2016-0647951E5 Exempt Foreign Trust

Principal Issues: General comments requested on the application of subparagraph (d)(ii) of the definition of “exempt foreign trust” in subsection 94(1).

Position: General comments provided on the meaning of the expressions “charitable purposes” and “created exclusively for charitable purposes” used in subparagraph (d)(ii) of the definition of “exempt foreign trust” in subsection 94(1).

Reasons: Based on our interpretation of the terms and consistent with our interpretation of the Canadian Court decisions in that matter.

Author: Routhier, Marie-Claude
Section: 94 (1)

XXXXXXXXXX                                                                                                   2016-064795
                                                                                                                           Marie-Claude Routhier
                                                                                                                           LL.B., D.D.N., M. Fisc.
June 14, 2016

Dear XXXXXXXXXX,

Re:  Exempt Foreign Trust

We are writing pursuant to our telephone conversation held on May 10, 2016 during which you requested our opinion on the application of subparagraph (d)(ii) of the definition of “exempt foreign trust” in subsection 94(1) of the Income Tax Act (the “Act”). More specifically, you desire to obtain our comments on the interpretation of the terms “created exclusively for charitable purposes” used in such provision of the Act.

Unless otherwise stated, all statutory references in this letter are to the Act.

Our comments

This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of a particular transaction proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

It shall be noted that the legal requirements to be eligible for registration as a charitable foundation or a charitable organization under the Act differ substantially from the legal requirements provided in subparagraph (d)(ii) of the definition of “exempt foreign trust” in subsection 94(1). The current letter only addresses the requirements under such latter provision of the Act. As such, the concepts used in relation to registered charities, as defined in subsection 248(1), are only applicable to the extent where the terms of section 94 are identical and used in the same context as the ones used in the Act, with respect to the eligibility of organizations to be registered as charities under the Act (e.g. “charitable purposes” and “exclusively for charitable purposes”).

In order to qualify as an exempt foreign trust, subparagraph (d)(ii) of the definition of “exempt foreign trust” in subsection 94(1) requires that the non-resident trust be created exclusively for charitable purposes and be operated throughout the particular period exclusively for charitable purposes.

Meaning of “charitable purposes”

According to the Department of Finance’s explanatory notes relating to the definition of “exempt foreign trust” in subsection 94(1), charitable purposes in that context mean charitable purposes as defined under the laws of Canada. As the Act does not provide a definition of “charitable” or “charitable purposes” (footnote 1), we must rely on the definition of the term under the common law principles applicable in Canada (“Canadian common law”).

To be charitable under Canadian common law, a purpose must fall within one or more of the four categories of charitable purposes established in Pemsel (footnote 2), as interpreted in Canada, and must be for the benefit of the community or an appreciably important class of the community (footnote 3).

To demonstrate the above, the charitable purposes provided in the trust’s governing document (i.e. the trust deed) must contain a clear statement of each of the three following elements, either expressly or implicitly through its context (footnote 4):

1.    The charitable purpose category, i.e. relief of poverty, advancement of education, advancement of religion, or certain other purposes beneficial to the community in a way the law regards as charitable.

This element is generally met by including, in the wording of the purposes mentioned in the trust deed, the charitable purpose category or the specific purpose descriptor within the fourth category (e.g. to promote health or to protect the environment), as the case may be (footnote 5).

2.    The means of providing the charitable benefit.

In order to satisfy such element, it is necessary that the purposes provided in the trust document define the scope of the activities that can be conducted to directly further the charitable purposes and ensure the provision of a charitable benefit to an eligible group (footnote 6).

3.    The eligible beneficiary group.

This element is usually met by satisfying the requirements provided in the Charities Policy Statement CPS-024 (footnote 7).

For the purposes of subparagraph (d)(ii) of the definition of “exempt foreign trust” in subsection 94(1), when a foreign trust grants funds to other organizations, it is our view that the recipient organization would have to be considered “charitable” according to Canadian common law.

On the other hand, when the charitable activities are carried out by an intermediary, we are of the opinion that the activities and the underlying resources provided must be subject to the direction and control of the trust (footnote 8). To satisfy such a requirement, the terms of the trust deed should provide the authority and means for the charitable trust to maintain direction and control over the funds distributed and over the recipient’s actions, as they relate to the trust’s charitable purposes.

Meaning of “created exclusively for charitable purposes”

As stated above, to comply with the requirements expressed in subparagraph 94(1)(d)(ii) of the definition of “exempt foreign trust”, the trust must, among other things, be created exclusively for charitable purposes. When deciding the meaning of “exclusively for charitable purposes”, in Guaranty Trust Co. of Canada (footnote 9), the Supreme Court of Canada confirmed that it is not sufficient that the organization be instituted “mainly” or “primarily” or “chiefly” for charitable purposes. It must be created “exclusively” for those purposes.

In our opinion, by applying the reasoning of Canadian courts, a purpose of a charitable trust, other than a charitable purpose, that is merely a means to the fulfilment of its charitable purposes would not deprive, in itself, the trust of its exempt status (footnote 10). However, once such purpose ceases to be merely incidental, but becomes a collateral non-charitable purpose of the trust, it is our opinion that the trust would not be considered to have been created exclusively for charitable purposes.

In the context of subparagraph (d)(ii) of the definition of “exempt foreign trust” in subsection 94(1), it is our view that a charitable trust may conduct commercial activities to the extent that they remain incidental to and only serve as a means of furthering the exclusive charitable purposes of the organization, rather than being an end in themselves (footnote 11) or a means of furthering any other non-charitable purpose. Where the commercial activity of a charitable trust is an end in itself, or furthers any other non-charitable purpose, we are of the view that the organization cannot be considered as being created and eventually operated exclusively for charitable purposes.

We also expect that the funds held by an exempt foreign trust be used exclusively for charitable purposes. Similar to commercial activities of a charitable trust, it is our opinion that an exempt foreign trust may accumulate and invest funds, so long as the accumulation and investments are incidental to and serve as a means of furthering the exclusive charitable purposes of the organization, rather than being an end in themselves.

Finally, it should be noted that the determination of whether a trust is operated throughout a particular period exclusively for charitable purposes constitutes a question of fact that must be determined on an ongoing basis.

We hope this information is of assistance to you.

Yours truly,

Louise J. Roy, CPA-CGA
Manager
For Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  Other than the inclusive definition of “charitable purposes” in subsection 149.1(1) that applies to sections 149.1 and 149.2.

2  The four charitable purposes categories were outlined by Lord MacNaghten in Commissioners for Special Purposes of the Income Tax v. Pemsel, [1891] A.C. 531.

3  Vancouver Society of Immigrant and Visible Minority Women v. Minister of National Revenue, 99 DTC 5034, SCC, per Iacobucci J. for the majority at par. 147-148.

4  Charities Guidance CG-019 How to Draft Purposes for Charitable Registration, July 25, 2013, par. 9.

5  For more information, see, among others, the following Charities Guidances and Charities Policy Statements: CG-014, CG-018, CG-021, CPS-002, CPS-E08, CPS-015, CPS-027, CPS-029.

6  Note 3, “Furthermore, the question of whether an organization was constituted exclusively for charitable purposes cannot be determined solely by reference to the objects and purposes for which it was originally established”.

7  Charities Policy Statement CPS-024 Guidelines for Registering a Charity: Meeting the Public Benefit Test, March 10, 2006.

8  For the purposes of subparagraph (d)(ii) of the definition of “exempt foreign trust” in subsection 94(1), we would expect similar guidance than such provided in Charities Guidance CG-002 Canadian Registered Charities Carrying out Activities Outside Canada, July 8, 2010, par. 1.1, 1.2, 5.3, 6, 7 and following.

9  Guaranty Trust Co. of Canada v. Minister of National Revenue, [1967] S.C.R. 133 (Guaranty Trust) [1967] S.C.R. 133, p. 143.

10  Note 9, p. 143.

11  Note 3, par. 60.

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