Sunday, October 14, 2007

A.Y.S.A. Amateur Youth Soccer Association v. Canada (Revenue Agency)

Is an organization whose main purpose is to support and promote amateur youth soccer in one Canadian Province entitled to registration as a charity under the Income Tax Act?

The Supreme Court of Canada, in A.Y.S.A. Amateur Youth Soccer Association v. Canada (Revenue Agency), 2007 SCC 42, considered this question. The case illustrates that Canadian law of charities is more easily understood historically, than by a principled analysis.

By way of background, the Income Tax Act, Canada provides favourable tax treatment to organizations that fall under certain categories. “Registered charities,” and “registered Canadian amateur athletic associations,” are not required to pay income tax on revenues they earn, and may provide donors with tax receipts. The donors may then use the tax receipts for tax credits (or deductions for corporations). “Non-profit organizations,” also are not required to pay income tax. But, non-profit organizations my not issue tax receipts. For an organization trying to raise funds, the ability to issue tax receipts, which will reduce a donor’s taxes, is quite attractive.

To qualify as a Canadian amateur athletic organization, an organization must be national in scope. Because A.Y.S.A. Amateur Youth Soccer Association (“A.Y.S.A.”) operated exclusively in Ontario, it did not qualify under this category.

A.Y.S.A. applied to Canada Revenue Agency to be registered as a charity. But Canada Revenue Agency rejected the application. The Federal Court of Appeal agreed with Canada Revenue Agency, and A.Y.S.A. appealed to the Supreme Court of Canada.

The Income Tax Act relies on the common law to determine what is charitable. The starting point of Canadian common law on this point goes back to mother England, and the Charitable Uses Act, 1601 (Eng.), 43 Eliz. 1, c. 4, (the "Statute of Elizabeth") which includes as charitable such activities as the following:

. . . relief of aged, impotent, and poor people; the maintenance of sick and maimed soldiers and mariners, schools of learning, free schools, and scholars in universities; the repair of bridges, ports, havens, causeways, churches, sea banks and highways; the education and preferment of orphans; the relief, stock, or maintenance of houses of correction; marriages of poor maids; supportation, aid, and help of young tradesmen, handicraftsmen, and persons decayed; the relief or redemption of prisoners or captives and the aid or ease of any poor inhabitants concerning payments of fifteens, setting out of soldiers, and other taxes.

(I suspect the starting point is really earlier, but the cases I have read all start with the Statute of Elizabeth.)

The House of Lords rationalized (to some extent) these activities into four categories in Income Tax v. Pemsel, [1891] A.C. 531. Charitable purposes fall under one of the following categories:

1) the relief of poverty; (2) the advancement of education; (3) the advancement of religion and (4) certain other purposes beneficial to the community, not falling under any of the preceding heads.

A.Y.S.A, not unreasonably, argued that its purposes fell under number four. Amateur youth soccer is beneficial to the community.

But, it is not that simple.

The common law only recognizes some purposes that are beneficial to the community as charitable. Many beneficial purposes are not.

Mr. Justice Rothstein, writing for him and seven others, took the following approach:

To summarize, in determining if an organization is charitable under the fourth head of Pemsel for purposes of registration under the ITA [Income Tax Act], it will be necessary to consider the trend of cases to decide if the purposes are for a public benefit which the law regards as charitable. It will also be necessary to consider the scheme of the ITA. Finally, it is necessary to determine whether what is sought is an incremental change or a reform best left to Parliament.

He held that A.Y.S.A. was not a charity at common-law.

In considering the cases, Mr. Justice Rothstein found that “[t]he trend of the cases supports the proposition that sport, if ancillary to another recognized charitable purpose such as education, can be charitable, but not sport in itself.” In A.Y.S.A.’s case, the sport was not ancillary to education.

With respect to the scheme of the Income Tax Act, Mr. Justice Rothstein emphasized the importance of maintaining the distinction between charitable and non-profit activities. The Income Tax Act does not support a significant change in the definition of charity to encompass all “non-profit social welfare activities.”

Mr. Justice Rothstein noted the potentially significant impact of recognizing all non-profit sporting and recreational activities as charitable. He wrote that it was better to leave reform up to Parliament.

I have a couple of concerns.

First, although in principle I agree that the court should defer to Parliament on questions of taxation policy, in a sense Parliament has deferred to the courts. Parliament could provide a comprehensive, principled definition of charity for tax purposes, but has chosen to rely on the common law. If Parliament does not like the way the courts evolve what is charitable at common law, it can always legislate something else.

Secondly, my related concern is that the common law notions of what is charitable impact trust law as well as taxation law. For example, in British Columbia, one can create a trust in perpetuity for the benefit of charities, but not for other beneficiaries.

Reform of the legal notion of charity in Canada is long over due. If Parliament and provincial legislatures won’t act, surely the courts can legitimately rationalize this area of law in light of the significant social and economic changes since the Pemsel case was decided in 1891.

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