http://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/111244/index.do
Humane Society of Canada for the Protection of Animals and the Environment v. MNR (August 17, 2015 – 2015 FCA 178, Ryer J.A.).
This commentary is provided by guest contributor, Andrew Skodyn of Lenczner Slaght LLP.
Précis: This case is interesting due to the variety of novel arguments raised by the Appellant concerning the interpretation of various subsections of the Income Tax Act (the “Act”) relating to charities and the application of other sections by the Court, including 149.1(1), 165(3), 168(1)(b),168(4)(a), 172(3)(a.1), 188.1(4), 189(7) and 230(2)(a).
For example, one argument raised by the Appellant was that under subsection 188.1(4), if the Minister found that the Appellant had conferred an undue benefit, a penalty could be imposed, but revocation of the charitable organization registration was precluded. The Court summarily rejected this submission, by reference to subsection 189(7).
In the event, the Court rejected all of the Appellant’s statutory interpretation arguments and the case turned instead on the Appellant’s admission that personal benefits (of up to $70,000) had been provided to its director (Michael O’Sullivan), in contravention of the Act and that its books and records could not prove otherwise. These personal benefits included meals, purchases at the LCBO, expenses at Disneyland, movies and comic books. The Court found that it was reasonable for the Minister to revoke the Appellant’s charitable organization registration in these circumstances.
Decision:
The Court noted that the Appellant (the expansively named Humane Society of Canada for the Protection of Animals and the Environment) had been incorporated in 1993 and that the audit in question was in respect of the 2006 tax year. In the course of the audit, the Minister “expressed concerns” about the books and records and about the following:
[7] Those letters also expressed concerns about a large amount – over $250,000 – of expense reimbursements made by the Appellant to Mr. O’Sullivan. While the CRA acknowledged that some of these reimbursements may have been the result of the apparent inability of the Appellant to obtain its own credit card, the CRA concluded that approximately $70,000 of that amount related to personal expenses of Mr. O’Sullivan. Included in that amount were a large number of personal meal expenses, the cost of comic books purchased through Paypal, liquor purchases from the LCBO, grocery purchases, tickets to entertainment events in the UK and the USA, and expenses of Mr. O’Sullivan and his family at Disneyland.
In submissions made to the Minister on August 31, 2009, the Appellant apparently acknowledged that approximately 5.64% of its 2006 expenses had been “mischaracterized” and that its accounting system “was unable to directly assign its allegedly charitable expenditures in 30 of its 42 major programs” [paragraph 9]
After a lengthy discussion of the procedural background and two prior decisions related to the record and notice of appeal, the Court identifies the issues on the appeal before it:
[30] Thus, I would formulate the issues in this appeal as follows:
(a) Does paragraph 172(3)(a.1) require the Minister to deliver the “complete record” to the Appellant and to this Court on an appeal under that provision?
(b) If the Minister found or could have found that the Appellant conferred an undue benefit on Mr. O’Sullivan, would this preclude the Minister from revoking the Appellant’s status as a charitable organization?
(c) Does the Appeals Directorate have the authority to vary the basis of revocation of the Appellant’s status as a charitable organization from that stipulated in the NIR?
(d) Was the Confirmation Decision reasonable?
Issue (a) was dealt with by the Court as follows:
[47] In my view, paragraph 172(3)(a.1) cannot bear the interpretation that the Appellant asserts. This paragraph simply provides a right of appeal from the Confirmation Decision, which is a Ministerial confirmation of the NIR. It says nothing whatsoever about the procedure that must be followed in order to pursue the appeal right that it provides. However, this does not mean that there are no applicable laws of Canada dealing with such procedure.
[48] Procedural matters with respect to appeals to this Court that are permitted under the Act are stipulated in the Rules. The Appellant’s argument essentially challenges the sufficiency of the Rules as construed by Justice Sharlow in Humane Society 2013.The Appellant did not appeal Justice Sharlow’s decision or otherwise dispute its merits before us. Accepting the Appellant’s argument would have the effect of construing paragraph 172(3)(a.1) so as to implicitly provide the procedural outcome that Justice Sharlow rejected when she considered Rules 317 and 318, the directly applicable procedural dispositions. In my view, it would not be appropriate for this Court to interfere with Justice Sharlow’s decision under the guise of an interpretation of paragraph 172(3)(a.1), as asserted by the Appellant.
[49] The Appellant urges the Court to read into paragraph 172(3)(a.1) one procedural matter that relates to the content of the record that is to be put before this Court in an appeal under that paragraph. If that were appropriate, why stop there? Why not dispense with the Rules entirely and just imply or read in all procedures relating to an appeal under paragraph 172(3)(a.1)? Of course, this cannot be done and I reject the Appellant’s urging to do so.
[50] While paragraph 172(3)(a.1) must, to the extent possible, be construed and applied so as not to deprive the Appellant of the right to a fair hearing in accordance with the principles of fundamental justice, the interpretation of paragraph 172(3)(a.1) as containing a bare right of appeal does not occasion or otherwise result in a deprivation of the aforementioned right.
[51] It cannot be said that, apart from the Appellant’s assertions as to how paragraph 172(3)(a.1) ought to be interpreted, appeals to this Court under that provision would be lacking in procedural protections. The right to a fair hearing before this Court is safeguarded in the Rules and, more generally, in the principles of procedural fairness. This conclusion is reinforced by the order of Justice Sharlow in Humane Society 2013, which required under Rule 343(3), that all of the relevant documents that were considered by the Minister during the entire process from the audit to the Confirmation Decision be placed in the Appeal Book.
[52] I therefore conclude that the proposed interpretation of paragraph 172(3)(a.1) that was urged upon the Court at the hearing of the appeal is incorrect and I reject it.
Issue (b) was dealt with by the Court as follows:
[55] The Appellant asserts that [subsection 188.1(4)] must be interpreted such that if an amount can constitute an undue benefit, then the only avenue open to the Minister is to penalize the entity that has conferred the undue benefit. In other words, the Minister is precluded from issuing a NIR in circumstances in which it is open to the Minister to assess a penalty under subsection 188.1(4).
[56] In the instant circumstances, the Appellant argues that it was open to the Minister to assess a penalty under subsection 188.1(4) in relation to the amounts of the Appellant’s income that were paid to Mr. O’Sullivan as personal benefits. As a result, the Appellant argues that the Minister was required to proceed in that fashion and was precluded from pursuing the revocation of the Appellant’s status as a charitable organization.
[57] In response, the Minister offers the following quote from a CRA document entitled “CRA Summary Policy CSP-U02, Undue Benefits”:
A registered charity that contravenes or continues to contravene the Act could [in addition to the imposition of a penalty under subsection 188.1(4)] also have its registration revoked.
[58] This quotation does no more than summarize subsection 189(7), which neither party provided to the Court. That provision reads as follows:
189 (7) Without limiting the authority of the Minister to revoke the registration of a registered charity or registered Canadian amateur athletic association, the Minister may also at any time assess a taxpayer in respect of any amount that a taxpayer is liable to pay under this Part.
189 (7) Sans qu’il soit porté atteinte à son pouvoir de révoquer l’enregistrement d’un organisme de bienfaisance enregistré ou d’une association canadienne enregistrée de sport amateur, le ministre peut établir à l’égard d’un contribuable une cotisation concernant toute somme dont celui-ci est redevable en vertu de la présente partie.
[59] As previously noted, the definition of registered charity includes a charitable organization. Accordingly, it is my view that subsection 189(7) provides a complete answer to the Appellant’s assertions, which I reject.
Issue (c) was abandoned by the Appellant post-hearing. Issue (d) was dealt with by the Court in two parts. The first part related to whether it was reasonable to confirm revocation of the registration because the Appellant had provided personal benefits to Mr. O’Sullivan and failed to devote all of its resources to charitable activities:
[67] Throughout the process from the audit to the Confirmation Decision, the CRA maintained that the Appellant made payments for the personal benefit of Mr. O’Sullivan. Indeed, the Appellant admitted that in fact some portion of the approximately $251,500 of expense reimbursements provided to Mr. O’Sullivan was provided as personal benefits. While there was disagreement between the parties as to the actual amount of the personal benefits, there is no suggestion by the Appellant that the total of these personal benefits was de minimis.
[68] In my view, it was within a range of justifiable outcomes for the Appeals Directorate to conclude that the provision of personal benefits to Mr. O’Sullivan, of even the lower amount recognized by the Appellant, constituted serious non-compliance with the applicable provisions of the Act.
Finally, the issue of failure to keep proper books and records was quickly dealt with (with significant understatement by the Court in paragraph [79]):
[78] The Appellant’s submissions give the impression of a general view that everything Mr. O’Sullivan did was on behalf of the Appellant, whether eating with others, eating alone, or purchasing items at the LCBO and other establishments (see, for example, purchases made at La Senza Girl, Usana Canada, Beaches Cinemas, HMV, Silver City, the Albery Theatre London, and Last Minute.com). The record before this Court included Paypal receipts for various forms of memorabilia, other types of receipts marked with a brief notation purporting to denote the alleged nature of the expense (e.g. “WM” for Working Meal), and various credit card statements. The Appellant submitted that this was sufficient evidence of the expenses’ charitable nature and thus demonstrated that the Appellant kept adequate books and records.
[79] These submissions have not persuaded me that the Appellant’s records and books of account met the requirements of paragraph 230(2)(a).
As a consequence, the appeal was dismissed with costs.