Date: 20130823
Docket: A-276-13
Citation: 2013 FCA 196
Present: MAINVILLE
J.A.
BETWEEN:
CHEDER CHABAD
Applicant
and
MINISTER OF NATIONAL
REVENUE
Respondent
REASONS FOR ORDER
MAINVILLE J.A.
[1]
The
applicant is a registered charity under the Income Tax Act, R.S.C. 1985,
c. 1 (5th Supp.) (“Act”). The Canada Revenue Agency (“CRA”) determined
that the applicant failed to comply with the requirements incumbent on a
registered charity, and as a result, the respondent Minister of National Revenue
(“Minister”), through her delegate the Director General of the Charities
Directorate, proposed on July 5, 2013, pursuant to subsection 168(1) of the Act,
to revoke the registration of the applicant as a charity under the Act. The
applicant now seeks an order prohibiting the Minister from giving effect to
that proposal by publishing a copy of the notice in the Canada Gazette
pursuant to subsection 168(2) of the Act.
[2]
On
August 16, 2013, Trudel J.A. issued an interim order prohibiting the Minister
from publishing the notice of revocation pending the determination of the
applicant’s motion. Both the applicant and the respondent Minister have now
submitted their respective motion records, and I have now heard the
representations from counsel by way of a telephone conference held on August
21, 2013.
Context and background
[3]
The
applicant operates a school for boys in the Toronto area. Approximately 180
boys from different areas in Ontario, and some from Alberta, attend the school.
The school teaches both secular studies and Jewish studies of the Orthodox
Chabad – Lubavitch tradition. The applicant claims to be the only school for
boys in the Toronto area that provides Chabad – Lubavitch religious
instruction.
[4]
Based
on the affidavit evidence submitted by the applicant, over 80% of the students at
the school receive a partial or full subsidy to cover their tuition costs, and
the funds required to subsidize the tuition come from the fundraising
activities of the applicant in its capacity as a charity registered under the
Act.
[5]
The
CRA audited the operations of the applicant for the period from July 2007 to
June 2009. In a letter dated October 25, 2011, the CRA identified numerous specific
areas of non-compliance which it says were uncovered by the audit. One notable
area of alleged non-compliance is with respect to a substantial number of gifts
in kind, ranging from artwork to jewellery and timeshares, which the applicant
was unable to substantiate the existence, the value or the use to the
satisfaction of the auditor, but for which it issued donation receipts over a
number of years. The amounts at issue are substantial, since the total value of
all such assets was reported to be over $10 million.
[6]
A
series of correspondence from the applicant to the CRA ensued as a result of
this audit letter, in which the applicant denied any wrongdoing. It notably attributed
the discrepancies in the values indicated in the donation receipts for the
gifts in kind and the actual realizable value of the assets to devaluation,
physical losses resulting from flooding of its various storage facilities, and
difficulties obtaining the full value of the assets through sales and silent
auctions.
[7]
The
applicant’s representations did not convince the Minister. As mentioned above,
on July 5, 2013 the Minister’s representative, on the basis of the audit
findings, issued a notice of a proposal to revoke the applicant’s registration
as a charity under the Act.
[8]
On
July 31, 2013 the applicant filed an objection pursuant to subsection 168(4) of
the Act. After unsuccessfully attempting to convince the Minister to delay the
publication of the notice until its objection has been dealt with, on August
15, 2013 the applicant submitted to this Court (a) an application for judicial
review with respect to the refusal of the Minister to postpone the publication,
and (b) a notice of motion seeking the same relief.
Procedural matter
[9]
The
applicant has proceeded by way of a judicial review application with respect to
the refusal of the Minister to postpone the publication of the notice of
proposal to revoke, and it has also submitted a motion for this purpose within
the framework of this judicial review application.
[10]
The
appropriate procedure is not by way of a judicial review application, but
rather by way of an application under paragraph 300(b) of the Federal
Courts Rules, SOR/98-106 (“Rules”) brought under paragraph 168(2)(b)
of the Act: International Charity Association Network v. Minister of National
Revenue, 2008 FCA 62, 375 N.R. 383 at para. 7.
[11]
Under
section 57 of the Rules, an originating document is not to be set aside only on
the ground that a different originating document should have been used. Moreover,
under section 55 of the Rules, in special circumstances, a rule may be varied
or dispensed with. In addition, the respondent Minister suffers no prejudice
from the procedural irregularity. I consequently intend to deal with the motion
on its merits as if it were an application under rule 300(b) of the
Rules brought under paragraph 168(2)(b) of the Act.
The applicable test
[12]
It
is well established that the applicable test, under paragraph 168(2)(b)
of the Act, to extend the period during which the Minister is precluded from
publishing a notice of revocation in the Canada Gazette is that set out
in RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R. 311 (“RJR-MacDonald”)
for the granting of a stay or an injunction: International Charity
Association Network v. Minister of National Revenue, 2008 FCA 114, 375 N.R.
387 at para. 5; Millennium Charitable Foundation v. Minister of National
Revenue, 2008 FCA 414, 384 N.R. 119 at paras. 5 to 15.
[13]
Adapting
the test set out in RJR-MacDonald to the circumstances of paragraph
168(2)(b) of the Act, I would formulate the test as follows:
i.
First, a preliminary assessment must be made of the merits
of the objection made or proposed to be made under subsection 168(4) of the Act
to ensure that there is a serious issue to be determined. The threshold here is
a low one. It suffices that the objection is not frivolous or vexatious. A
prolonged examination of the merits of the objection is neither necessary nor
desirable.
ii.
Second, it must be determined whether the party seeking the
extension will suffer irreparable harm if it were refused. The only issue to be
decided at this stage is whether the refusal to grant the extension could so adversely
affect the applicant’s interests that the harm could not be remedied in the
event that the objection or the subsequent appeal to this Court is successful.
Irreparable harm refers to the nature of the harm suffered rather than its
magnitude. It is harm which cannot be quantified in monetary terms or which
cannot be cured, usually because the applicant cannot normally collect damages
from the Minister resulting from the revocation of its registration under the
Act.
iii.
Third, an assessment must be made as to whether the
applicant would suffer greater harm from the granting or refusal of the
extension than the Minister. The factors which may be considered in the
assessment of this "balance of convenience" test are numerous and
vary with each case. Public interest considerations may be considered within
this balancing exercise.
Serious Issue
[14]
In
this case, the respondent Minister accepts that there is a serious issue to be
determined resulting from the applicant’s notice of objection under paragraph
168(4) of the Act, and I am persuaded that the low threshold with respect to
this element of the test has been met.
Irreparable Harm
[15]
The
thrust of the Minister’s objection to the extension is based on the second component
of the test concerning irreparable harm. Since the applicant provided little
financial information regarding its operations, current financial situation and
future funding requirements, the Minister submits that the applicant has failed
to demonstrate that the revocation of its registration will result, as it
alleges, in the cancellation of the upcoming school year and to the dismissal
of teachers and staff.
[16]
The
Minister relies on Gateway City Church v. Minister of National Revenue,
2013 FCA 126 for the proposition that general assertions of harm are
insufficient to establish irreparable harm. The Minister also relies on the
2012 Registered Charity Information Return of the applicant in which it reported
over $10 million in assets, and operating expenditures of just over $1.6
million. As a result, the information the applicant has reported in its own
returns suggests that it has the means to continue operating pending the
outcome of its objection and its eventual appeal to this Court.
[17]
At
the hearing, counsel for the applicant acknowledged that it reported
substantial assets that, if liquidated, could cover the costs of its operations
pending the outcome of its objection and of an eventual appeal to this Court.
However, these assets are in kind, and the applicant would need sufficient time
to liquidate them in an orderly fashion. Counsel consequently informed the
Court that the applicant was no longer seeking the prohibition of publication of
the notice until its rights of objection and appeal were exhausted, but was now
rather seeking an extension of six months to proceed with an orderly
liquidation of its assets in kind.
[18]
The
applicant also relies heavily on the impact the revocation would have on its
ability to issue donation receipts for its tuition fees. As set out in the
audit letter from the CRA dated October 25, 2011, although tuition payments do
not normally qualify as gifts, it has nevertheless been the CRA’s position to
treat as gifts the portion of tuition fees from schools that operate in the
dual capacity of providing both secular and religious education, and that may
be attributable to the religious education component of the curriculum. The
methods for doing so are set out in CRA Circular IC75-23 Tuition Fees and
Charitable Donations Paid to Privately Supported Secular and Religious Schools.
If the applicant loses the ability to issue such receipts, the costs of tuition
will necessarily be greater for the parents since they will no longer benefit
from any resulting tax relief. This may impede access to the school for some
students.
[19]
The
applicant thus submits that without an orderly liquidation of its assets and
the ability to collect tuition fees and to issue donation receipts for the
religious instruction component of its curriculum, the school may be left
without sufficient liquid funds to operate this year, resulting in its closure
or in serious disruption of its activities affecting both the students and
staff of the school.
[20]
Counsel
for the respondent Minister recognizes that the after-tax costs of the tuition
would be affected by the revocation. However, counsel submits that in light of
the substantial assets at the disposal of the applicant, it could elect to
compensate the affected parents through additional tuition subsidies.
[21]
As
stated above, and as noted by Sopinka and Cory JJ. In RJR-MacDonald at
p. 341, “the notion of irreparable harm is closely tied to the remedy of
damages”. Even if the applicant is successful in its objection under paragraph
168(4) of the Act or in an eventual subsequent appeal to our Court under
subsection 172(3) of the Act, barring exceptional circumstances, it would not
be entitled by law to claim damages from the Minister as a result of the prior revocation
of its registration as a charity.
[22]
The
situation here is analogous to some extent to that of stays and injunctions in
cases involving the Canadian Charter of Rights and Freedoms, Part I of
the Constitution Act, 1982, being Schedule B to the Canada Act 1982 (UK),
1982, c.11 (“Charter”). Again in RJR-MacDonald at p. 341, Sopinka
and Cory JJ. noted that the assessment of irreparable harm involving Charter
rights is a task which will often be more difficult than a comparable
assessment in a private law application, since damages are not the primary
remedy in Charter cases. This led the learned judges to conclude (at p.
342 of RJR-MacDonald) that in light of the relatively low threshold of
the first component of the test relating to a serious issue, and the
difficulties in applying the second component of the test involving irreparable
harm where damages are not normally available, that many proceedings will be
determined when considering the third component of the test concerning the
balance of convenience.
[23]
Since
this state of affairs is essentially the same with respect to an application
under paragraph 168(2)(b) of the Act, it is my considered opinion that
the same approach, which emphasizes the balance of convenience component of the
test, should be applied to decide many such applications.
[24]
This
approach does not negate the component of the test respecting irreparable harm.
The applicant must still clearly demonstrate that it will suffer irreparable
harm. However, in light of the fact that an applicant may not seek damages
against the Minister, the significance of that component must be assessed
accordingly. Likewise, the peculiarities of the charitable activities sector
and of charitable organizations generally, which are not based on profit or gain,
must also be taken into account.
[25]
In
this regard, I note that this Court has repeatedly stated that the loss of the
ability to issue tax receipts for gifts and the reduction in the ability of a
charity to transfer funds to qualified donnees is not per se proof of
irremediable harm: Choson Kallah Fund of Toronto v. Minister of National
Revenue, 2008 FCA 311, 383 N.R. 196 at paras. 6 to 10. I agree. Charitable
donations may be directed by donors to other charitable organizations, and the
charitable work of an affected charitable organization may in many instances be
assumed by another charity. Irreparable harm in the context of an application
under paragraph 168(2)(b) of the Act requires more.
[26]
Addressing
first the evidentiary issue raised by the respondent based on Gateway City
Church v. Minister of National Revenue, above, that decision simply
reiterates the well-known and long established principle that irreparable harm
cannot be inferred, but must rather be established by clear and compelling evidence:
Imperial Chemical Industries PLC v. Apotex Inc. (C.A.), [1990] 1
F.C. 221 at p. 228; A. Lassonde Inc. v. Island Oasis Canada Inc. (C.A.),
[2001] 2 F.C. 568 at paras. 2, 19-20; Haché v. Canada (Minister of Fisheries
and Oceans), 2006 FCA 424 at para. 11; Choson Kallah Fund of Toronto v. Minister of National Revenue, above at para. 5.
[27]
That
being said, each case turns on its own facts as set out in the evidentiary
record submitted to the Court. In this case, there is ample evidence in the
record establishing that the operations of the applicant’s school are
principally funded through tuition fees from parents and funds generated from
charitable gifts, including more particularly gifts in kind. This is referred
to throughout the correspondence between the CRA and the applicant. Moreover,
this is specifically set out in the affidavit of Rabbi Yona Shur, which
confirms that over 80% of the concerned students receive a partial or full
subsidy for their tuition costs through funds generated from the fundraising efforts
of the applicant in its capacity as a registered charity. The respondent has
not challenged this affidavit.
[28]
Moreover,
the affidavit of Chanoch Nelekn, a parent of a student attending the school,
confirms that his child’s tuition is subsidized by funds raised by the school,
and that if such subsidies were not provided he would not be able to afford to
have his son attend the school.
[29]
Turning
to the respondent’s submissions concerning the assets, I recognize that the
applicant has reported substantial assets. However, it is not challenged that
these are for the most part in the form of assets in kind. Moreover, the entire
record before me shows that the heart of the dispute between the CRA and the
applicant revolves around the difficulties associated with the liquidation of
similar assets in kind at reported market values. In these circumstances, the applicant
has convinced me that it will be difficult for it, in the immediate short term,
to secure the cash required to operate the school this fall from the
liquidation or pledge of its assets in kind.
[30]
This
cash-flow problem will be compounded by the fact that the parents of the
students would be precluded from obtaining receipts with respect to the
religious education component of the tuition fees, as allowed under the CRA
Circular IC75-23 Tuition Fees and Charitable Donations Paid to Privately
Supported Secular and Religious Schools. Though there may be a dispute
between the CRA and the applicant as to the methodology used to calculate this
component, the revocation of the registration would preclude disputing the
matter through notices of objection and in the Tax Court of Canada. The parents
have obviously already made their choice to send their sons to this school this
fall, and any change in the financial arrangements associated with the tuition
fees, including the receipt related to the religious education component, would
result in unexpected financial hardship for at least some parents with respect
to the tuition for the fall session.
[31]
Taking
into account the circumstances of this case and after carefully considering all
the evidence submitted, the applicant has demonstrated, on a balance of
probabilities, that the revocation of its registration will cause irreparable
harm.
Balance of convenience
[32]
The
concept of inconvenience should be widely construed in applications under
paragraph 168(2)(b) of the Act. The Canadian public has a legitimate
interest in the integrity of the charitable sector and in ensuring that the
important advantages conferred under the Act at great expense to the taxpayers
are properly managed and applied. As noted in the affidavit of Holly Brant
submitted by the respondent Minister, the Department of Finance estimated the
federal cost associated with the charitable sector credit and deduction was
$2.9 billion for the 2011 taxation year alone.
[33]
It
is consequently appropriate and reasonable for the CRA to closely scrutinize the
activities of a registered charitable organization, and for the Minister to
proceed with the revocation of the registration of such an organization where
there are serious grounds to believe that the property gifted to it has been
overvalued in the receipts it issues and which confer important tax benefits. In
such circumstances, the balance of convenience weighs heavily in favour of the
public interest which the Minister represents. As a consequence, applicants prevailing
themselves of paragraph 168(2)(b) of the Act bear a heavy burden on the
balance of convenience component of the test, since (barring evidence to the
contrary) the Minister should be presumed to be acting faithfully in
discharging his duty of promoting the public interest.
[34]
Under
the circumstances of this case, and taking into account the evidence submitted,
had the only harm inflicted on the applicant been that identified in the above
discussion concerning the irreparable harm component of the test, I would not
have found that the balance of convenience favoured the applicant.
[35]
However,
in the analysis required under the balance of convenience component of the
test, I must also include a “consideration of any harm not directly suffered by
a party to the application” (RJR-MacDonald at p. 344). In this case
there are the interests of the 180 students of the concerned school to take
into account.
[36]
The
academic year will begin in the next few days, and should the operations of the
school be disrupted as a result of a shortfall of liquidities, the students and
their parents will be placed in a difficult situation. I have no doubt that the
parents of the students of the school would have serious difficulties finding,
within the next few days, another education institution suitable to their
religious convictions, since the uncontested evidence before me shows that the
school is the only institution of its kind providing Chabad - Lubavitch
religious instruction in the Toronto area. Moreover, with the academic year
about to begin, these students would face a disruption in the education pathway
that they expect to follow this fall.
[37]
In
these circumstances, the balance of convenience requires that an orderly
solution be crafted which takes into account both the interests of the students
as well as the general public interest in the integrity of the charitable
sector.
Conclusions
[38]
In
light of the above I will order, pursuant to paragraph 168(2)(b) of the
Act, that the period during which the Minister is precluded from publishing a
copy of the notice proposing to revoke the registration of the applicant in the
Canada Gazette be extended, on a one-time basis, to December 31, 2013.
[39]
This
order will allow the applicant to pursue the operations of the school without
major disruptions for the fall semester, thus hopefully allowing the students
to pursue their preferred curriculum of secular and religious studies for that
semester. During this period, the applicant will be expected to proceed with an
orderly liquidation of a large part of its assets in kind. It will also be
expected to develop, if feasible, an alternative plan to continue the
operations of the school after December 31, 2013 without the status of a
registered charity under the Act. The applicant will further be expected to
notify forthwith the parents of the students of the fact that the Minister
will, in all likelihood, proceed with the required publication so as to revoke
its registration soon after December 31, 2013. This information will allow the
parents sufficient time to consider and secure alternative arrangements for the
education of their affected children for the winter 2014 semester, or continued
enrolment with the applicant’s school in a non-registered charity context if
that is feasible.
[40]
In
light of the circumstances, there shall be no order as to costs.
"Robert M. Mainville"
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