May 8, 2022
Charitable trusts are major exceptions to the rule that a trust must have a person or persons as beneficiaries. A charitable trust also receives favourable tax treatment, and is exempt from rules about accumulating income or holding property in perpetuity.
We have discussed purpose trusts generally before, but a recent case out of British Columbia creates an opportunity to talk about charitable purposes.
As this article’s title says, not every good cause is a charitable purpose. Canada’s definition of charitable purposes traces back to a law passed in England in 1601, and restated in 1891. Our society has changed a lot since then, but not the definition.
The 1891 case was called Pemsel v. Special Commissioners of Income Tax, so the established categories are called the “Pemsel heads”:
- relief of poverty
- advancement of education
- advancement of religion
- other purposes beneficial to the community
In the recent British Columbia case, Jim Crerar, age 75, with no dependents or close relatives, decided that he wanted to establish a charity to pay the legal costs of poor people wishing to sue their former employers. Early in his life, he had been fired, lacked funds to pay a lawyer, and would have been destitute but for a fortuitous inheritance.
He applied for a declaration from the court that this was a valid charitable purpose.
He first described the purpose as the “relief of poverty”.
Seems simple.
Not really.
The courts have wrestled with the definition of poverty. It is not limited to aid for those on the brink of starvation, or the provision of the necessities of life. It has been applied to trusts that provide funds to alleviate temporary financial depressions.
The judge did not agree that this trust would fit that category. He was critical of the lack of definition of “poor” in describing the potential beneficiaries.
He also said that it was unlikely that a person would receive the sort of immediate relief he felt fit the category. He went on to say that “the only guaranteed beneficiary is legal counsel whose fees and disbursements are secured by payment from the fund.”
Ouch.
So what about the fourth Pemsel head? “Beneficial to the community” seems pretty broad.
Which is exactly the problem with relying upon the fourth head. Because it sounds so wide open, courts over the years have taken a very narrow view of what fits. If you are pausing to shake your head at that last sentence, trust us, it makes sense to lawyers and judges, and probably only to those sort of folks.
First, the court compares the purpose in question to purposes previously found to be charitable. Which sounds good, if you want to live in 1601 or 1891.
Second, the court examines whether prior exceptions to the rules cover the proposed purpose.
Third, if the purpose might allow funds to be used for activities that are clearly not charitable.
Further, the scope of the trust must benefit a sizable chunk of the community, not a small or private sliver.
Promoting access to justice has been held to be charitable, so that is good.
Except the proposed Jim Crerar Trust was found not to be for access to justice.
Why?
- There was no evidence that a sizable segment of society faces access to justice issues related to wrongful dismissal;
- there was no evidence regarding the presence or absence of other alternatives available to persons; and
- the special privileges of a charity are not to be treated lightly.
The judge left it open that the trust agreement could be redrafted to better fit the requirements, but gave no specific guidelines for doing so.
This case illustrates that:
- charitable purposes are narrower than you might think;
- clear drafting is required in a trust agreement of any sort but especially one hoping to have a charitable purpose; and
- evidence of a beneficial effect to a sizable segment of society is needed for the fourth Pemsel head.
Part of the Proud Tradition at Weilers LLP is our commitment to community, to the people and institutions of Thunder Bay and Northwestern Ontario. From this beginning, we have been involved with the creation and administration of charitable organizations. Our corporate and estates lawyers are skilled in drafting. If you are a trustee or director of a charity, or hope to establish a charitable gift, we may be the lawyers for you.