UNDUE BENEFITS TO A CHARITY'S DETRIMENT

Most people volunteer for charities because of an earnest belief in the charity’s cause or are otherwise looking for a way to help their community. Very few invest their time and energy into a charity looking for payback. Yet, over time, either through inadvertence, convenience, or because the opportunity presents itself, individuals have been known to receive a tangible benefit from their involvement with a charity. The law penalizes charities for giving an undue benefit to an individual, corporation or entity.

An undue benefit can take many forms, for example, a director may receive an honorarium, payment or some other direct benefit for serving as a director, or parents may receive a tax receipt for paying the fee for their child’s participation in a church trip. While the list of possible examples for undue benefit from a charity is long, it is also possible to benefit from a charity in a manner that is entirely benign and within the scope of the law. The most obvious example is an individual who donates to a charity and receives a tax creditable receipt. Clearly, this is a method of benefit inherent in our system of charity governance. Other examples include prizes for contests run by charities, reference letters, or benefits received in the course of the charity’s of its charitable activities.

Recent changes to the Income Tax Act include a penalty to the charity for undue benefit visited upon an individual, corporation or entity (including other charities). The penalty to the charity for giving an undue benefit is 105% of the benefit for a first offence and 110% of the benefit for a second offence. The Canada Revenue Agency could also simply revoke the registration of a charity (although from a practical perspective it is unlikely the CRA would use this in any but the most drastic of cases).

The Income Tax Act describes the meaning of ‘undue benefit’. Generally, the law does not penalize a charity that confers a benefit in the ordinary course of its charitable activities. An important exception to this rule is where it can reasonably be considered that the beneficiary only received the benefit because of his or her relationship with the charity. Undue benefit also excludes reasonable payment for property or services acquired by a charity. For example, a church member who is a carpenter can receive fair market value payment for his or her services without fear that this might incur a penalty to the church.

On the other hand, an undue benefit would include:

-an outlay from the charity as a gift to another individual (unless it was being done to fulfill the charity’s objects); and

-any income, property or assets paid to (or even made available for the personal benefit of) any individual who:

(a) is a proprietor, member, shareholder, trustee or settlor of the charity,

(b) has contributed or otherwise paid into the charity more than 50% of the capital of the charity, or

Perhaps the most striking element of this penalty is that it is imposed on the charity as a whole as opposed to the decision makers of a charity. Nevertheless, whether the benefit is given to the decision makers, a relative of a decision maker, a party unrelated to the charity or even another charity, it is the group as a whole that must pay the price.

Unfortunately, there are few systemic procedures charities can put in place to avoid providing an undue benefit to others. Perhaps the easiest and most obvious is education for every member of a charity. Another possibility would be for a charity to audit its receipts every year to ensure that the charity received all donations without any compensation to the donors. Still another approach might be to audit all programs and expenditures to ensure that all outlays were in the legitimate pursuit of a charity’s objects. Whichever method charities choose, they should recognize that conferring a benefit on others may be to their own detriment.

If you have any questions or comments about this article, or to arrange an educational session at your charity please call me at 416.712.2218 or email me at law@aptlaw.com.

Adam Aptowitzer distributes the above newsletter on the understanding that it does not constitute legal advice or establish the solicitor/client relationship by way of any information contained herein. The contents are intended for general information purposes only and under no circumstances can it be relied upon for legal decision-making. This newsletter is current only as of the date above and does not reflect any subsequent changes in the law. Readers are advised to consult with a qualified lawyer and obtain a written opinion concerning the specifics of their particular situation.