We recently posted the CRA letters and charity response relating to the revocation of Brightline Foundation. The CRA concerns with the charity relate to the valuation of certain publicly listed shares. Here is an excerpt from one CRA letter:

Fair market value (FMV)

The Act requires a registered charity to ensure the information on its official donation receipts is accurate. The requirements for the contents of the receipts are listed in Regulation 3501 of the Act. A registered charity could have its registered status revoked under paragraph 168(l)(d) ofthe Act for issuing tax receipts other than in accordance with the Act or that contain false information.

The Act does not provide specific guidance in determining how a gift of public shares should be valued. A careful review of the facts of each situation should be made to determine the FMV. Given the wide disparity of property donated to registered charities, it is a charity’s responsibility to determine the most appropriate methods and procedures to determine the FMV. The CRA highly recommends the use of an independent appraiser.

As a general rule, the CRA has accepted the use of the closing bid price of a public share on the date it is received or the mid-point between the high and the low trading prices for the day, whichever provides the best indicator, given the circumstances, of the FMV on normal and active market trading. However, there are times when other factors may have to be taken into consideration in determining the FMV. The onus is on the charity to consider all of these factors when determining a share’s FMV. The following is a partial listing of the factors which could impact a share’s FMV: the size of the block of shares in relation to the whole; the volume traded; the attributes of the shares; whether the donor has control or was a minority shareholder; whether there were any restrictions on the transferability of the shares; and whether the shares were thinly traded, which would require a review of trades over a longer period of time.

As explained in our May 16, 2019, letter, the CRA’s Business Equity Valuation (BEV) area determined that the FMV of the [REDACTED] shares was substantially less than the tax-receipted amounts. It is our position that the share values provided by BEV take into consideration factors that were not reflected in the trading prices on the day the shares were transferred to the Foundation. The responsibility lies with the Foundation to ensure that the donation receipts are issued for the property at their FMV. Furthermore, the Act requires that donation receipts issued for property, other than cash, are recorded at “the fair market value of the property at the time the gift is made.” Although the Foundation indicated in its representations that it does not agree with the BEV determination, we have not received any additional facts or documentation that would indicate that we have misunderstood or not considered all of the relevant information when valuing these shares.

Consequently, it is our view that the Foundation has not alleviated our concerns in this matter, and it remains our position that the Foundation’s charitable donation receipts were grossly inflated in a series of non-arm’s length transactions. As such, under paragraph 168(1)(d) of the Act, the registration of a registered charity may be revoked if it fails to issue tax receipts other than in accordance with the Act or that contain false information.

CRA notes in their Registered Charities Newsletter – Spring 2002 – No. 12 – Spring 2002 that you cannot just use the closing price for marketable securities:

Some other factors that may have to be taken into consideration are: the size of the block of shares in relation to the whole; the volume traded; the attributes of the shares; whether the donor had control or was a minority shareholder; whether there were any restrictions on the transferability of the shares; and whether the shares were thinly traded, requiring a look at trades over a longer period of time.

In Brightline Foundation v. Canada (National Revenue), the charity went to court to try and obtain an order postponing the date on which the CRA could publish, in the Canada Gazette, a copy of the notice of revocation. Brightline had argued that CRA had committed to not publishing the notice of revocation until the FCA has reviewed the application. CRA published the notice in the Canada Gazette. CRA argued on this motion that the application by Brightline should be dismissed as it was moot because the publication had already taken place.

The FCA notes:

[8] There is nothing in this excerpt from the Revocation Notice that would support Brightline’s argument that the Minister had promised not to publish a copy of the Revocation Notice until Brightline’s application under paragraph 168(2)(b) of the Act had been heard and a decision had been rendered by this Court. There is no merit in Brightline’s argument.

One of the more interesting arguments made by Brightline was:

There is no evidence the Director General, Charities Directorate has been delegated the Minister’s authority to publish notice of intention to revoke charitable status in the Canada Gazette. Consequently, there is no evidence the notice published in the Canada Gazette is operative.”

This argument was not accepted by the Court.

[18] The power to publish a copy of the Revocation Notice was delegated to the Director General, Charities Directorate (Income Tax Act – Authorization to exercise powers or perform duties of the Minister of National Revenue published on the website for the Government of Canada). There is no merit to Brightline’s argument that the publication of a copy of the Revocation Notice was not properly authorized.

The Court decided:

[22] The Minister’s motion will be allowed, with costs, and Brightline’s application for an order extending the period of time that had to expire before the Minister could have published, in the Canada Gazette, a copy of the Revocation Notice, will be dismissed on the basis that this application is moot.

It is interesting to note that Brightline Foundation in 2022 had no revenue, expenditures, assets or liabilities. Since 2009, according to its T3010 filings on CharityData.ca, it issued official donation receipts for a total $1,193,248. It had total expenditures, including management and administration and gifts to qualified donees since 2009 of $109,667. The T3010 filings reflect no expenditures on charitable activities (which is typical for foundations), but only $83,600 was spent on gifts to qualified donees. So, in its lifetime, the charity issued $1,193,248 in tax receipts and gave $83,600 in gifts to other charities. It shows in 2014 an unrealized loss on the current value of investments of $976,222. Not surprising that CRA would have some concerns with this charity.