7 October 2002 External T.I. 2002-0145205 - ARMS LENGTH BOARD AND CHARITABLE DESIGNATION

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

What are the requirements under the Act regarding the number of arm's length members on the board governing a registered charity?

Position:

Provided a charity otherwise qualifies for registration, if 50% or more of its directors, trustees, officers or like officials deal with each other and with each of the other directors, trustees, officers and like officials at arm's length, the charity may be designated as either charitable organization or public foundation. Otherwise, it will be designated as a private foundation.

Reasons:

The wording of the definitions for "charitable organization", "public foundation" and "private foundation" in subsection 149.1(1) of the Act.

XXXXXXXXXX 						2002-014520
  							Alison Campbell
October 7, 2002

Dear XXXXXXXXXX:

Re: Board of Directors of a Charity

We are writing in reply to your letter dated June 3, 2002, wherein you requested our comments on the requirements for charities to have board of director members that deal at arm's length. Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject of an advance income tax ruling request submitted in accordance with the guidelines established in Information Circular IC 70-6R5. We can however, provide you with the following general comments.

Provided a charitable entity otherwise satisfies the criteria for being a registered charity under the Income Tax Act (the "Act"), the nature of the relationships among the directors, trustees, officers and like officials of a charity will affect the type of designation that charity witl have for purposes of the Act. The Act provides for three types of designation: charitable organizations, public foundations and private foundations.

"Charitable organization", "public foundation" and "private foundation" are all defined terms found in subsection 149.1(1) of the Act. For both "charitable organizations" and "public foundations" the definitions require that 50% or more of the directors, trustees, officers or like officials, must deal with each other at arm's length, and that they also must deal at arm's length with each of the other directors, trustees, officers or like officials.

Subsection 251(1) of the Act, deems individuals who are related to each other by way of blood, marriage, common-law partnership or adoption to not deal at arm's length. With respect to unrelated persons, subsection 251(1) of the Act, provides that it is a question of fact whether they deal at arm's length. As is stated in paragraph 16 of Interpretation Bulletin IT-419R "Meaning of Arm's Length", "the following criteria have generally been used by the courts in determining whether a transaction has occurred at "arm's length":

• was there a common mind which directs the bargaining for both parties to a transaction;
• were the parties to a transaction acting in concert without separate interests; and
• was there "de facto" control.

Interpretation Bulletin IT-419R, provides more information to assist you in determining whether people are considered to deal at arm's length for purposes of the Act. A copy is attached for your reference.

Where a registered charity, has 50% or more of its directors, trustees, officers or like officials not dealing at arm's length with each other, or they do not deal at arm's length with each of the other directors, trustees, officers or like officials, the charity would be designated as a private foundation. An organization that has a designation as a charitable organization or a public foundation, which undergoes a change in its board of directors that causes the organization to no longer meet the arm's length test required for these designations, may be re-designated as a private foundation. There are some rules in the Act, dealing with charitable gifts that apply differently depending on the charity's designation. The type of designation will also affect the disbursement quota requirements of the charity.

In addition to Interpretation Bulletin IT-419R, we have enclosed for your reference, CCRA Guide number RC 4108(E) "Registered Charities and the Income Tax Act". This document discusses the issues related to a registered charity's type of designation and whether those who direct the charity's operations are at arm's length. The document includes examples that should be helpful in determining whether 50% or more of the directors, trustees, officers or like officials deal with each other at arm's length and with each of the other directors, trustees, officers or like officials at arm's length. The document also discusses the re-designation of a charity's status and some of the implications for a charity on gifts made to it and its disbursement quota, which depend upon the charity's designation.

As a final point, we would note that our comments are limited to requirements under the Federal Income Tax Act. We would recommend that you also determine whether there are any other federal or provincial statues (for example, trustee laws, business corporation laws, "societies" laws) that may also have requirements regarding the composition of your board of directors.

We hope that our comments will be of assistance to you.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Income Tax Rulings Directorate