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“All or substantially all” – A look at CRA’s political activities test

political activities testGiven that the Minister of National Revenue is considering the results of the recent Consultation Panel on the Political Activity of Charities which provided suggestions on the political activities test it may be worthwhile to look at a specific aspect of the test which relates it back to the related business rules (and social enterprise).

Peppered throughout the Income Tax and Excise Tax (i.e. GST / HST) Acts is the “all or substantially all” test. The legislative necessity of such a test should be obvious. Tax acts apply to all sorts of transactions, some are predictable and some are not, but even in predictable cases one wants to avoid the law of unintended consequences and try to ensure that the law only applies to the cases one has in mind. As a result the tax laws are filled with elastic tests like ‘all or substantially all’, ‘reasonable’ and ‘the intent of which is….’.

Both the related business rules and the political activity tests are of the ‘all or substantially all’ variety. But of course, while Parliament relies on the useful ambiguity in such a term, those of us who have to apply the law seek a bright line by which to govern ourselves. Case law in the past – notably decided in Income Tax provisions which have nothing to do with charities – has struck upon substantially all as being a bright line of 90%. So, in the case of the related business rules the legal provision would read as follows:

related business, in relation to a charity or Canadian amateur athletic association, includes a business that is unrelated to the purposes of the charity or association if [90% of ] persons employed by the charity or association in the carrying on of that business are not remunerated for that employment;

The Political Activity tests for Charitable Foundations / Organizations and RCAAAs are all similar and look like this:

(6.2) For the purposes of the definition charitable organization in subsection 149.1(1), where an organization devotes [90%] of its resources to charitable activities carried on by it and

(a) it devotes part of its resources to political activities,

(b) those political activities are ancillary and incidental to its charitable activities, and

(c) those political activities do not include the direct or indirect support of, or opposition to, any political party or candidate for public office,

the organization shall be considered to be devoting that part of its resources to charitable activities carried on by it.

But this is only a rule of thumb and there have been a number of cases decided over the years which have provided different takes on the ‘all or substantially all tests’. While these have all been decided in relation to other provisions of the Income and Excise Tax Acts the use of the term is the same and therefore the lessons learned from those judgements are applicable in the charity provisions as well.

Fundamentally, these judges of the Tax Court have found that ‘all or substantially all’ is a matter of interpretation based on the particular circumstances of the situation. As a basic rule of interpretation the test implies that the amount will be closer to the 100% than 50%. But, notwithstanding the clear logic of this statement, the test should not be taken to mean 75% as opposed to 74.99%.

On the other hand, this leaves a difficulty for those in the sector, and those that advise them, about where exactly the bright line actually lies. It would seem that using the 90% test is a conservative position to take, and therefore rather useful. But every organization is going to want to investigate its specific circumstances to determine if that is reasonable in the circumstances – unfortunately there is very little guidance on this point as well.

One might also make the point that using the ‘all or substantially all’ test may be appropriate in some places of the Income Tax Act, and maybe here as well, but there is no relation to how that test may be interpreted in relation to another provision as to how it effects these. Perhaps these issues will be part of the deliberations in the Minister’s office.

By: Adam Aptowitzer

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Drache Aptowitzer LLP

Tax and Charity Lawyers at Drache Aptowitzer LLP
Drache Aptowitzer LLPis one of Canada’s foremost experts in the law related to charities and non-profit organizations. Their team of bloggers is led by Adam Aptowitzer LLB. He is a lawyer practicing in the areas of charity and tax law. He is a member of both the bars of Alberta and Ontario. He has been speaking and writing on the topic of charity law for several years and been published in numerous publications including the Canadian Taxpayer, the Canadian Fundraiser and the Not-for-Profit News and has been cited as an expert in many publications including the National Post.Read more here
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