Law Times

Law Times • May 4, 2015 Page 7 www.lawtimesnews.com COMMENT Federal budget offers good news for charities BY rYan PrendergasT, linseY rains, and Terrance carTer For Law Times n April 21, Finance Minister Joe Oliver introduced the government's budget for 2015. The budget contains a number of important proposed amendments of benefit to the char- itable and not-for-profit sector. Although the budget contains good news for the char- itable sector, it is worth noting that it did not include the stretch tax credit for charitable giving proposed by Imag- ine Canada or an administrative mechanism to provide an extension of the 36-month period announced in the 2014 federal budget in which an estate donation can be treated as a gift in a terminal return as many in the chari- table sector had hoped for. Nor was there any follow up to the 2014 federal budget announcement that there would be a review of the tax-exemption status for non-profit or- ganizations under s. 149(1)(l) of the Income Tax Act and, most importantly, there were thankfully no new compli- ance requirements imposed on charities as there have been in previous federal budgets. The 2015 budget introduces a new capital-gains ex- emption for private shares and real estate when these assets are sold to an arm's-length party and the proceeds donated to a registered charity within 30 days of the dis- position. Where a portion of those proceeds is donated, the capital gains exemption would apply only to that portion. The changes avoid valuation issues on the gift by requiring that the private shares or real estate are sold and the proceeds or a portion of them are transferred to the registered charity and that the purchaser be at arm's length from both the donor and the qualified donee. The budget also proposes further anti-avoidance rules in order to address other possible opportunities for tax avoidance that would reverse any capital-gains exemp- tion by including the exempted amount in the income of the donor in the year of the reacquisition by the donor or non-arm's-length person or redemption of the shares. In addition, the budget proposes amendments to the Income Tax Act that will allow all registered charities, in- cluding private foundations, to passively invest in limited partnerships. Currently, the Canada Revenue Agency's position is that charities that become limited partners in a limited partnership are carrying on a business rather than merely making a passive investment. Two signifi- cant results of the CRA's current position are that the limited partnership's business must meet the definition of a related business in order for the investment to be ac- ceptable and private foundations cannot make such in- vestments because the Income Tax Act prohibits them from carrying on any type of business. The budget describes the proposed Income Tax Act amendments as having a twofold purpose: to enable "charities to diversify their investment portfolios to better support their charitable purposes" and to give charities "the f lexibility to use more innovative approaches to ad- dress pressing social and economic needs." New s. 149.1(11) is deemed to have come into force on April 21, 2015, and establishes how the fair-market value of a member's interest in a partnership is to be deter- mined for the purposes of the section 188.1 penalties and the section 149.2 excess corporate holdings rules. Subsec- tion 253.1(2), which will apply to investments made after April 20, 2015, establishes that a registered charity with an interest in a partnership will not be seen as carrying on a business if the following conditions are met: • By operation of any law governing the arrangement in respect of the partnership, the liability of the member as a member of the partnership is limited. • The member deals at arm's length with each general partner of the partnership. • The member, or the member together with persons and partnerships with which it does not deal at arm's length, holds interests in the partnership that have a fair-market value of not more than 20 per cent of the interests of all members in the partnership. The budget indicates that charitable organizations and public foundations can continue to carry on related businesses through limited partnerships in addition to making passive investments in accordance with the Income Tax Act amendments. In addition, the budget proposes to amend recent changes to the Income Tax Act by expanding those foreign entities eligible for registration as a "qualified donee" to include "foreign charitable foundations." Since Jan. 1, 2013, the Income Tax Act has required that for- eign organizations applying for qualified donee status in Canada meet the definition of a "charitable organization" under the legislation. This excluded foreign charities that would not have met this definition under Canadian law. The government will amend these provisions to change the wording in the Income Tax Act that requires that the foreign organization "is a charitable organization" to refer to a "foreign charity . . . not resident in Canada." While short on details, the budget states that Employment and Social Development Canada will launch a social finance accelerator effort to assist so- cial entrepreneurs in having their social finance pro- posals become investment ready in order to better attract private investment through activities such as workshops, advisory services, mentorship, network- ing opportunities, and investor introductions. The budget also proposed eliminating the mortgage prepayment penalty on long-term, non-renewable loans held with the Canada Mortgage and Housing Corp., a measure that would allow non-profit housing providers to access private sector loans at current lower rates and free up funds that may ultimately help improve the con- ditions and quality of affordable housing offered. More- over, starting in 2016-17 and extending over two years, the budget proposes spending $2 million towards ex- panding the Computers for Schools program originally founded in 1993 by Industry Canada and TelecomPio- neers, which operates in co-operation with all provinces and territories in collecting and donating refurbished government computer equipment to organizations. LT uRyan Prendergast and Linsey Rains are associates at Carters PC. Terrance Carter is managing partner of Carters and counsel to Fasken Martineau DuMou- lin LLP on charitable matters. The authors thank Bart Danko and Anna Du Vent for assisting with this article. u SPEAKER'S CORNER Judge invokes novel qualifier in assessing reasonable notice n the context of employment, induce- ment occurs whenever a rival or its agent embarks on a campaign of luring the targeted employee away from his secure employment to join the competitor's firm. A promise of long-term security, greater remuneration, more valued responsibilities, and career advancement opportunities are common examples of inducement. In its recent judgment in Fraser v. Canerector Inc., the Ontario Superior Court considered the workings of the inducement concept and expressed a novel qualifier that the "time of year" the employer terminates the employ- ment should be a factor in the assessment of reasonable notice. In Fraser, the plaintiff, Stuart Fraser, worked for his previous employer for seven years. By reasons of certain changes at his workplace, he developed a level of disen- chantment with his future employment prospects but had yet to start actively look- ing for new pastures when his friend, identi- fied only as Mr. Tuzi, approached him about an opening at his future employer, Caner- ector Inc. After two rounds of interviews, Canerector hired Fraser for its acquisitions group in June 2011. In 2013, the company changed his position to division liaison, something that was more of an evolution- ary rather than a revolutionary change. Less than three years later, the company dismissed Fraser. As a consequence, he sued for wrongful dismissal. Given the Supreme Court of Cana- da's very strong clarion call in Hryniak v. Mauldin and in light of the Ontario Court of Appeal's equally strong message in Arnone v. Best Theratronics, Fraser's ac- tion proceeded by way of a mo- tion for summary judgment. In his lawsuit, Fraser took the position that the company had induced him to leave a secure, long-term position at another firm to accept employ- ment with Canerector and, as such, the period of reasonable notice ought to have regard to that fact. He also claimed an en- titlement to the prorated bonus accrued to the date of his dismissal as well any bonus amounts that might have ac- crued during a reasonable notice period since bonus entitlement was an integral part of his compensation package. Canerector disputed the characteriza- tion of the hiring process as constituting inducement of any kind. Dealing with the issue of inducement, Justice Sean Dunphy concluded Canerector hadn't selected Tuzi to either locate a candidate to fill the open- ing or lure Fraser away from his secure employment. He also found that on the evidence, the plaintiff hadn't established inducement. In arriving at his conclusion, he considered the following factors: Caner- ector offered Fraser a "lower" base salary with the "potential" for higher remunera- tion in the future; it hired him as an en- tirely "new" employee by refusing to allow him to carry over his entitlements to vaca- tion and severance pay from his previous employment; and, significantly, he was subject to an initial 90- day probationary period, a fac- tor that's inconsistent with any allegation that the company had induced him to leave his former secure employment. Turning to the quantum of reasonable notice, Dunphy noted Fraser was fortunate to mitigate his loses by securing alternate employment within a 10-week period following his dismissal. He dismissed the two- week statutory notice as being too little and found the requested 12-month notice period to be excessive. Instead, he awarded Fraser a reasonable notice period of 4-1/2 months while factoring the "time of year" of his termination. He explained that because the company had terminated Fraser in June, it was "quite foreseeable that hiring decisions at his level might have needed to be delayed somewhat due to the summer months in order to account for va- cation schedules of key decision-makers." But for the negative impact of the summer period, Dunphy would have awarded Fraser a shorter period of notice of three months. This pronouncement is bittersweet. On one hand, Fraser sends a welcome message to employees that employers should account for the potential negative impact of summer vacations upon the dismissed employees' job prospects when assessing their entitlements at dismissal. On the other, it sends a troubling message to employers that forces them to carefully choose the timing of dismissal. In refusing to award bonuses, Dun- phy explained that Fraser's bonus plan implicitly required participants to be "ac- tive" employees at the time the company undertakes the assessment process after year end. He also found the plan itself was fundamentally discretionary and subjec- tive and lacked any formula a court might objectively apply. Fraser argued the bonus was an integral part of his remuneration and that absent a formula, there must be an objective assess- ment of it. Having distinguished a number of cases, Dunphy noted the parties hadn't pointed him to any case law where the courts had found an entitlement to a bonus arising from a discretionary plan that involved no formula to turn to. But would the outcome have been different had Fraser advanced his claim for bonus entitlement on the basis of a loss of opportunity to earn it by reason of the employer's unilateral action? Fraser adds another layer of complexity when assessing a dismissed employee's en- titlements. It may mean some uncertainty for employers when calculating pay in lieu of notice, thereby necessitating legal advice before proceeding with a dismissal. LT uNikolay Chsherbinin is an employment lawyer at Chsherbinin Litigation and au- thor of The Law of Inducement in Cana- dian Employment Law, published by Car- swell. He's available at 416-907-2587, nc@ nclaw.ca or nclaw.ca. O I Labour Pains Nikolay Chsherbinin

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