Charity Business Planning


Charity Business Planning

How to operate a business while remaining on-side CRA requirements and tax law

Article by Jonathan Wright. Click here for homepage.

Phone:   604.678.4459


Your charity’s story likely sounds a little like this. You’ve begun with energy and enthusiasm. Goals are set and milestones reached one by one, and you realize it might be time to grow.

And then a problem. More often than not, while the dreams expand, the budget more or less remains the same. How then might a charity fund the next part of its journey?

One increasingly common answer is to use business to bridge this gap. A common belief among charities is that income earned and used for charitable ends makes the business activity permissible, but unfortunately, this is not the case. Done right, operating a business is fully permissible under tax law and Canada Revenue Agency (“CRA”) requirements. Done wrong and the risks, including penalties and even revocation, will outweigh the benefits.

This note discusses some of the more important aspects of how a charity might avoid common missteps in conducting its business and stay on-side CRA requirements and tax law.


First, we ask whether the activity is a business at all. Not all income-generating activities are businesses at law. Some are even charitable. The key characteristic of a charitable income-earning activity is that it retains the elements of altruism and public benefit. The charity might offer a service that is otherwise unavailable to the public, or set fees for the services according to charitable rather than market objectives.

In-depth discussion of these is outside the scope of this note. For now, let us assume the activity is a business.

Related business

Under the Income Tax Act (the “ITA”) and CRA policy, a charity can only operate a business if it is a “related business”. There are two types of related businesses. The first is a business that is 90% or more run by volunteers (which is straightforward and not considered in detail here). The second is one “linked” and “subordinate” to a charity’s purposes, discussed below.

Linked to a charity’s purposes

The key question here is whether the business activity is integrated in action and philosophy with the purposes and operations of the charity. The CRA gives four types of business which would be considered linked to a charity’s purpose. In paraphrase, these are:

(a)        A usual and necessary concomitant of charitable programs, this being business activity that supplements charitable programs.

(b)        An off-shoot of the charity’s charitable programs, occurring when a charity creates an asset in the course of its charitable programs that it then may bring to market.

(c)        A use of the charity’s excess capacity, arising when a charity uses its assets to gain income in periods when they are not being used to their full capacity.

(d)        Sale of items that promote the charity or its objects, including the sale of charity-branded goods, like mugs or t-shirts.

Subordinate to a charity’s purposes

A business will be considered subordinate to a charity’s purposes if it is not a non-charitable purpose of the organization in its own right.

The CRA sets out four categories of factors it considers in the question of whether a business is subordinate and subservient to a charity’s purposes.

(a)        The activity receives a minor portion of the charity’s resources.

(b)        The activity is integrated into the charity’s operations.

(c)        The charity’s charitable goals continue to dominate its decision-making.

(d)        The charity continues to operate for exclusively charitable purposes.

The focus of these questions is whether the charity has strayed from its charitable roots. Important follow-up questions include whether the charity’s physical and human resources are taken up by the business, whether the business is stand-alone or integrated into the charity’s operations, whether the activity could operate outside the charity and whether decisions for the charity have strayed from its charitable purposes toward a profit motive.

Staying on-side

The question of whether an activity is linked to a charity’s purposes can be complex. Businesses run by a charities are rarely so straightforward as a hospital parking lot or the sale of crops grown on a heritage farm—two examples used by the CRA as related businesses.

For whether the activity is subordinate to a charity’s purposes, no single category or factor will be decisive. A charity can miss requirements set out above and the activity may still remain subordinate. However, the analysis has moving parts which will depend on the circumstances of the particular charity.

Finally, even where a business is off-side, a charity may still operate it indirectly through a wholly-owned for-profit company. The company may then donate the proceeds from the business and receive tax credits for up to 75% of its income.

If your charity is considering starting a business or has already begun such an activity and is concerned as to whether it is on-side tax law and CRA policy, please do not hesitate to contact the author at or 604.678.4459, or visit our website at


Forgive My Intercorporate Debt


Forgive My Intercorporate Debt

Article by Jonathan Wright. Click here for homepage.

Phone:   604.678.4459


Debt between related companies is commonplace. SubCo needs money to fund a new venture, so ParentCo lends the capital. SisterCo has an expense arising which is paid from BrotherCo’s bank account and accredited by the company bookkeeper as a loan.

In dealing with intercorporate debt, there’s a tax issue that’s often overlooked: what happens when debt is forgiven? This note tackles that issue, summarizing some of the factors to be considered and shedding light on the problems that might result.


The debt forgiveness provisions in the Income Tax Act (the “ITA”) apply to “commercial obligations” that are “settled”. Commercial obligations includes a debt from one entity to another where the debtor used the money for the purpose of earning income. These debts are “settled”, among other circumstances, when the debt is cancelled.


The tax consequences arise on the amount forgiven by the lender. This is the lesser of the original loan and the principal remaining, minus anything paid by the debtor in exchange for cancelling the debt.

The forgiven amount is applied first to reduce certain tax attributes on the assets of the debtor. For example, it first reduces its non-capital losses. These are losses which might otherwise have been able to reduce the future income, and thus the tax, of the debtor company.

When these are used up, the forgiven amount is applied next to reduce allowable business investment losses and capital losses, undepreciated capital cost balances, cumulative eligible capital amounts, and so on.

Once these are eliminated, half of the remaining balance is included in the income of the debtor, turning an otherwise innocent-looking transaction among related companies into a surprise tax bill.


Fortunately, there is some relief available.

One avenue arises where a debtor is insolvent. There is an ITA provision which permits a deduction from the income inclusion discussed earlier. This deduction is equal to the amount of the income inclusion minus two times the fair market value of the net assets of the debtor. If the net value of the assets is nil, then the deduction will be equal to the inclusion and no tax will arise.

Another option is to transfer the tax owing to related company that qualifies under the rules. For this to apply, the related company has to agree to the transfer.

The final method is to claim a reserve, allowing the income inclusion to be arise over five years instead of all at once.


There are further issues around debt settlement that are beyond the scope of this note. For example, unless strict requirements are met, the loss to the lender company on the debt settlement may be denied. This kind of uneven tax treatment, with tax issues to one entity and no benefit to the other, can be avoided with careful tax planning prior to entering into a debt situation.

If you are looking for tax advice on intercorporate debt or other matters relating to your business, please do not hesitate to contact the author at or 604.678.4459, or visit our homepage at


This Cross-Border Business


This Cross-Border Business

Article by Jonathan Wright. Click here for homepage.

Phone:   604.678.4459


So your business is looking to Canada. Maybe your product is on every American desk and you’re in search of a new market. Perhaps you’re eyeing Canadian engineering talent, or you might simply want to take advantage of our lower corporate tax rates.

Whatever the reason, the structure you choose when entering into Canada matters from a tax perspective, and a little foresight can bring substantial benefits. In this note, my purpose is to provide some general ideas on how your northward expansion might best be accomplished from a tax perspective.

No Limits

There are many options available, but I focus here on two: the Unlimited Liability Company (“ULC”) and the more typical limited company (a “Limited Company”). In Canada both are treated as their own company and are taxed on their own income or losses. The difference here is their treatment under US tax law.

See Through Me

In the United States, though tax will arise and be payable in a Limited Company, tax liability for a ULC (and, more importantly, tax losses incurred by the ULC) flows through to the parent.

Because of its flow-through nature, the ULC is popular for US businesses coming into Canada. Available for incorporation in British Columbia, Alberta and Nova Scotia, these corporations are treated as fiscally transparent under US tax law. In effect, they are treated like a branch of their US parent company.

The benefit here is the flow-through of losses. For a profitable US company expanding into Canada, the ability to use the losses incurred building its Canadian arm against its US corporate income can result in very significant tax savings. Then, once the Canadian business is profitable, the US parent is given foreign tax credits for tax paid in Canada.

Cash and Credits

Another option is the Limited Company. Neither Canadian nor US tax law permits the flow-through of income or losses from these entities. However, there are circumstances where this form is preferable to a ULC, the most common arising in circumstances where the new entity does not expect to incur any losses.

One structure where losses are unlikely to arise occurs when the US parent company sets up a Canadian business to develop its intellectual property. In this circumstance, the US parent would likely pay a service fee, resulting in income in the Canadian subsidiary greater than its expenses.

A Limited Company might be set up this way in order to take advantage of the Canadian Scientific Research and Experimental Development (“SRED”) credits. Broadly speaking, these are tax incentives available to Canadian businesses conducting research and development in Canada. Though more attractive credits are available for companies controlled by Canadians, these are available even for companies owned by foreign parents. And in these circumstances, the Limited Company would have income immediately against which it can use the SRED credits.

More to Consider

There are other factors which your tax professional will consider as you weigh your options. For example, the unlimited liability inherent to ULCs may be an issue. There will also be questions about the debt to capital ratio, and the best method of withdrawing funds from the Canadian subsidiary. Though relatively straightforward for a Limited Company, tax professionals in Canada have had to devise additional steps for withdrawing funds from a ULC in order to obtain the same tax benefits.

If you are considering whether coming to Canada makes sense for your business or are looking for tax advice on the ideal structure for doing so, please do not hesitate to contact the author at or 604.678.4459, or visit our homepage at


Hidden Tax Savings (Part 2) – Selling Real Estate


Hidden Tax Savings (Part 2) – Selling Real Estate

Article by Jonathan Wright. Click here for homepage.

Phone:   604.678.4459


Selling a business or real estate can result in a substantial amount of tax. This burden can be particularly large if the real estate is in a rapidly-growing market like Vancouver or your business was built from scratch. Fortunately, there are some little-known rules in the Income Tax Act that can defer tax where you intend on reinvesting the proceeds of sale in a replacement property.

This update has been released in two parts. Last week’s discussed the small business rollover in section 44.1. This week we address the rollover on the sale of real estate found in section 44.

Old Property

These rules apply to different types of property, but we focus here on the sale of old and purchase of new real estate.

For a purchase to qualify under the section 44 replacement property rules, the real estate sold (the “Old Property”) must meet certain requirements. There are exceptions, but generally speaking the Old Property must be a “former business property”. For this to apply, the property must be used primarily for the purpose of earning income from a business. In other words, vacant or pre-development land won’t qualify. In addition, property used in businesses earning rental income is specifically excluded.

Replacement Property

There are also requirements for the new, replacement property. These are that it must be acquired and used by the taxpayer to replace the Old Property and for the same or similar purpose to which the taxpayer put that property.

To meet the first part of this test the property must actually be acquired as a replacement. In other words, there must be a connection between the sale and acquisition.

To meet the second part, the use for both properties must be the same. For example, if the Old Property was the clinic where you practiced psychiatry, the replacement property must fill this same role in your business.

This requirement must be satisfied within a year from December 31 of the year you sold the property. The Canada Revenue Agency and the courts have made it clear that the property must actually be used within the time period in accordance with the intended purpose. It cannot be purchased within the time period and then simply held for a later use, even if that intended use qualifies.

Please note that there are exceptions to some of these requirements for involuntary dispositions (such as government appropriation) and that, for these tests, qualifying use by related parties will satisfy the requirements.

Tax Deferral

Where the requirements above are met, the capital gain (and resulting tax) is effectively rolled from the Old Property to the replacement, avoiding tax for the time being and thereby increasing the cash that can be reinvested.

If you are looking for tax advice about this real estate rollover or other tax planning opportunities for you or your business, please do not hesitate to contact the author at or 604.678.4459 to book a consultation, or visit our website at


Hidden Tax Savings (Part 1) – Selling Shares


Hidden Tax Savings (Part 1) – Selling Shares

Article by Jonathan Wright. Click here for homepage.

Phone:   604.678.4459


Selling a business or real estate can result in a substantial amount of tax. This burden can be particularly large if the real estate is in a rapidly-growing market like Vancouver or your business was built from scratch. Fortunately, there are some little-known rules in the Income Tax Act that may help defer tax where you intend on reinvesting the proceeds of sale in some replacement property.

This update will be released in two parts. Next week’s will address the sale of real estate. In this update we discuss the tax deferral available through the section 44.1 small business rollover.

Share Sale

This provision is designed less for the retiring business owner than for the serial entrepreneur, selling one business and buying another within a relatively short time frame. For the relief to apply, the taxpayer and the shares must meet a number of conditions.

First, the taxpayer must be an individual (i.e. not a holding company) selling the shares of an eligible small business corporation (an “ESBC”).

To paraphrase, an ESBC share is a common share of a Canadian-controlled private corporation the assets of which are used principally in an active business carried on primarily in Canada. There are size limits for the company which most small businesses will meet easily. In addition, certain corporations are excluded from being ESBCs, including professional corporations (like an incorporated doctor or lawyer), corporations carrying on a leasing or rental business or corporations where more than 50% of their value is derived from real estate.

If the shares sold otherwise qualify, there is a further requirement for the ownership period. With certain exceptions, these shares must be owned by the person selling them for at least 185 days.

Share Purchase

The last requirement is that the new investment be made another ESBC. The purchase of these shares must be finalized within 120 days after the end of the year in which the original sale was undertaken.

Tax Deferral

Where all the requirements are met, the capital gain (and resulting tax) is effectively rolled from the shares of the first company to the second, avoiding tax for the time being and thereby increasing the amount that can be reinvested in your new venture.

If you are looking for tax advice about the small business rollover or other tax planning opportunities for you or your business, please do not hesitate to contact the author at or 604.678.4459 to book a consultation, or visit our website at


Time to Incorporate?


Time to Incorporate?

Article by Jonathan Wright. Click here for homepage.

Phone:   604.678.4459


Most businesses reach a point where this becomes an important question: whether or not it’s time to incorporate. There are costs involved but the tax and legal benefits can be significant for business-owners and even professionals like real estate agents, dentists and doctors.

The purpose of this note is to tease out some of the benefits of incorporation to see whether it makes sense for you. Read on, or (if your time is short) click here for a brief, one-page chart on the benefits of incorporation, holding companies and income splitting.

Defer tax

At the time of writing, the small business rate for corporations is 13.5%. Compare that to the top tax rate for individuals of 47.7% and you can see why incorporating might make sense.

To be clear, the government receives its share. When a shareholder takes her dividend from the corporation, she pays tax on the dividend essentially equal to her individual marginal rate minus the tax already paid by the company. As a result, if a person is taking out of her business all the income it makes in the year (say, to pay down her mortgage), tax deferral won’t provide much benefit yet. However, if the shareholder is able to hold off on receiving the cash, perhaps reinvesting profits back into the business, this tax can be endlessly and wonderfully deferred.

The small business rate isn’t available for all corporations. However, carry on an active business (providing services say, or selling products) or have sufficient employees in your passive business and this rate should be available to you.

Limited liability

A corporation is a separate entity—another “person” in legal speak.

This means that if the corporation is carrying on a business and runs into a problem (your widget injures a customer or a bank calls in a loan) the liability stops at the corporate level. The creditor might sue for the company’s assets but it won’t have access to those of the shareholder, like her home or cottage. There are exceptions to this (fraud being a glaring example or when a shareholder guarantees company debt), but the general rule is that liability doesn’t pass through the corporation.

Income splitting

This might be the most significant benefit of incorporation currently available and can be combined for even better results with a family trust.

Income splitting with a spouse as an employee is available before incorporation, but pay must be reasonable. If a business-owner pays her spouse $200,000 to do bookkeeping for five hours a month, this may be flagged by the CRA and the deduction disallowed.

On the other hand, income splitting through a company isn’t subject to reasonability requirements. If the company is set up properly the company can issue dividends to whomever the director chooses, including spouses and children over 18, and in whatever amounts.

Add a family trust into the mix and you can have one individual in full control of the company, while at the same time being able to income split as desired. This control keeps the equity of the company in the hands of the trustee, protecting it from potential creditors like the divorced spouse of a child.

Lifetime capital gains exemption

I’ve covered this area in more detail in an article I wrote recently. In brief, every Canadian has a lifetime capital gains exemption which is indexed to inflation ($824,176 at the time of writing) on the sale of shares of a corporation. There are certain requirements that need to be met but, if satisfied, the result is that on the sale of your company, $824,176 in gains is exempt.

Bring in other shareholders, whether directly or by way of trust, and this exemption can be multiplied. For example, a company owned solely by a trust with four adult beneficiaries would have an exemption of nearly $3.3 million.

Professional corporations

Certain professionals (including lawyers, doctors, dentists and real estate agents) are permitted to incorporate under their professional legislation and thus have access to the benefits above. However, these professional corporations must meet legislated standards, including requirements with regard to incorporation documentation and restrictions on shareholding. We here at Wright Legal have experience with these requirements and dealing with the various governing bodies and would be happy to assist you as necessary.

Time to incorporate?

If you are considering whether incorporation makes sense for you or are looking for tax advice on whether setting up a trust or holding company will be beneficial for your business, please do not hesitate to contact the author at or 604.678.4459, or visit our main page at


Voluntary Disclosures


Voluntary Disclosures

Article by Jonathan Wright. Click here for homepage.

Phone:   604.678.4459


Tax is complicated. Mistakes happen, even to professionals.

Unfortunately, these mistakes, especially ones carried on over a number of years, can be expensive. In recovering a tax debt, the CRA can go after a person’s assets and even his or her home. Even in circumstances where no tax was owing (such as a missed form) penalties can mount up.

Fortunately, the CRA has a program for individuals, trusts and businesses to voluntarily disclose their tax issues and details and then receive a waiver of penalties and sometimes a reduction in interest.

I wrote about this briefly in an earlier article and now turn to it in greater detail.

Voluntary Disclosures

The program is called the “Voluntary Disclosures” program. The process works as it sounds. A taxpayer explains the details of the overlooked tax matter or delinquent tax issue and provides the missing returns or forms which were required. If the CRA approves the disclosure, they waive all penalties and sometimes even interest.

There are four requirements for a successful voluntary disclosure.

1.         It must be voluntary.

In brief, this means that the CRA hasn’t begun any action against the taxpayer which already has or might in the future uncover the tax issues being disclosed. For example, a disclosure won’t be voluntary if a company under audit for unreported income discloses that unreported income.

2.         It must be complete.

The CRA wants you to come in from the cold. No tax issues can be withheld. If a deliberately-suppressed tax issue comes up during the course of the disclosure, this issue could put the entire disclosure in jeopardy.

3.         It must involve a penalty.

This is satisfied in most circumstances where tax issues arise. If you don’t report income or file a form you are required to file, this will involve a penalty.

4.         It must be one year past due.

In other words, the issue occurred in 2015 or before. If the issue began more than a year ago and continues to this day, the ongoing issue may still be included.

Disclosure Process

The process begins with hiring a tax practitioner, such as Wright Legal, to gather your information and put together your explanation for non-compliance. For most of my clients the reason for the tax issue simply comes down to a misunderstanding of what was required.

The tax practitioner will then work closely with your accountant to put together the returns or forms that should have been filed. If you don’t have an accountant, we would be happy to provide you with the contact information for a number of accountants we trust.

You can proceed either on a no-names basis or provide your name. In order to qualify you eventually need to provide your name, so we only proceed on a no-names basis if you still need time to put together materials to make an adequate disclosure.

If you would like to come in for a consultation on your tax matters, or are wondering about tax planning opportunities for you personally or for your business, please do not hesitate to contact the author at or 604.678.4459, or visit our website at


Estates, Probate Fees and Alter Ego Trusts


Estates, Probate Fees and Alter Ego Trusts

Article by Jonathan Wright. Click here for homepage.

Phone:   604.678.4459


Probate fees, at 1.4% of the value of an estate, can be a significant cost for the beneficiaries receiving assets under a will. The good news is that with some simple planning, they can be avoided.

Probate fees?

Though labelled as a fee, probate fees in provinces like British Columbia and Ontario are actually not fees at all. They’re a tax on the value of a deceased’s property located in BC.

The motivation behind the fee is a government service. The probate registry ensures that the estate representative is the correct one, safeguards the estate from fraudulent claims and ensures that the estate is protected and that the assets are correctly distributed according to the wishes of the deceased.

However, as the Supreme Court of Canada has made clear, these “fees” don’t correspond to the amount of work necessary to accomplish the service. Take an estate with a home as the sole asset. If that home is worth $1,500,000, probate will cost $21,000. Double the value of the home and the fees are $42,000, without any extra work for the folks at the probate registry.

Avoiding probate

There are a number of ways to avoid probate, but this article focuses on joint partner and alter ego trusts—typically the best option available for avoiding probate on principal residences. If you or your spouse are older than 65, this option will be available to you.

Joint partner trusts are for couples and alter ego trusts for solo individuals. For these trusts, while the couple or individual are alive they can put property in and take property out of trust, and only they may access trust assets or funds.

Once the individual or the last spouse passes away, these properties then pass to the chosen beneficiaries. Since the assets don’t pass through the estate, the result is an avoidance of probate fees on these assets.

Joint partner and alter ego trusts

These trusts are more flexible than most. They can remain in existence up to and even beyond the lives of the individual and his or her spouse, perhaps in order to care for a young child or a disabled family member. Also, though tax is payable on the transfer of assets into most trusts, for these, assets roll in at cost, without tax owing.

Assets typically included are principal residences and vacation homes, but I often also see investment portfolios and shares of a family business put in trust. Given that the a person’s most valuable asset might be the shares of a family business, their inclusion is a significant benefit.

Since trusts can claim principal residences in respect of their beneficiaries, the principal residence exemption continues even while the home is in trust. In addition, property transfer tax on the transfer to the trust can typically be deferred by the use of a bare trust.

One last benefit is some protection from wills variation legislation. Especially if you are planning on leaving a child, spouse or other dependant out of your will, it is possible that a claimant could begin proceedings to obtain a part of your estate. Putting your assets in a joint partner or alter ego trust may reduce, if not eliminate, potential wills variation claims against your estate.

Is it right for you?

The value threshold when these trusts become worthwhile will vary from client to client. I typically recommend these trusts when estate assets are valued around $2,000,000. At this amount, savings to beneficiaries are in the amount of $28,000.

If you are interested in learning more about options for your estate, including joint partner and alter ego trusts, or wish to receive advice on this or other tax or trust matters, please do not hesitate to contact the author at or 604.678.4459, or visit our website at


Reducing tax on the sale of your business


Reducing tax on the sale of your business

The sale of a privately held company can result in a sizable amount of tax. The greater the growth, the more significant the pain from a tax perspective, as the government takes a larger cut of the purchase price. But with a little foresight and tax planning, this cut can be reduced.

If you're planning on selling your business at some point in the future this article I wrote for Business In Vancouver may give you an idea or two on how you might save on tax.


What NPOs Should Know


What NPOs Should Know

Last week we addressed some of the legal pitfalls that charities might run into. This week we turn our attention to pitfalls for non-profit organizations (“NPOs”) and to one crucial way to avoid legal conflict often overlooked by both charities and NPOs.

Restrictions on use of Resources

We have already discussed the use of resources for charities, but this is also important for NPOs. The law in this area for NPOs is less strict, and there is more flexibility as to how resources might be used. But one important restriction is ensuring that none of the assets of the NPO be made available for the personal benefit of its members.

Problems arise in situations where the boundary between the non-profit activity and the welfare of its members is blurred. One extreme example from a CRA note involved a commune where the members shared their resources, using an NPO as an intermediary. The NPO earned interest income and then used this income to pay medical and living costs for the members. This is a clear example of resources being made available for the personal benefit of the members of the NPO.

A less extreme example, which arises for strata corporations, is that some might use a part of their income to reduce strata fees. This would also be a personal benefit to members.

Personal benefit can be even more subtle than this. Say a member of an NPO, who runs a contracting business, controls that NPO. If he were to use his contracting company to perform tasks for the NPO at above market rates, this would be a personal benefit to the member. Another example might be an NPO buying a recreational property and treating it as a private condo for members.

What is not an issue are things such as wages to employees or market value fees for services. Even if the employee or contractor is a member of the NPO, this is fine. Instead, what the law is meant to catch are distributions or other private benefits from the NPO.

Revenue Generation

This area might be the most fraught for NPOs.

Though the term “non-profit” is in the NPO name, this should not be taken to say that an NPO cannot run a profitable activity. This courts have said definitively that, within certain boundaries, an NPO may indeed make profit. The issues arise primarily in those situations where profit becomes a purpose in and of itself.

It is not uncommon that an NPO might devise some source of revenue as a way of sustaining its non-profit activities. Often the rationale justifying the revenue generation is that it should be acceptable because all the profit is used for a non-profit purpose and thus the ends (funds accruing to a good purpose) justify the profit-generating means.

Unfortunately, this is unacceptable. As a rule of thumb, the CRA has said that if an NPO cannot undertake an impugned “non-profit” activity without earning profit, then the NPO has a profit purpose, putting the NPO offside ITA requirements, potentially resulting in the revocation of its NPO status.

One issue that comes up is where an NPO has funds as a reserve. The NPO might have accumulated it for the purpose of saving for a capital improvement or because an expense arises on a regular basis. Meanwhile, the cash might be invested in securities and be earning income.

The CRA has said that large reserves or retained earnings can put an NPO offside the requirements of the ITA, especially if it is earning significant amounts of income on these reserves. Accordingly, it is important in these circumstances for the NPO to consider the size of the reserve necessary for its non-profit activities and maintain it at that level accordingly.

The unfortunate result is that NPOs cannot be self-sustaining. This is an interesting policy choice made by our government and, with the rise of social enterprise blurring the lines between business and societal benefit, one might wonder whether this will one day change.

Importance of Documentation

Finally, we turn to a topic equally crucial for both charities and NPOs. Last week we discussed the importance of agreements when a charity hires an intermediary. However, documentation is important across the board.

For example, when an organization hires a person or organization, having an agreement sets its terms. More than anything, it acts as insurance. The parties return to the agreement in times of confusion, and when conflict arises, the agreement determines the result.

Another issue that can happen for charities and NPOs is that decisions might be made without proper documentation. A board might convene to make a major decision, but not draft the minutes or the resolution approving the action. An issue might not arise at that time, but a lack of documentation becomes a problem in those rare circumstances when something does go awry. Accidents happen and board conflicts arise. Having proper documentation can definitively resolve what might otherwise result in a significant issue.


Stumbling Blocks for Charities


Stumbling Blocks for Charities

Running a registered charity or charitable foundation (a “charity”) or non-profit organization (“NPO”) can be a complex task. In addition to concerns about employees, programs and day-to-day operations, there are also legal requirements that can be a stumbling block for the unwary.

These organizations are afforded a number of tax benefits under the Income Tax Act (the “ITA”). Neither pay tax on their income, and charities may also offer tax receipts for donations. The trade-off for these benefits are certain legal requirements. They dictate a number of things, including how these types of organization use their resources and who may benefit from their activities.

The purpose of this note and the next (coming next week) is to review, in brief, some of the legal pitfalls that charities and NPOs might run into, and a crucial way to avoid legal conflict in the future. This week we consider charities.

Use of Resources

The ITA requires that a charity devote all its resources to charitable activities carried on by the organization. This requirement should inform everything done by a charity and it comes into question when a charity wishes to use its funds for something other than its own immediate charitable activities.

For example, a foundation might wish to provide money to other organizations doing charitable work. This is appropriate, so long as the organization is a “qualified donee” under the ITA. However, a foundation cannot provide funds to an NPO, no matter the quality of its activities or how similar its operations are to those of the charity or “charitable” in nature they are. Similarly, a foreign charity, such as a 501(c)(3) in the United States, will not qualify for donations either.

This issue can arise where a charity is affiliated with another organization, say an NPO doing good work in a community or a foreign branch of the charity. The Canada Revenue Agency (the “CRA”) has said, and the courts have affirmed, that a charity cannot be a “conduit” for funds, providing tax receipts to individuals for money that then passes through the charity to other organizations. These activities can put a charity at risk of revocation.

Contract Arrangements

The CRA has said that charities may make use of intermediaries in a number of situations. For example, it can use agents or contractors, or be a participant in a joint venture with another organization.

The key requirement in such circumstances is that the charity maintain direction and control over its resources. The idea is that the charity must make the decisions over the use of its resources and set out the parameters of the activity, its goals, who benefits and when the activity is complete.

The CRA recommends adopting certain measures to ensure that a charity does not go offside these requirements. The most effective tool would be a written agreement setting out, in detail, the duties of the intermediary. In addition, the charity must also monitor the activity, providing instruction on an ongoing basis and arranging for the charity’s funds to be kept separate. The CRA even suggests that a charity make periodic transfers of funds, based on performance, rather than providing a lump sum all at once.

Revenue Generation

The requirement that a charity devote its resources to carrying on charitable activities clearly also limits the activities a charity can undertake to earn money, in particular, carrying on business.

The first question to be answered is whether the activity is a business at all. For example, soliciting donations would not qualify and is thus a fully appropriate activity for charities. Similarly, if the activity by its nature has no capability to earn a net profit, the CRA has said that this would not qualify as a business.

If it is a business, a charity should consider ITA and CRA restrictions. In essence, the business must be a “related business”. There are two types of related business:

1.         one run substantially by volunteers; and

2.         one which is “linked” and “subordinate” to a charity’s purpose.

The first is relatively simple. “Substantial,” according to the CRA, means 90%. In other words, ensure that 90% or more of the individuals running the business are volunteers, and the business will be a related business.

The second has two parts. The first, the question of whether the business is linked to a charity’s purpose, is satisfied in a number of circumstances:

1.         the business is a usual and necessary concomitant of charitable programs;

2.         the business is an offshoot of a charitable program;

3.         the business is simply using excess capacity; or

4.         the business is in the sale of items which promote the charity.

Examples of these could be a church renting out excess capacity to a neighbouring community organization (3) or a hospital renting out its parking spaces (1).

A business being “subordinate” to the charity’s purpose, according to the CRA, means that it is subservient to the dominant purpose of the charity. Here, the important questions are whether:

1.         the business receives too much of the charity’s attention and resources;

2.         the business is integrated into the charity’s operations;

3.         the charity’s charitable goals still dominate the charity’s decision making processes; and

4.         there is any private benefit stemming from the business.

Positive answers to any one or more of these questions could indicate that the activity is not subordinate to the charity’s purpose, thus putting the charity offside.

Information on NPOs Coming Next Week

Check back in here next week for a discussion of some of the legal pitfalls a NPO can run into and how they might be avoided.

If you would like legal or tax advice for your charity or NPO or are considering starting one yourself, please feel free to contact the author at


The Health and Welfare Trust: A Tax-Efficient Health Insurance Option for the Owner-Manager

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The Health and Welfare Trust: A Tax-Efficient Health Insurance Option for the Owner-Manager

For an owner-manager of a small business, buying health insurance might not be practical. It can be expensive, and you might even spend less yearly on health care than the cost of insurance. In addition, the inflexibility of health insurance products is an issue. You might not use any of the amounts allocated to the chiropractor or psychologist, leaving you with excess coverage in those areas and too little in another.

There are alternatives. This update focuses on one in particular which is quite valuable to the owner-manager as both flexible and tax-efficient.

Tax deductions

Since 1986 the Canada Revenue Agency (the “CRA”) has allowed companies to set up what is called a “health and welfare trust” (“HWT”). These are creatures of CRA policy and the rules around them are not found in the Income Tax Act (the “ITA”).

The idea behind the HWT is to turn after-tax personal medical expenses for you and other employees into deductions for your company. Paying these expenses before tax is a significant benefit that can save money for you and your company.

There is already some personal tax relief for medical expenses, in the form of the medical expense tax credit (the “METC”), but this relief is limited. This bulletin does not discuss the METC in detail but, in brief, the credit is small (15%) and qualifying expenses for you and your family must meet a certain threshold for the relief to activate.

The health and welfare trust

The benefits provided under the HWT policy are broader and are discussed below.

The first step is to approach a HWT company or an insurance specialist who can advise you on your options. There are a number of HWT companies, with start-up fees ranging from $100 to $250 and ongoing fees of between 5-10% of all expenses submitted to the HWT.

After your company signs an agency agreement with the HWT company, it will set up a HWT on your company’s behalf. The terms of this trust will require your company to fund the trust based on an actuarial estimate of the medical expenses required for the year. From there, employees submit medical expense receipts to the trust, the HWT company reviews the receipts to make sure they qualify, and then the trust pays back the employee for the expense, up to a reasonable coverage limit which the directors of your company will decide on. Your company will be required to pay a percentage of each expense to the HWT company, based on the fee negotiated.

Tax benefits and flexibility

There are tax benefits to these trusts on two levels.

First, all contributions to the trust, including the fees paid to the HWT company as a portion of your employees’ expenses, are deductible to your company, so long as they meet all ITA requirements.

Second, when the trust reimburses the employee for the expenses, this reimbursement is not taxable to the employee, so long as the expenses qualify for such treatment.

In addition to the tax benefits, this option allows you to provide a pool of money to your employees (and to yourself, if you are employed by your company) for medical expenses not limited by the arbitrary categories mandated under medical insurance. If the limit for reimbursement is $2,000 and you want $2,000 in massages, then be prepared for an especially relaxing year.


The use of a health and welfare trust can provide significant benefits, both to you as the owner-manager of your company, and to your employees. However, there are a number of requirements a trust must meet in order to qualify under CRA guidance. As a result, care should be taken to ensure that the HWT company you are dealing with is providing you appropriate advice.

If you wish to discuss the benefits of such trusts in greater detail, or desire tax advice on other matters from a planning or risk management perspective, please feel free to contact the author at

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The Aging Trust: After 21 Years


The Aging Trust: After 21 Years

In the earliest days of trusts, the knight would transfer title to his estate to a friend before he left for his crusade. The hope was that the friend would manage the home, land and other property in the knight’s favour and in favour of his family, and then transfer title back upon the knight’s return.

In certain circumstances, the friend would refuse, leaving the knight without the ability to recover his property. Out of this predicament the rules of equity developed such that though legal title to the property might be the hands of a certain person (that is, in “trust”), the “equitable” interest to the property would remain in the hands of the beneficiary—here, the knight, his spouse and his heirs.

Nowadays trusts are used for more prosaic purposes, and most typically to minimize tax. For certain trusts, the trustee might hold the property and distribute income to the beneficiaries as she chooses. The underlying property would appreciate in the hands of the trustee and the deemed disposition of the property on the death of the settlor of the trust would typically be avoided.

21 Year Rule

If not for the Income Tax Act rule known as the “21 Year Rule”, gain on property held in trust could be endlessly deferred. What this rule provides is that on the 21st anniversary of the settlement of the trust, and every 21 years thereafter, the trust will be deemed to have disposed (the “Deemed Disposition”) of its capital property for proceeds equal to the fair market value of that property, and to have reacquired that property for an amount equal to that fair market value.

The accrued gain on assets in a trust after 21 years can be significant, and proactive steps should be taken in order to avoid the tax bill that might otherwise result.

Gain is Pain

There are a number of methods of avoiding this tax. The simplest is to distribute the assets to the beneficiaries of the trust. This may be done on a “rollover”, or tax-deferred, basis in certain circumstances. However, the issue with this is that the trustee may not wish to put the voting or redeemable shares in the family company, or indeed other valuable assets, directly in the hands of the beneficiaries who might not be fully trustworthy, for whatever reason.

Another option is to continue to hold the assets in the trust, but to fix the interest of the beneficiaries such that their interests vest indefeasibly. There are issues with this method also. The flexibility for the trustee to allocate income or capital to one beneficiary as against another would be eliminated. In addition, if all the beneficiaries are of the age of majority and of full capacity, they could demand that the trust be collapsed and the assets distributed to them, with the same result as the first option.

There are other options that attempt to resolve these issues. A capital reorganization might be undertaken to keep voting non-participating shares in the trust while distributing non-voting participating shares to the beneficiaries. This option has its risks from a tax perspective in that the voting non-participating shares might still have value and result in tax to the trust, but might be worth the risk depending on the circumstances.

Other Options

Other trusts might permit further options depending on their terms. In order to understand all options available, it is important to retain a tax professional to fully consider the terms of the trust deed.

If you are interested in learning more about the taxation of trusts and the 21 year rule, or wish to receive advice on these or other tax matters, please do not hesitate to contact the author at


Income of Strata Corporations: How Not to Lose Tax-Exempt Status


Income of Strata Corporations: How Not to Lose Tax-Exempt Status

In addition to managing strata assets and common areas, strata corporations (called “condominium corporations” elsewhere in Canada) sometimes generate income on the side. For example, strata corporations will often operate coin laundries, rent out party rooms or receive license fees for cell towers or solar panels.

Many strata corporations simply assume that they qualify as non-profit organizations (“NPOs”) under the Income Tax Act (the “ITA”) and thus do not need to pay tax on their income. However, NPO status is not automatic. Care must be taken that the activities of the strata corporation do not cause the corporation to lose this status.

The purpose of this update is to consider some of the requirements for a strata corporation to maintain its NPO status and discuss what sort of income-generating activity might either cause a strata corporation to no longer be tax exempt or result in tax for the strata lot holders themselves.

Basic Requirements

In order for a strata corporation to obtain tax exempt status as a NPO under the ITA it must meet certain requirements. These include, in paraphrase:

1.         the strata corporation must be organized and operated exclusively for any purpose except profit; and

2.         no part of the strata corporation’s income may be payable to any member of the strata corporation.

In addition, a strata corporation must file a T2 corporate tax return annually. If the assets of the strata corporation exceed $200,000 or meet certain other criteria, it must also file a Form T1044 with its T2. Many strata corporations do not file either of these forms, leaving them potentially open to penalties.


As noted above, strata corporations often earn income over and above strata fees (which are not considered income under the ITA). Some income generating activities which could put a strata corporation off-side the NPO requirements include operating a golf course or renting out a caretaker suite owned by the corporation to third parties. In these circumstances the Canada Revenue Agency (the “CRA”) has said that the strata corporation would no longer be organized and operated exclusively for any purpose except profit.

Importantly, under British Columbia’s Strata Property Act, the common areas in a strata are owned by the strata lot owners as tenants in common and not by the strata corporation itself. Thus, income from rentals of common property areas (such as rooves for cell towers or party rooms) might be considered income of the strata lot owners rather than the strata corporation. If so, the result of this would be that the rental or leasing activity would not jeopardize the NPO status of the strata corporation, but a proportionate share of this income would have to be reported by the strata lot owners in their personal tax returns.

Another risk comes from the use of the income. Often such income is used to reduce strata fees. If the income belongs to and is reported by the owners, this is not an issue. However, if the income belongs to the strata corporation, the result is that a portion of the strata corporation’s income is payable to members of the corporation, thus putting the corporation off-side the NPO requirements and potentially leaving the NPO open to revocation.

As one example, the CRA has said that income from a cell tower would either be income of the strata lot owners or, if not, might cause the strata corporation to no longer be tax exempt because the income is used to reduce strata fees.


Not all income-earning activity puts a strata corporation off-side the requirements above. Both the CRA and case law confirm that a NPO may earn a profit so long as this profit is incidental to and arising from activities directly connected to its non-profit objectives. As a result, unlike running the golf course, operating a coin laundry for owners and tenants would be incidental to its activities as a strata corporation and thus permissible under these rules.

The CRA has also stated that it is prepared to consider income from common areas owned by the strata lot owners to be tax-free income of the strata corporation where this income is “incidental” in the manner discussed above. This is a significant benefit, but care must be taken to determine whether the income-generating activity truly is incidental and whether it arises from activities directly connected to the non-profit objectives of the strata corporation.

Going Forward

First, it is important to seek professional advice before a strata corporation or other NPO begins activities which might put it off-side the NPO requirements. Often such issues can be resolved with careful tax planning.

In addition, these requirements are not straightforward and mistakes can happen, including neglecting to file a T2 or Form T1044.

In these circumstances, the good news is that the CRA has a “voluntary disclosures” program which, if the requirements are met, permits the CRA to waive any penalties owing if the entity comes forward voluntarily and outlines its errors or omissions. Even under this program, any tax owing must still be paid.

If you are interested in learning more about the voluntary disclosures program, or simply wish to receive advice on these or other tax matters, please do not hesitate to contact the author at

This article also appeared in the Vancouver Island Strata Owner's Association's November 2015 Bulletin. Read the full bulletin here .


New Rules for Charitable Deductions to Estates


New Rules for Charitable Deductions to Estates

Recent updates to Canada’s Income Tax Act provide greater flexibility for executors to allocate deductions for charitable gifts between the deceased herself and her estate. These new rules provide a valuable tool from an estate planning perspective. In addition, they also clear up certain areas of confusion under the old legislation. These updates come into effect in 2016 and are discussed below.

Old Rules

Under the old rules, which will remain in effect for 2015, there was a distinction as to whether the deceased had made a gift by will or whether it was by the estate. One example would be where the will gave discretion to the executors as to the quantum of the donation. Another would be where the will provided discretion to executors as to which charity (or other qualified donee) received the donation. The question in these circumstances was whether the gift was truly made by will, and thus by the deceased, or by the estate itself.

Timing was also an issue. In these circumstances, is the gift made on the death of the individual or at the time the property itself was transferred?

The new rules resolve these issues definitively.

New Rules

The focus of the new legislation is the time at which the property is transferred. If the gift is made by will, by the estate or by a qualifying beneficiary designation under a RRSP, RRIF, TFSA or life insurance policy, then the donation is deemed to have been made:

  1. at the time the property is transferred and not at any other time; and
  2. by the estate and not the deceased or any other individual.

Previous concerns about gifts being subject to a formula or discretion to the trustees as to the objects of the donation are thus no longer relevant.


Consider a will which provides discretion to the executor of the estate as to the quantum of a donation and the charity which is to be the object of the donation. Pursuant to this power, the executor chooses to donate $10,000 to The Canadian Red Cross Society, a registered charity, during the first year of the estate. The result under the new rules is that this donation is deemed to be made (1) by the estate and (2) during its first taxation year.

The result is precisely the same if the $10,000 donation is expressly made by will and the property is transferred during the first year of the estate. In other words, the result is that this donation too is deemed to be made (1) by the estate and (2) during its first taxation year.


The flexibility in allocation discussed earlier revolves around whether the estate is a “graduated rate estate” (“GRE”) under the Income Tax Act. Most estates will be GREs for the first three years of their existence, but can be excluded from this definition if they cease to be a “testamentary trust” under the Income Tax Act, perhaps because of a contribution to the capital of the trust otherwise than as a consequence of the death of the deceased.

Though a full discussion of GRE requirements and pitfalls is outside the scope of this update, access to graduated rates for the first three years of an estate’s existence also depends on the estate being a GRE, so care should be taken to obtain tax advice before providing any funding to an estate or otherwise taking an action that might jeopardize its status as a GRE.

If an estate is a GRE, the executor has the flexibility to allocate the gift deemed made by the estate to any of the following taxation years:

  1. to the deceased in her year of death;
  2. to the deceased in the year before her year of death;
  3. to the GRE in its first year;
  4. to the GRE in its second year; and
  5. to the GRE in its third year.

In addition, the typical 5 year carry-forward for all gifts remains in effect.

If you are interested in receiving advice on these or other tax matters, please do not hesitate to contact the author at