institutions are not eligible.
EMPLOYMENT LAW FOR NON-PROFITS
Obviously one should examine in depth the use of volunteers and inter-action between volunteers and employees. In answering whether someone is an employee the traditional common-law control test has often been used. That is to say whether or not control existed, whether a person owned their own tools and to what extent a person shares in the profits or risks? This test however does not always assist us with different contacts. A volunteer may not be an "employee for the purposes of the Employment Standards Act but may be an employee in determining vicarious liability or human rights issues. Generally speaking a principal is liable for the acts of an agent. Their apparent scope
of authority can be express or implied from the principal’s conduct or acquiescence. In short, to protect both volunteers and employees from foreseeable harm it is prudent to obtain adequate insurance. Although not prescribed, non-share capital corporations are permitted and generally do provide by-law that the corporation, out of funds of the corporation, will insulate directors from personal liability arising out of their exercise of their functions as directors.(s.80 Ont. Act and 2.93 Fed. Act). Because volunteers are not covered by Workers’ Compensation insurance should be purchased. Under the Occupational Health and Safety Act a worker is "a person who performs work or supplies services for monetary compensation." A volunteer therefore would not normally be covered by this Act but organizations owe a duty of care to volunteers for negligent conduct on its behalf and may also be vicariously liable for the negligent conduct of volunteers.
A trade union may also claim that a person performing the work should be brought into the bargaining unit. The organization should therefore carry out a job evaluation of functions, content and tasks as well as ascribing skill and responsibility in advance to be clear. Obviously one should refrain from assigning volunteers work which is "material" or substantial" to a paid employee’s duties.
Human Rights legislation has been deemed to be quasi-constitutional and therefore enjoys some paramountcy. Organizations may be affected when recruiting and working with individuals as well as in the relationship between volunteers and employees. Certain cases have extended human rights legislation beyond the traditional common law understanding of employment. It is prudent then to view everyone as falling within the legislation. The code does however permit discrimination or grants preferences to persons similarly identified with a religious, philanthropic, educational, fraternal or social institution or organization that is primarily engaged by their race, ancestry, place of origin, colour, ethnic origin, creed, sex, age, marital status or handicap.
Criminal records can be requested at the application stage, interview stage, and record search stage. While the code prohibits discrimination on the grounds of "record of offenses" an employer can discriminate on the basis of a conviction where the applicant has not received a pardon, or for which a pardon has been revoked. Requests for information should always ask about a "pardon" or risk being deemed inappropriate.
In general an assessment of why volunteers are required and what disadvantages may stem from their rise should be conducted. One should ask whether current supervisory resources allow for new personnel, and whether volunteers will adversely affect paid employees.
RISK MANAGEMENT
Responsibilities and Duties of Directors
The state of the law involving liability of directors and. officers is unsettled and unsatisfactory. Directors must be at least 18 years old and cannot be undischarged bankrupts. The Charities Accounting Act does not purport to set out an exclusive code regulating the conduct of corporations however under Section 6 of the Act an Ontario Court (General Division) Justice is empowered, upon receiving a complaint from the public, to order the Public Trustee to make an inquiry into the collection of funds. Both this Act and the Charitable Gifts Act govern the holding of certain business interests. It is often a very difficult question of law whether a particular object or activity is charitable; directors and officers should take legal advice on such points and not attempt to make such decisions on their own as common sense does not always apply. There is also no specific mechanism governing the conduct of, or applying sanctions to, the directors of corporations that contravene these two statutes. In fact, in Ontario, there is very little substantive legislation in general governing the conduct of charitable and non-profit corporations. We must therefore draw from the common law to ascertain the current state of liability of directors and officers. One thing is certain, they must act honestly, in good faith, and in the best interests of the corporation. They must use care, diligence and skill. They should be up-to-date and knowledgeable about the policies and affairs of the organization. One must make inquiries about management and operation, promptly perform agreed upon tasks, read minutes and reports and attend meetings. Directors cannot change the constitution or by-laws to excuse themselves from their duties.
Trustee Versus Directorship Duties
The Office of the Public Trustee does make certain recommendations such as the administration and management of charitable property should be done by a single regime rather than a multiplicity. Of particular interest, and of contention, is their assertion that the law of charitable trusts ought to apply. This raises a fine point in law however has other very practical ramifications. With the greatest of respect for the Office of the Public Trustee I must, and many other experts must, disagree. If we adopted this view it would essentially negate the distinction between charitable trusts and charitable corporations and place a much higher onus on the directors of charitable corporations than is currently applicable to the directors of business corporations. It would place corporations in the position of having to frequently apply to courts for approval of actions. The fact of the matter is that when a corporation receives funds for its general purposes it is not clear that it acts as a trustee over those funds. The relevant law is that under which the corporation was incorporated and organized, not general principles of trust law. To conclude otherwise would ignore the express provision of Section 118 of the Corporation Act that permits the incorporation of corporations with "charitable" objects. It is submitted that this Act applies and that if it had been intended to make the administration of such corporations subject to the provisions of the Trustee Act the legislature would have done so in clear terms. It follows then that although directors of corporations are not themselves trustees of the general assets of the corporation, they
appear to be subject to the same types of fiduciary obligations as are directors of other forms of corporations.
Liability, Statutory Offenses and Insurance
Under the Income Tax Act two potential offenses exist, tax evasion, and failure to keep proper records and books. Both offenses are strict liability and therefore invite the defence of due diligence.
The Corporation Act creates a number of specific regulatory offenses such as making a false entry in corporate records, impeding inspection of corporate records by authorized persons, selling securities, and making an untrue statement in any return, certificate, financial statement or any other document. Prosecutions are rare and if guilty one is liable to a fine of not more than $200.00. Further, under section 81, directors are jointly and severally liable for wages not exceeding 6 months and for the vacation pay accrued for not more than twelve months. Such suits must be instigated while the person is a director or within 6 months after he or she ceased to be a director. It is important then for directors to make sure that obligations to employees are kept current at all times.
The Income Tax Act also requires compliance with reporting and filing of annual income tax returns. Personal liability can also result if the corporation has failed to deduct and remit source deductions and possibly withholding taxes in respect to payments made to non-resident persons. The defence of due diligence is also available here but the limitation period expires two years after cessation of office, rather than 6 months. Courts have imposed a relatively stringent standard of diligence however an element of subjectivity is applied to volunteer directors holding them to a somewhat less rigorous standard. A prudent Board would take steps to see that the corporation’s auditors regularly monitor the compliance requirements under provincial law and providing any former directors with evidence of such compliance.
Under the Environmental Protection Act there has to be a strict program of environmental monitoring of the use of the land owned or occupied by the corporation. Proper disposal and storage of toxic substances is a must. Directors must also take reasonable care to prevent the unlawful discharge of a contaminant. A person having control over a contaminant will be responsible for clean-up costs and many other fines and even jail terms are available if there has been a wanton disregard for lives.
Under the Excise Tax Act there is direct liability on directors who fail to remit "net tax” (G.S.T.) The limitation expires two years after the person ceased to be a director and the defence of due diligence is available. To be prudent, many keep a separate trust fund for G.S.T. purposes as the statute may impose trust obligations.
The Employment Standards Act is a minimum code for employee relations. A director could face a large fine for authorizing, permitting or acquiescing in the corporation’s contravention of the Act. Failure to comply allows for a fine of up to $50,000.00.
Many other statutes also impose duties such as the Pension Benefits Act that allows for a $25,000.00 fine if there is a failure to adequately hold employee pension funds in trust, and the Health Insurance Act, wherein it is an offence to evade payment and where if the Corporation is insolvent the directors must personally pay the premiums. The Occupational Health and Safety Act requires the corporation to ensure safety and, if your organization is not exempted as already discussed, fines of up to $25,000.00 and one year jail terms exist.
The Corporation Act however imposes no express statutory test for the duty of care imposed on directors. The common law states that directors need not exhibit a greater degree of skill than what can be reasonably expected from persons with their knowledge and skill. They are not liable for business judgments and not bound to give continuous attention to the affairs of the corporation. No high objective standard is generally expected. It is recommended that there be a reliance on the advice of various professionals. The common law duty of obedience requires an obligation to implement valid corporate decisions and that officers and agents obey the general law applicable to corporations. Directors should meet their obligations in good faith and make decisions with the best interests of the corporation in mind and not further personal gain. One should avoid conflicts of interest. The Corporation Act has adopted the "safe harbour" provision allowing for full disclosure and then not voting. One should probably exit the room during the decision so as to be absolutely certain of avoiding controversy. Failure to comply can result in a setting aside of the transaction and a fine of not more than $200.00. It should be noted that the Office of the Public Trustee takes the position that directors of charitable corporations are trustees and cannot benefit from their trust without the express sanction of the court under the Trustee Act. Federally, payment of reasonable salaries and other benefits for services rendered to an organization or the reimbursement for expenses is allowed. Registered charities in Ontario preclude directors from holding salaried positions without court approval. The Office of the Public Trustee also takes this view. It is the author’s respectful submission that this area is also in need of legislative reform as some of the most knowledgeable and skilled directors are often full-time employees. The Income Tax Act already provides for effective monitoring and sanction if amounts paid were unreasonable.
A corporation with fewer members than 3 for more than 6 months places the individuals in the position of being liable for the whole of the debts contracted for in that time. A member can avoid lability if notice is served of a protest to the corporation and the sending of a Registered letter to the Ministry advising of the protest. Liability will also enure if, upon dissolution, claims have not been satisfied. With registered charities on wind up a penalty tax is assessed if the net assets of the charity are not distributed to another qualified donee within one year. Any members who receive property by way of distribution are liable along with the corporation for a confiscatory tax equal to the amount of the property received.
Members, are generally not liable however if members begin to exercise increased authority, they also increase their potential liability.
Section 80 of the Corporation Act, permits corporations to indemnify directors however the Office of the Public Trustee takes the position that charitable corporations cannot provide indemnities without obtaining a Court Order under the Trustee Act. As mentioned they view directors as trustees of the assets and the giving of an indemnity’ would allow them to profit from their office. This view is not an accurate reflection of the law. Most charities, in any event, probably have normal indemnity by-laws already.
TERMINATION OF NON-PROFITS AND CHARITIES
One must remember that charities and non-profit organizations are two different things. Both can be corporations but do not have to be incorporated. Unlike registered charities, non-profit organizations are not required to be registered under the Income Tax Act. Neither are subject to income tax. Charities can issue receipts whereas non-profit organizations cannot issue official receipts. Non-profits may distribute assets among their members whereas charities must distribute to other registered charities.
Reasons for termination vary. While Revenue Canada takes the view that "profit" is not fatal, an organization may lose tax-exempt status if excess profits invested in an interest bearing deposit are continually renewed every year. Similarly status is lost if dividends are paid, if the change in objects means their will be business for profit, if it was determined activities were in fact for profit, and if it resolves to wind-up and distribute assets to its members.
Further an Annual Summary or Form 3 for Canadian Corporations must be filed by June 1st of each year and failure to file for 2 years will result in a dissolution.
When a tax-exempt corporation becomes taxable there is deemed to be a year end at the time it ceased to be tax-exempt, a mandatory deduction of available reserves, a disposition and then re-acquisition of assets at fair market value, a latent recapture on depreciable property, and a limitation on loss carry-forwards. Thereafter the corporation would be subject to tax in the same manner as all other corporations. Distribution is a dividend. Revenue Canada views such distributions as payment on account of capital and as representing proceeds of disposition of such person’s interest in the corporation.
The Letters Patent will provide for either devolution to another organization having similar objects or to its members. If no members are alive assets ultimately escheat to the Crown.
Please recall requirements to maintain registered charity status and disbursement quotas mentioned earlier to avoid termination. A registered charity can have its registration revoked for numerous reasons including, voluntary revocation, or non-compliance with the Income Tax Act, that includes carrying on a business, disbursement quotas not being met, 50% of voting is controlled by non-arm’s length individuals, incurring a debt to discharge another debt, delaying expenditure of funds, carrying on political activities, disbursement of more than 50% of income, and provision of funds to non-qualified donees. Pursuant to section 149.1(6) where more than 50% of income is disbursed in a taxation year even if to qualified donees, a charitable organization will not be considered to be devoting it’s resources to charitable activities. Although it would be subject to revocation, the Minister may merely change the designation. Also under the Income Tax Act is the provision for revocation if receipts issued contain false information. Examples are receipts for tuition fees, payment for services, donations of merchandise, membership payments offering a material advantage, loose donations where a particular donor cannot be easily identified, donated items of no real value, and if the donation is conditional on assistance to an unqualified donee which is viewed, instead, as private benevolence. Registration can also be revoked if there is a failure to file "Registered Charity Public Information Returns" or "Returns of Information." Similarly non-compliance with books and records is a problem.
Termination may also happen upon the advice of the Public Trustee. Letters Patent must clearly state that corporations are subject to the Charities Accounting Act and Charitable Gifts Act and the Public Trustee will require strict adherence as already discussed.
A problem often arises when a corporation moves and Revenue Canada does not receive a Public Information Return (T3010). The charity will then also not receive a notice of intention to revoke because it will go to the wrong address.
Where the charity applies for revocation wherein the Minister may give notice to the registered charity that he or she proposes to revoke the registration. Upon the Minister publishing notice in the Canada Gazette, within 30 days of the mailing of the notice, the registration is revoked. There is no appeal and the charity will have to re-apply for registration. An appeal to the Federal Court of Appeal is available by filing a notice of appeal within 30 days from the mailing of notice of revocation however the court has discretion to allow for a greater period of time.
The consequences of revocation impose a tax on a charity to be paid within one year on the assets of the charity however a hole exists in the legislation which does not catch income earned from the date notice is given to the time of revocation.
Dissolution must be authorized by a majority vote.
Where a corporation has been dissolved for default in filings under the Corporations Information Act cabinet may revive the corporation if an application is received within 5 years from the date of dissolution on terms and conditions they may see fit to impose. The Public Guardian and Trustee will retain the property for the intended charitable purpose and they too must pre-approve the revival. A fee of $120.00 is payable. Obviously reasons for the dissolution will have to be provided and confirmation that the organization continues to carry on its charitable activities.