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1 MILLER THOMSON LLP Barristers & Solicitors, Patent & Trade-Mark Agents CHARITIES & NOT FOR PROFIT NEWSLETTER April 2004 The Charities and Notfor-Profit Newsletter is published periodically by Miller Thomson LLP's Charities & Not-for-Profit Group as a service to our clients and the broader voluntary sector. We encourage you to forward the delivering this newsletter to anyone (internal or external to your organization) who might be interested. Complimentary subscriptions are available by contacting charitieseditor@ millerthomson.ca. Inside Miller Thomson Vancouver Seminar Leading Private Client Lawyer Joins Miller Thomson Miller Thomson Charities Lawyers Recognised as Leading Practitioners BC Court of Appeal Refuses to Impose Bylaws on BC Society CRA Gifts in Kind of Software and Website Design MILLER THOMSON VANCOUVER SEMINAR Miller Thomson LLP will be hosting a complimentary client seminar on the morning of May 19, 2004 at the Sutton Place Hotel in Vancouver. The seminar will include presenters from a number of our offices across Canada and will cover issues of interest to the voluntary sector such as recent tax changes for charities, corporate governance, the tax limitations on charities carrying on a business and new privacy developments. To be added to the invitation list, please contact Sandra Enticknap of our Vancouver office at senticknap@millerthomson.ca. LEADING PRIVATE CLIENT LAWYER JOINS MILLER THOMSON Miller Thomson LLP is pleased to announce that Martin J. Rochwerg has joined the firm as a partner in our Toronto office. Martin is named by LEXPERT as one of the most frequently recommended estate planning lawyers in the country. He is also a fellow of the American College of Trust and Estate Counsel, a Past President of the Estate Planning Council of Toronto and Past Chair of the Trust and Estates Section of the Canadian Bar Association (Ontario). As a member of Miller Thomson LLP's National Private Client Services, Tax and Charities Groups, Martin will continue to serve as counsel to Canadian and international businesses, individuals, families and charities, providing advice on Canadian and multi-jurisdictional tax planning, estate planning, business succession planning, wills and trusts, and philanthropy. He will also continue to contribute to the legal profession as a regular author, speaker and teacher. MILLER THOMSON CHARITIES LAWYERS RECOGNIZED AS LEADING PRACTITIONERS The 2004 Canadian Legal LEXPERT Directory introduced a new category for charity law specialists. Congratulations to Arthur Drache, C.M., Q.C., Susan Manwaring and Robert Hayhoe who are recognised in the directory as being among the nineteen leading Canadian charity and not-for-profit law practitioners. As well, Arthur Drache, Rosanne Rocchi and Martin Rochwerg are recognised as leaders in the related area of estate and personal tax planning / estate litigation. Court Approves Foundation s Request for a Total Return Investment Approach Liability of Clergy Malpractice Donations Challenged by Bankruptcy Trustees Around Miller Thomson

2 BC COURT OF APPEAL REFUSES TO IMPOSE BYLAWS ON BC SOCIETY Donald H. Risk Vancouver Catherine McGhie Vancouver Student-At-Law In early 2004, the BC Court of Appeal, in Erickson v. Luggi, considered the extent to which a corporation incorporated under the BC Society Act could have bylaws imposed upon it. The Court of Appeal reversed a lower court decision that crossed the line from judicial rectification into judicial interference. The decision is of interest in BC, since most BC charities and not-for-profit organizations are incorporated under the Society Act - the approach taken by the Court of Appeal may even be of some guidance in other provinces. The Erickson case began in the BC Supreme Court when members of the Carrier Sekani tribe brought a petition to remedy irregularities in the procedural affairs of the Carrier Sekani Tribal Council which was incorporated under the Society Act. In response to this petition, the chambers judge imposed amended by-laws on the Council. Relying on the court's jurisdiction under s. 85 of the Society Act to rectify irregularities that occur in the conduct of the affairs of a society, the judge declared immediately operative by-laws calling for the Annual General Meeting of the Council's members and the election of the Tribal Chief and Vice-Tribal Chief. The bylaws also provided for new notification and voting procedures in relation to the meeting and election. Describing the lower court's judgment as "ill-advised", the Court of Appeal held that s. 85 of the Society Act does not give the courts the power to amend a society's bylaws. A society's bylaws can only be amended by a special resolution of the members, in accordance with section 23 of the Society Act. The Court of Appeal determined that in situations such as the one before it, where there is an unwillingness on the part of those with due authority to call a meeting or where there are poorly-drafted bylaws, the appropriate remedy is to order the holding of the meeting and to give directions for those with a right to be heard at that meeting. However, the Court wrote, "that is as far as the matter can go." B.C. courts have been faced with situations similar to this in the past and have usually been guided by the society's bylaws when ordering rectification. The courts have only rarely "amended" bylaws, and then only to bring them into line with the Society Act - for example to ensure adherence to the statutory notice provisions. This decision serves to confirm that the purpose of s. 85 of the Society Act is simply to allow the judiciary to amend procedural defects in the affairs of a society. It does not purport to allow the court to amend substantive constating documents of a society. This judgment leaves unanswered many questions as to the scope of remedial actions that are now open to the court. Will the courts be able to impose secret ballots at members meetings or to draw up membership lists that are the subject of a dispute? Perhaps these measures would now be considered beyond the scope of judicial rectification. Despite these uncertainties, the decision is a welcome reminder that BC courts should be reluctant to exercise their remedial powers under s. 85 if the disputed issues can be resolved by the bylaws of a society, which, after all, the members have determined would govern the organization. While the corporate law applicable to charities and not-for-profit organizations outside of BC may differ, the Erickson decision certainly confirms the importance of considering bylaw provisions in detail prior to their implementation. It is always preferable for an organization's members to agree on sound corporate bylaw provisions before a dispute breaks out. 2

3 CRA ON GIFTS IN KIND OF SOFTWARE AND WEBSITE DESIGN Robert Hayhoe Toronto The recent Canada Revenue Agency Registered Charities Newsletter No. 18 includes an interesting discussion of gifts in kind. A portion of the discussion deals with the situations in which a registered charity should obtain professional valuation assistance and provides some recommendations on valuation. The discussion of valuation is a useful restatement of the Canada Revenue Agency's known approach. Newsletter No. 18 also contains a discussion of donations of software and of website design services. Simply put, a donation only meets the legal definition of a gift if it is a voluntary transfer of property. Donations of services are not gifts because services are not property. A software developer who develops software for a charity is providing a service to the charity as is a website designer who develops a website. It is therefore not possible for a charity to issue an official donation receipt for these services. However, the Canada Revenue Agency acknowledges that it could be possible to structure the website or software development as donations of intellectual property. Registered Charities Newsletter No. 18 indicates that the Income Tax Rulings Directorate is examining the issue and would like to receive comments by June 30, Even before the position of the Rulings Directorate is released, it is sometimes possible to structure what might otherwise be a donation of a service into a gift of intellectual property. However, each situation must be examined with care in order to ensure that the donation meets the legal requirements to be considered a gift. Miller Thomson lawyers have significant experience structuring gifts of intellectual property. COURT APPROVES FOUNDATION'S REQUEST FOR A "TOTAL RETURN" INVESTMENT APPROACH* Rachel Blumenfeld Toronto rblumenfeld@millerthomson.ca Many endowed foundations have felt the impact of low interest rates on their ability to meet their disbursement quota. By the time the private foundation set up under the terms of the 1958 will of Mary Elsworth Stillman took its disbursement quota problem to court late last year, its cumulative disbursement quota shortfall had reached $738, A "quick fix" - allowing the foundation to dip into capital to make up the shortfall - would not prevent the problem from reappearing in the next few years. Only an overhaul of the investment and distribution provisions of this foundation would prevent the problem from recurring. Under the will, Scotia Trust (the trustee), was instructed to pay half of the net annual income to each of two charities, the Toronto Aged Men's and Women's Homes and Community Living Ontario. There was no power to encroach on capital. Mrs. Stillman set out investment powers which, while fairly broad, contained restrictions which have hampered the ability of Scotia Trust to meet the disbursement quota in recent years. In her will, Mrs. Stillman directed the trustee not to invest in government, provincial, state or municipal bonds, encouraging instead investment in real estate and "sound established equities." Scotia Trust adopted an investment policy that adhered to Mrs. Stillman's wishes and, for many years, was able to protect the capital of the foundation. Scotia Trust and the charities could have applied to CRA to reduce the foundation's disbursement quota under subs (5) of the Income Tax Act. Alternatively, they could have applied to the Public Guardian and Trustee ( PGT ) under s. 13 of the Charities Accounting Act for authorization to encroach on capital to meet its current and future shortfalls. But the trust company and the charities went further and applied to the Ontario Court for an order that would essentially change the investment policy established in Mrs. Stillman's will allowing the foundation to adopt a "total return" investment and distribution policy. 3

4 A total return investment policy seeks to "achieve the best return in terms of income and capital gains without distinguishing between them." In his well-reasoned decision, Justice Cullity (previously a trust, charities and tax lawyer of considerable distinction) quoted at length the views of Prof. Williamson, who provided his opinion on the benefits of this type of investment concept for charitable foundations and endowments. An essential component of the concept is that "distributions to the charitable objects will be calculated as an appropriate percentage of the total return irrespective of their source in income or capital gains." The PGT did not consent to the order requested by Scotia Trust and the charities, requiring a full hearing of the matter, rather than a simpler (and cheaper) application to vary the terms of the trust under the Charities Accounting Act. While the PGT recognized the need to fix the current disbursement quota problem facing the foundation, and apparently did not object to allowing a distribution of capital to meet the disbursement quota, the PGT would not consent to the more broad remedy of modifying the investment scheme to a "total return" policy. It is difficult to discern the reasoning behind the PGT's objection, other than, perhaps discomfort on the part of the PGT to agree to something that may be viewed as a radical departure from the terms of the original trust. Justice Cullity relied on a broad view of the court's inherent jurisdiction to amend trusts under the cy près legal doctrine and approved the adoption (in principle) of the total return model for the foundation. He then considered the submission of the parties regarding the details of the plan and settled on a distribution rate of 4.25%, which may be adjusted with the consent of the PGT by way of an application under s. 13 of the Charities Accounting Act. Justice Cullity took note of a letter from Carl Juneau (then of the CRA) that provides charities with some comfort that they will not be de-registered for failure to meet their disbursement quota as a result of declining interest rates and directs charities to apply for a relief under subs (5). Scotia Trust was directed to make this request with respect to the accumulated shortfall. The Stillman case points to the importance of drafting the investment powers of a trust in terms that are sufficiently broad to permit trustees to modify a charity's investment policy to meet a changing investment climate and to include a distribution scheme that ensures that the trust can encroach on capital to meet its disbursement quota when necessary - without having to resort to a costly court application. Providing for this flexibility in the trust documents is even more important now that the 2004 Federal budget has announced new rules designed to alleviate some (but not all) of the disbursement quota problems faced by charities. *Based on a similar article by the author published in Canadian Not-for-Profit News. LIABILITY FOR CLERGY MALPRACTICE Mark Frederick Toronto mfrederick@millerthomson.ca There has been extensive U.S. litigation on the duty of clergy in the counselling and congregational discipline contexts. While there has been somewhat less Canadian jurisprudence, a recent decision provides guidance on whether a religious organization and its clergy can be held liable for damages inflicted in the course of investigating and dealing with sexual abuse by a member. The plaintiff in the recent Ontario decision in V.B. v. Cairns was raised as a child within a certain religious denomination. Her father molested her when she was between the ages of 11 and 15. At age 19, she disclosed this abuse to the Toronto branch of the faith's head office. An elder advised her to apply Biblical principles to resolve the matter, under which she would be required to confront her father and seek his repentance. An initial meeting took place at the family home among the plaintiff, her father and mother and two local elders, at which the plaintiff was required to describe to the elders the details of the abuse. At a second 4

5 meeting, which was held as a "judicial committee", the plaintiff was again required to recount her abuse, this time in front of three elders. The plaintiff commenced an action against the two elders who had been at the first meeting, as well as against the denomination and one of its advising elders, for negligence and breach of fiduciary duty. The plaintiff alleged that forcing her to go through two meetings to describe the abuse was traumatic, that the elders attempted to cover up the abuse and that they advised the plaintiff not to seek medical help or to report the abuse to secular authorities. All of this, she claimed, was the cause of ongoing psychological problems. Findings of Fact The Court found that the plaintiff's claims of fraudulent concealment by the elders were unfounded, as were the accusations that they told her not to seek medical help or to report the abuse to authorities. To the contrary, the Court found that the elders of the denomination had acted reasonably in both suggesting medical treatment and counselling to the plaintiff, and in encouraging and following up on reporting to the Children's Aid Society. However, the court found that the application of Scripture in convening the first meeting was not actually the proper action dictated by the abuse disclosure polices of the particular faith tradition in the context of such serious circumstances. The second meeting was found to be an internal discipline hearing and played little part in the subsequent tort analysis. Breach of Fiduciary Duty The court pre-empted the question of whether a fiduciary duty was actually owed by the two elders in favour of asking the question of whether it would be found violated if indeed it did exist. The worst behaviour of the elders was akin to simple negligence. This was not enough to constitute a breach of fiduciary duty, which would need to a stronger element of bad faith or betrayal of trust. Negligence Having found that the two elders present at the first meeting acted responsibly, the negligence claim was based on the internal doctrine of the faith concerning dispute resolution. Canadian courts, more so than their American counterparts, have held that freedom of religion is not absolute and have been willing to find clergy malpractice. Causation was found in that the first traumatic meeting, at which the victim was compelled to face her father, would not have taken place but for the suggestions of the church elders. The Court considered whether it would be reasonable for a parishioner to expect that a clergy member would exercise reasonable care in dispensing advice concerning sexual abuse to a congregation member, especially given the closeness of the faith community. While the standard of care expected was not that of a professional counsellor, it was foreseeable to a normal person that a meeting with her father would likely cause further harm to the plaintiff. The Court pondered whether the damage would be mitigated by the fact that the meeting was prescribed by the religion, which the adult plaintiff consensually followed. The finding was that in cases such as this, what appears to be voluntary consent is in fact informed by a power imbalance, here between the plaintiff and the church elders whom she was raised to obey unquestioningly. Additionally, the meeting she underwent was not even a correct application of the faith tradition's teachings, thus further weakening this defence. Damages The only defendant liable for damages was the denomination itself for its negligent advice. The plaintiff was a "crumbling skull" case on the basis that she likely would have suffered the majority of her psychological harm from the abuse itself as opposed to any subsequent advice, and that the denomination's negligence was merely a furthering factor. General damages were assessed at $5,000 plus costs. Analysis Religious organizations must be careful in undertaking to provide advice where pure psychological and/or psychiatric damages may have been occasioned to a victim. While we would like to think that a court would not punish good faith efforts of a religious organization to aid a member of the organization or even a member of the public, clearly such efforts will have to have a reasonable basis if liability for negligence is to be averted for harm that may result. Charities typically have an obligation to report to child welfare authorities or police any information they have 5

6 that leads them to believe a child is being abused. Many religious organizations have developed sexual abuse disclosure plans and policies to deal not only with clergy and volunteer abuse, but abuse in the wider community. The purposes of these plans and policies are to encourage a thoughtful and reasoned approach to dealing with these issues and to establish a proper and attainable standard that religious and charitable organizations can meet allowing them to provide truly useful help to victims in line with the organizations callings. Miller Thomson lawyers are experienced at drafting sexual abuse disclosure and prevention plans. We are also experts at defending religious denominations and clergy against abuse claims. DONATIONS CHALLENGED BY BANKRUPTCY TRUSTEES* Craig Mills Toronto cmills@millerthomson.ca It's the end of a long fundraising campaign. After a great deal of hard work, a charity has been able to raise a considerable amount of money that it now plans to put to good use. After allocating the charity's budget for the next year, the charity receives a letter from the trustee in bankruptcy of a long-time donor. The letter advises that not only has the donor made an assignment in bankruptcy, it demands the return of the donor's sizeable donation for this past year. Should the charity be concerned? The answer depends upon how and when the donation was made. When an individual makes a voluntary assignment into bankruptcy, all of the individual's assets automatically vest in his or her trustee in bankruptcy. Once appointed, the trustee's main goal is to ensure the equitable distribution of assets among all entitled creditors. In some cases, where a bankrupt has attempted to reduce his or her assets to the prejudice of his or her creditors, a trustee may need to employ the mechanisms included under the Bankruptcy and Insolvency Act ("BIA") to address the debtor's wrongdoing. One mechanism available to a trustee is the ability to challenge a gift made by a bankrupt to a stranger (such as a charity) as a "settlement." Section 91 of the BIA provides that any settlement (or transfer) of property made within one year prior to the donor's bankruptcy is void against a trustee in bankruptcy. Further, if the settlement (or transfer) of property occurred within five years of the date of bankruptcy, it is void against a trustee in bankruptcy if the trustee in bankruptcy can establish that the donor required the property to pay his or her debts or that the debtor's interest in the property did not pass on the execution of the settlement. On the other hand, a transfer made in good faith and for valuable consideration would not be caught by these provisions. Therefore, if a trustee in bankruptcy is able to establish that the transaction is a settlement, the property may be recovered from the recipient by the trustee for the benefit of the bankrupt's creditors. The obvious question is what is meant by the term "settlement"? A "settlement" is broadly defined in the BIA to include gratuitous transfers or gifts. Although a donation appears to fall within this definition, a 2002 decision of the Ontario Court of Appeal in Royal Bank v. Whalley has made it clear that the analysis does not end here. In Whalley, a husband received a large inheritance that he subsequently transferred to his wife. Approximately 20 months later, the husband made an assignment in bankruptcy. Subsequently, the Royal Bank of Canada commenced proceedings to set aside the transfer of the inheritance to his wife using the settlement provisions of the BIA. The Ontario Court of Appeal concluded that in order for the transaction to be considered a settlement, there must be evidence that that the donor intended that the property be retained for benefit of the recipient in its original form or in a form that can be traced. In other words, a gratuitous transfer of property is only a settlement if the donor intended that that the property be retained for the donee's benefit. On the other hand, if the donor intends that the property will not be retained by the donee, but used as the donee sees fit, it is a gift and cannot be attacked as a settlement. Although this requirement does not form part of the statutory definition of settlement, Canadian courts have repeatedly applied this restrictive gloss upon the definition of settlement. As stated in Whalley, the rationale behind this restriction is to avoid the unintended consequences of an expansive definition. For instance, 6

7 without such a restriction, family members could be forced to refund money already spent on their living expenses. On the basis of the decision of the Ontario Court of Appeal in Whalley, it is clear that a settlement can be distinguished from a gift by examining the intention of the disposition. If the transfer of property is made with the intention that it be used for the donee's benefit either in its original or a traceable form, it is a settlement. On the other hand, if the property is transferred without any restrictions on how it is to be used, it is a gift and cannot be challenged as a settlement. Under this framework, most donations to a charity would be immune from attack by a trustee in bankruptcy using the settlement provisions of the BIA. As most gifts of money or property to a charity are intended to be spent or used as the charity sees fit, the intention requirement could not be established by a trustee in bankruptcy in such cases. That said, not all donations will be protected. If a donor has made a donation imposing restrictions upon how the money is to be used, then it may be considered to be a settlement and thus available to the bankrupt's creditors. Accordingly, charities should be careful when dealing with gifts of money accompanied by specific instructions from a donor. If the donor has made it clear that the subject matter of the donation should be kept for the benefit of the charity in its original or a traceable form, a charity should be mindful of this possibility. In such circumstances, it may be prudent for a charity to consider taking certain precautions, such as maintaining a reserve, to ensure that if it is presented with such a claim by a trustee in bankruptcy, the charity has a level of protection. On a risk management basis, a charity which receives a significant gift from a donor who is known to be in financial difficulty should consider obtaining specific legal advice in order to ensure that the gift cannot be challenged in bankruptcy. A charity which is contacted by a bankruptcy trustee should contact its lawyer immediately. Miller Thomson s insolvency lawyers have specific experience advising and defending charities against these claims. * Based upon a similar article published in the Lawyers Weekly WHAT'S HAPPENING AROUND MILLER THOMSON LLP Robert Hayhoe published "The End of Charitable Donation Tax Shelters in Canada?" in the April issue of The Exempt Organization Tax Review, a US legal journal. Susan Manwaring (with William Hawley) presented on "Charitable Remainder Trusts Update", Arthur Drache presented on "Related Businesses: What's Okay and What's Not" and Robert Hayhoe presented on "Operating Outside of Canada: What's New, What's Right and What's Wrong," at the 2nd National Symposium on Charity Law "What's New and What's Coming," sponsored by the Canadian Bar Association in Toronto in April. Miller Thomson was a Plenary Sponsor of the 11th Annual National Conference of the Canadian Association of Gift Planners for which Rachel Blumenfeld of our Toronto office was a member of the Conference Planning Committee. Robert Hayhoe presented on "Fundraising Across the 49th Parallel", Rachel Blumenfeld presented (with Jasmine Sweatman and Mary MacGregor) on "Mediating Estate Disputes - Donor Capacity" and Susan Manwaring presented (with Malcolm Burrows) as part of the "Government Relations Open Forum." Robert Hayhoe and Susan Manwaring published "Recent Developments in Charities / Not-for-Profit Law" in the 2004 Canadian Legal LEXPERT Directory The analysis of the 2004 Federal Budget prepared by Susan Manwaring (with Malcom Burrows) for the Canadian Association of Gift Planners was published in April in the Canadian FundRaiser as "Implications of Budget Provisions for Voluntary Sector". Robert Hayhoe published "An Updated Introduction to the Taxation of Non-Profit Organizations" in The Philanthropist in April. Arthur Drache continues as editor of Carswell's monthly Canadian Not-for-Profit News. The April issue contained articles by him entitled "Senate Committee Studies Gifting Policies," "Major Art Donation Decision," "Humanists Persuade Charities Directorate," "Revised Finance Proposals," "Can a Donation Be Too Big?," 7

8 "Arts Community Owed Much to Onley" and "The Care and Feeding of Donors." Rachel Blumenfeld also contributed "Ontario Court Approves "Total Return" Approach." Robert Hayhoe published "Highlights of the 2004 federal budget as it affects charities". Rachel Blumenfeld presented on "Trusts: A valuable tool for estate planning" at a Peel Institute seminar in late March. Jennifer Babe was a Co-Chair of the Ontario Bar Association's Privacy for the Business Lawyer seminar in mid- April at which Rachel Blumenfeld presented on "We Are a Small Charity. Surely This Privacy Stuff Does Not Apply to Us?" Rosanne Kyle and Katherine Xilinas of our Vancouver office published an article, "Income Tax Clarification on Band and Municipal Commonality" in the Lawyers Weekly in April. The article dealt with the qualified donne status of native bands. Sandra Enticknap presented Tips and Traps in Estate and Gift Planning to the Heart and Stroke Foundation of B.C. and Yukon and the Canadian Diabetes Society as part of their Health and Wealth series. The Health portion was presented by Dr. Brian Rodrigues on the topic of Diabetes, Obesity and Heart Disease. MILLER THOMSON LLP CHARITIES & NOT-FOR-PROFIT GROUP Toronto/Markham Jennifer E. Babe Alan Belaiche Rachel L. Blumenfeld Arthur B.C. Drache, Q.C., C.M Mark R. Frederick Kathryn M. Frelick Robert J. Fuller, Q.C Robert B. Hayhoe Hugh M. Kelly, Q.C Jacqueline L. King Peter D. Lauwers Susan M. Manwaring Rosanne T. Rocchi Brenda Taylor (Corp. Services) Michael J. Wren Vancouver Sandra L. Enticknap Martin N. Gifford Diana Haynes (Corp. Services) Alan A. Hobkirk Eve C. Munro Donald H. Risk Calgary William J. Fowlis Sandra M. Mah Gregory P. Shannon Edmonton Bruce N. Geiger Dragana Sanchez-Glowicki Waterloo-Wellington Frank O. Brewster Stephen R. Cameron Teresa Douma William R. Greenwood John J. Griggs Thomas P. Jutzi J. Jamieson K. Martin Richard G. Meunier, Q.C Robin-Lee A. Norris Note: This newsletter is provided as an information service to our clients and is a summary of current legal issues. These articles are not meant as legal opinions and readers are cautioned not to act on information provided in this newsletter without seeking specific legal advice with respect to their unique circumstances. Miller Thomson LLP uses your contact information to send you information on legal topics that may be of interest to you. It does not share your personal information outside the firm, except with subcontractors who have agreed to abide by its privacy policy and other rules. 8