are charitable trusts “public”? - canadian bar association · 2012-05-24 · • charitable...

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Are Charitable Trusts “Public”?

Adam Parachin

Faculty of Law

University of Western Ontario

[email protected]

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Orthodox Classification of Trusts

Express Trusts

Trusts for Persons Trusts for Purposes

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Basic Question

What makes trusts for charitable purposes unique?

Are they as readily distinguishable from personal trusts as tends to be assumed?

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Differentiating Characteristics

1. Charitable Trusts are…Charitable

2. Charitable Trusts are for Purposes

3. Charitable Trusts are Public

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The Definitional Question

If a gentleman of education, without legal training, were asked what is the

meaning of “a trust for charitable purposes”, I think he would most probably

reply, “That sounds like a legal phrase. You had better ask a lawyer.” (Commissioners for Special Purposes of The Income Tax v. Pemsel [1891] A.C. 531 at 584 (per Lord Macnaghten)

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The Definitional Question

The law of charitable trusts…[is] an area riddled with arcane and archaic

learning, hair-splitting distinctions, irreconcilable authorities and anomalies

for which nobody ever dares offer any explanation other than their history. (P.C. Hemphill, “The Civil Law Foundation as a Model for the Reform of Charitable Trusts Law” (July 1990) Australian Law Journal Vol. 64 404 at 405.)

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The Purposes Question

• Admittedly, absence of discrete beneficiaries raises some unique issues:

– Who will enforce purpose trusts?

– How to apply certainty of objects test?

– How to conceptualize a “division of title”?

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• But uniqueness of purpose trusts is perhaps overstated

• Difference of degree versus Difference of Kind

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• Charitable purpose trusts do not lack end beneficiaries

– Some charitable trusts could actually pass the certainty of object test for

discretionary trusts / powers of appointment

• Personal trusts do not absolutely lack end purposes

– Henson trusts?

– Protective trusts?

– Conditioned beneficial entitlements?

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• With charitable purpose trusts, we discern end beneficiaries through the

explicitly identified purposes

• With personal trusts, we discern end purposes through the explicitly

identified beneficial interests

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The Public Question

• Publicness of charitable trusts is often treated as a received wisdom:

– “…the cases seem to reflect a general, unstated, and possibly

unrecognized feeling on the part of judges that charitable trusts are

not really private…” (James Colliton, “Race and Sex Discrimination in Charitable Trusts” (2002-2003) 12 Cornell J.L. & Pub. Pol. 275

at 288)

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The Public Question

– “Charitable trusts are public entities by their very nature…” (James Colliton, “Race

and Sex Discrimination in Charitable Trusts” (2002-2003) 12 Cornell J.L. & Pub. Pol. 275 at 292)

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The Public Question

– “…charitable trusts are public trusts…” (P.S.A. Lamek, Case Comment 4 Osgoode Hall L.J. 113

(1966) at 116)

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The Public Question

– “It can hardly be contended in the light of all these considerations that

the settlor of a charitable trust is dealing with private property in a

private way.” (P.S.A. Lamek, Case Comment 4 Osgoode Hall L.J. 113 (1966) at 117)

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The Public Question

Why do we care whether charities are truly “public”?

Is this just idle academic reflection for those who think about law?

Or are there practical implications for those who actually practice law?

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Practical Implications

• Regulatory Posture of State:

– Facilitative versus Interventionist

• Specific Examples:

– Public Benefit Requirement

• Who can be excluded from a charitable trust?

– Transparency

• e.g., salary disclosure

– Mandated “Stewardship”

• e.g., salary caps

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Practical Implications

• Specific Examples Cont’d:

– Political Engagement:

• “The guarantee of freedom of expression in paragraph 2(b) of the Charter is not a

guarantee of public funding through tax exemptions for the propagation of opinions no

matter how good or how sincerely held.” (Human Life International in Canada Inc. v. M.N.R. [1998] 3

C.T.C. 126 (FCA), para 18)

– Charter Scrutiny:

• “While the Foundation may have been privately created…as a charitable trust…the

Foundation has, in realistic terms, acquired a public or, at the least, a quasi-public

character.” (Canada Trust Co. v. O.H.R.C. (1990) 69 D.L.R. (4th) 321 (Ont. C.A.) at para 33, per Robins J.A.)

– Investment Autonomy

• In re Milton Hershey School Trust, 807 A.2d 324 (Pa. Commw. 2002).

– Cy-Pres

• Original intent vs Redeploying Charitable Assets

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Indicia of Publicness

• Public Subscriptions

• State Sponsorship of Charity • Income Tax Concessions

• Targeted Property Tax, Retail Sales Tax and HST Concessions

• Perpetual Existence

• Accumulations Act (exempt)

• Rule Against Remoteness of Vesting (Lenient Treatment)

• State Enforcement

• Public Benefit Test

• Charitable Purposes = Public Purposes?

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• So we know charitable trusts have a public dimension

• BUT → Is the public dimension overstated?

→ Is the private dimension understated?

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Examine publicness in light of:

(1) Public Benefit Test

(2) State Sponsorship of “Charity”

• State enforcement

• Income tax concessions

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Public Benefit Test

• Public Benefit test described as “capricious”, “arbitrary” and “sometimes

impossible to reconcile” (See G.H.L. Fridman, “Charities and Public Benefit” (1953), 31 Can. Bar Rev. 537 at p. 539)

• Terminology is part of the problem

• Periodically, legal tests are framed using imprecise / misleading language

• Distortion follows b/c lawyers fixate on terminology at the expense of the

underlying concept

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Public Benefit Test

• “Public Benefit” reflects a very poor choice of language to capture the

intended concept

• The “public” in “public benefit” does not per se mean “public”

• So what does it mean?

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Public Benefit Test

• “Public” requirement serves 3 functions:

(1) Certainty of Objects Function

(2) Stranger Function

(3) Benefit (or Utility) Protecting Function

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Certainty of Objects Function

• Charitable trusts are said to be exempt from certainty of objects function

• True, but nevertheless misleading

• Charitable status is unavailable where it is uncertain who the trust will benefit

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• “Public” requirement means that charities must benefit “a public”

• Must be able to say that the fund is of benefit to “the community or of an

appreciably important class of the community” (Verge v Somerville [1924] A.C. 496 at 499 per

Lord Wrenbury)

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Keren Kayameth v IRC [1932] A.C. 650:

• Object was to purchase land in Palestine, Syria, etc, for the purpose of

“settling Jews on such lands”

• Denied charitable status on the basis of the “public” requirement

– What section of the community was being benefited?

– Jews everywhere? Jews “repatriated to the Promised Land”?

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Williams’ Trustees v IRC [1947] AC 447:

• Object was to “promote Welsh interests in London by social intercourse”

• Denied charitable status on the basis of the “public” requirement

• Lord Simonds reasoned that “Welsh” raised the same issues as “Jews” in

Keren Kayameth

• there was no identifiable “section of the community” being benefited

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• Uncertain versus Unascertained Beneficiaries

• Charitable trusts must benefit a certain community (“a public”)

• But the ultimate beneficiaries must be unascertained

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Stranger Test

• Primary function of “public” requirement is to differentiate private

benevolence from legal charity

• Private benevolence entails conferring benefaction on the basis of private

selection criteria:

– Specifically naming beneficiary

– Personal relationship

– Employment relationship

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Stranger Test

• Charity entails conferring benefaction on unascertained persons remote to

the benefactor

• Truly charitable act entails benefitting anonymous persons of emotional and

obligational distance to the settlor

• Beneficiaries must be drawn from the public

– Re Compton [1945] Ch. 123

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Stranger Test

So what does this tell us?

• “public” does not mean “public” so much as “not private”

• not a positive requirement of publicness so much as a (limited) prohibition

against privateness

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Stranger Test

Supporting Authorities

• Per Lord Simonds in Williams Trustees v. IRC [1947] AC 447 at 457)

[A] trust in order to be charitable must be of a public character. It must

not be merely for the benefit of particular private individuals.

• Per Lord Reid in I.R.C. v Baddeley [1955] A.C. 572 at 606

[The] contrast between a section of the community and a fluctuating

body of private individuals has been used as the proper test in

several cases without any suggestion that it is an inadequate test.

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Stranger Test

Permissible Privateness:

• “public” requirement does not even rule out all privateness

• Relief of poverty funds have been restricted on the basis of family,

employment and other private relationships (e.g., club membership)

• Scholarship funds with priority given to descendants of settlor or employees

of a particular employer

• Trusts to benefit residents of a locality and their descendants

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Benefit Protecting Function

• Complicated and unresolved law

• Basic Point: Limiting class of beneficiaries can sometimes undermine the

benefit of a charitable trust

• Fund might fail public requirement if class of beneficiaries is too narrow

• But how do we know if the class of beneficiaries is too narrow?

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I.R.C. v. Baddeley [1950] A.C. 572

• Dictum of Lord Simonds contemplated a bridge for “impecunious Methodists

only”

• Lord Simonds concluded not charitable b/c not public

• What does this tell us about the public requirement?

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Two Views:

(1) Charitable trusts must not restrict goods/services in a way that is inconsistent

with the underlying charitable purpose

– CRA doc CPS-024, dated March 10, 2006

– Charity Commission (2008), Analysis of the Law Underpinning Charities and

Public Benefit,

(2) Only purposes of general public utility must be formally open to all

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• Second view finds support in cases upholding restrictions on class of

beneficiaries:

– educational trusts have been conditioned on the basis of religious affiliation,

parental occupation and nationality

– Home of aged Christian Scientists

– Home of rest exclusive to seamen

– Trust for poor lawyers and their families

– Promotion of marriage among persons of a specified religion

– etc

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Main Point:

• Public requirement does not unambiguously preclude settlors of charitable

trusts from targeting benefaction

• Charitable trusts need not benefit the public at large

• Are these really public trusts then?

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State Sponsorship of Charity

Two Examples:

(1) State Enforcement of Charitable Trusts

(2) Income Tax Concessions

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State Enforcement of Charitable Trusts

Does state enforcement mean charitable trusts are public in nature?

Necessary to consider:

(1) Reasons Behind State Enforcement

(2) Implications of State Enforcement

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Reasons Behind State Enforcement:

• There is no one else to enforce them!

• True, but possibly oversimplified

• State could just as well disallow charitable trusts

• State enforcement reflects a policy preference to support charitable trusts

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Reasons Behind State Enforcement:

• State enforces charitable trusts because they are public in nature

• Not necessarily true

• Charity is a private activity supported by the state owing to its positive

social consequences

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Implications of State Enforcement:

• State enforcement introduces a public dimension absent from personal

trusts

• But charitable trusts are otherwise privately established, privately

managed and (largely) privately funded

• At most we have here a public-private partnership

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Income Tax Concessions

Do Income Tax Concessions Render Charitable Trusts Public?

Not necessarily:

(1) Not everyone agrees donation concessions are actually concessions

(2) Largest portion of donations funded privately → Cautionary Note: Calls for enhanced donation incentives could change this!

(3) Tax concessions do not normally render taxpayers “public”

(4) Is the state recognizing public purposes or incentivizing desirable private activity?

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Conclusion

• Charitable purpose trusts perhaps not as distinct as is often thought

• Portrayal of charities as “public” institutions is potentially distorting

• Charitable trusts are privately established, privately operated and to

significant extent privately funded

• Charitable trusts can target goods / services more narrowly than the public

at large

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Conclusion

• Be cautious of tax reform proposals that could “tilt the balance”

are charitable trusts “public”? - canadian bar association · 2012-05-24 · • charitable...

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