On August 17, 2015 the Federal Court of Appeal released their decision in Humane Society of Canada for the Protection of Animals and the Environment v Minister of National Revenue (2015 FCA 178) which confirmed CRA’s decision to issue a Notice of Intention to Revoke (“NIR”) the organization’s charitable status for failure to devote all of its resources to its charitable activities, for conferring an undue benefit on a member of its governing board, for improperly completing an information return, and for failing to maintain adequate books and records.
The main issue in this case revolved around the undue benefits conferred on Michael O’Sullivan, a director, officer, and member of the charity. Following an audit of the charity in 2006, CRA determined that the charity had reimbursed Mr. O’Sullivan for approximately $70,000 worth of personal expenses, including comic book purchases, liquor purchases, grocery purchases and personal entertainment costs. Consequently, pursuant to subsection 168(1) of the ITA, CRA issued the NIR to the charity. The charity appealed the notice with CRA and the Tax Court of Canada, but both the Appeals Directorate, and subsequently the Tax Court, confirmed the Minister’s initial decision.
The charity in their appeal argued that a penalty, instead of the NIR, should have been issued to the charity as section 188 of the ITA required CRA to issue a penalty in situations where undue benefits were found to have been conferred. However, due to the numerous instances that Mr. O’Sullivan received personal benefits, the Court rejected the charity’s argument. Instead, the Court held that the benefits conferred could not be considered “inadvertent” as argued and the charity failed to devote “all of its resources to charitable activities”. Given this, the charity failed to meet the ITA’s definition of a charitable organization and the Minister had the right to revoke the charity’s status pursuant to section 168(1)(b) of the ITA.
Although the facts in this case are extreme, charities still need to ensure that they do not confer any undue benefits on directors or officers on their board. It is essential that charities ensure that they only reimburse for expenses directly connected to their charitable purposes. In order to better protect their charitable status, charities should consider developing operating policies around director and officer expenses in order to prevent the disbursements of funds that are unrelated to the charitable operations of the organization.