The 1945 Foundation v. Minister of National Revenue, [1974] CTC 2109

The Chairman (orally: February 14, 1972):—This is an appeal by The 1945 Foundation from assessments dated November 14, 1969 wherein tax was levied in respect of income for the taxation years 1965 to 1968, both inclusive, and from reassessments dated June 25, 1970 in respect of the taxation years 1963 and 1964. The issue is whether or not this Foundation is a charitable organization or corporation. The facts are generally not in dispute.

John R Hecht and Lottie I Hecht are a husband and wife who were married in 1945 and who have no issue. Mr Hecht was the only witness called on behalf of the appellant and no evidence was adduced on behalf of the respondent.

A brief summary of the facts indicates that Mr Hecht was born in Austria. At the age of 9 years he lost his father and he and his mother were forced to earn their own living. In 1938 he was forced to flee the country due to the invasion by the Germans, and he eventually ended up in New York City penniless. (I quote these facts merely to show the history of this man and the feeling that he might be expected to have for persons who are impoverished.)

However, he settled in Canada and prospered so well that by 1962 he had amassed a substantial estate. In 1962, having no children or close relatives, he consulted his lawyer and the latter advised him to set up a charitable foundation. As a result, The 1945 Foundation was incorporated on June 14, 1962 under the Societies Act of the Province of British Columbia, RSBC 1960, c 362. This is established by Exhibit A-1 in these proceedings, and therefore I find as a fact that The 1945 Foundation was a corporation for the purposes of the Income Tax Act.

Subsequently in 1962 the Hechts transferred assets to the Foundation to the value of $450,000. Since its incorporation the Hechts have been two of its directors, the others being a retired banker, a solicitor and a chartered accountant. In practice, it appears that cheques were signed by any two of Mr and Mrs Hecht and one Fuchs, who apparently was in the employ of Mr Hecht in another capacity. The first distribution from the fund took place about four months after the incorporation. Payments out of the fund appear to have been on a regular basis in some instances and on a one-time basis in others. The recipients are all set out in Exhibit A-2.

As Mr Hecht put it, for those distant relatives who were old, sick or poor, the Foundation set up regular payments, and others were given payments on birthdays and at Christmas. It was to this evidence that counsel for the respondent directed much of his cross-examination of Mr Hecht. Mr Hecht explained that this system made it easier for people to receive funds and the Foundation was able to disguise the payments in order to preserve the pride of the people who were receiving this charity.

Again, in practice, Mr and Mrs Hecht would receive letters or information as to persons in need, and they would prepare a list, which was then shown to the other directors. Normally, the names on the list would be approved—there is no evidence that any were not approved—as submitted. The evidence indicates that, on occasion, other directors would suggest names, and there is no indication that the names suggested by them were not approved. In any event, whoever was approved to receive payments apparently received the distribution through a Mrs I Oliver, to whom a cheque was made, and the funds were disbursed by her.

On occasion other gifts were made to charitable groups such as the Red Feather and the United Jewish Appeals. Also, on one occasion, a scholarship was provided for a talented young pianist who was not related, even distantly, to the Hechts. There was also evidence that, on another occasion, tuition was paid to a university for the grandson of a distant relative of Mrs Hecht. I point this out because, in almost all instances of disbursements to so-called relatives, the degree of relationship was so distant as to be almost indiscernible.

From a review of the evidence contained in Exhibit A-2, which is the list of recipients, it is clear that the payments went about equally to strangers and to distant relatives. This is conceded by both parties. In almost all instances, the payments made were small and, as Mr Hecht put it, “were just something to make life a little easier for those in need”.

A payment was made to a Miss Heney, who was suffering from terminal cancer and who was supplied with funds sufficient to provide her with special nursing care while she was alive. I think it is also of interest to note that a good many of the recipients were people who ‘had been victimized by the war in Europe.

At the same time as the Hechts were making these gifts on behalf of the Foundation, they were also, in their personal capacities and in other corporate undertakings, making gifts to charity and, in some cases, making additional gifts to persons whose names appear in Exhibit A-2 as beneficiaries of the Foundation.

The evidence reveals that neither of the Hechts made any claim for a deduction on his or her personal return when the assets were transferred to the Foundation. The evidence also reveals that in each year the Foundation disbursed at least 90% of its income, and that the auditor and solicitor, who were directors, were paid their regular fees when accounts were submitted.

Given this brief summary of the facts, the question then is whether the Foundation qualifies as a “charitable” organization or corporation within the meaning of either paragraph (e) or paragraph (f), or both, of subsection 62(1) of the Income Tax Act. I think one must first look to see if it would be classified as a charitable organization in the legal sense.

In Special Commissioners of Income Tax v Pemsel, 3 TC 58, Lord Macnaghten set out, at page 96, four principal positions: (1) a trust for the relief of poverty; (2) a trust for the advancement of education:

(3) a trust for the advancement of religion; and (4) a trust for other purposes beneficial to the community not falling under any of the other three heads. It is well established, and it is conceded by the appellant, that in all but the first of these heads, the benefit must go to a fairly substantial section of the community, and therefore a claim for private benevolence would not qualify.

Counsel for the appellant relied on the so-called “poor relations” cases to show that schemes for the relief of poverty do not lose their charitable status by virtue of their being limited to aiding persons connected by family relationship to the donor, particularly the case of In re Compton, [1945] 1 Ch 123, and the cases cited therein, as well as Oppenheim v Tobacco Securities Trust Co, Ltd, [1951] 1 All ER 31 (House of Lords), which was cited to show that trusts to relieve poverty are an exception to the general rule.

It is succinctly put by Mr Justice Cross in Trustees of the George Drexler Of rex Foundation v Inland Revenue Commissioners, [1965] 3 All ER 529, in the extract I now quote from page 535:

No difficulty arises about the relief of poverty amongst the ex-employees of the company, for cases which are binding on courts of first instance and the Court of Appeal show that a trust for the relief of poverty can be a good charitable trust although the class of potential beneficiaries is a private class limited by links of relationship or common employment, as here.

With those comments I agree, and 1 think they are equally applicable to the laws of this jurisdiction. On the whole, in this case the gifts were given to people in need. It is true that in some cases the recipients were not destitute, but in all cases there was a need which these gifts helped to fill.

On all the evidence, I find the appellant to be a charitable corporation within the meaning of paragraph 62(1 )(f) of the Income Tax Act, and I therefore allow the appeal and refer the matter back to the respondent for reassessment on that basis. I do not know what arrangements were made with the Minister of National Revenue, but as I understood the comments at the outset, I presume the personal appeals of Mr and Mrs Hecht would follow the event.

Appeal allowed.