22.02.12

Charity Begins at Home

Christmas is a time for giving and as such charities benefit from the goodwill of the holiday season. Many companies illustrate their corporate social responsibility by donating to the many charities in Jamaica that give voice to those at risk and the underprivileged.

Given the socio-economic contribution of charities to our society the question can be asked: what really is a charity? The law with respect to charities is not consolidated into one statute but rather the Companies Act, the Income Tax Act, and the General Consumption Tax Act provide the framework for the establishment and operation of a charity. In particular, the Income Tax Act and the General Consumption Tax Act acknowledge the advantage to promoting compassion for the human condition by providing certain tax advantages to charitable organisations.

Most frequently the life of a charity begins at its incorporation under the Companies Act. The usual business vehicle to establish a charity is the incorporation of a company limited by guarantee without a share capital. One or more individuals may incorporate a company by signing and submitting its Articles of Incorporation to the Registrar of Companies. The Articles of Incorporation outline the framework of the company and will include for example the number of members that the company proposes to be registered, the registered office of the company, the number and names of directors, and the name of the secretary. Each member of a company limited by guarantee without a share capital is required to "guarantee" an amount which will be contributed to the assets of the company in the event of its being wound up. There is no minimum amount of guarantee specified by the Act and therefore this could be a nominal sum such as $100.

The entity's operations are required to be confined to specific objects and powers stipulated in its Articles of Incorporation and its purpose should fall within one of the following categories:

  1. relief of poverty;
  2. advancement of education;
  3. advancement of religion; or
  4. other charitable purposes beneficial to the community that do not fall within the abovementioned categories.

An example of a charitable purpose, therefore, would be to provide basic human needs to victims of disasters. This purpose must be expressly stated in the company's Articles of Incorporation.

At or after incorporation, an entity wishing to be treated as a company established for a charitable purpose may apply in writing to the Minister of Industry, Investment and Commerce ("the Minister") for a licence to remove the word "limited" from its name. This would be premised on the fact that the entity is formed for the promotion of commerce, art, science, religion, charity or other useful object and intends to apply its profits, if any, or other income for the promotion of its objects. Further such an entity must prohibit the payment of any dividend to its members.

If the Minister is satisfied that the entity's purpose falls with the abovementioned parameters he will grant the licence to the entity. This licence is granted on such conditions as the Minister thinks fit. Further, if the entity alters or amends its Articles of Incorporation then same must be submitted to the Minister for approval. This licence will result in the entity being exempt from the payment of Assets Tax on the value of the company's assets pursuant to the Assets Tax (Specified Bodies) Act.  

Generally, the entity can then apply for certain exemptions under the Income Tax Act provided its purpose is found to be exclusively charitable. The Income Tax Act indicates that the income of any corporation or association organized and operated exclusively for religious, charitable, scientific, or educational purposes is exempt from income tax provided no part of its net income benefits a private stockholder or individual. The organisation must apply for this exemption and it is at the discretion of the Commissioner of Taxes to determine whether the association falls within the parameters of this exemption.  

In addition, the Income Tax Act provides that that a donation to any institution or organization established and operated exclusively for charitable or educational purposes and approved by the Minister of Finance is an allowable deduction for the purpose of calculating the aggregate taxable income of the donor. Therefore, the entity must apply to the Minister of Finance for this approval in order for its donors to benefit from this advantageous allowable deduction. 

Further, under the General Consumption Tax Act the entity may make an application to the Minister of Finance to be designated an "approved organisation". An approved organisation is defined as an organization concerned with the welfare of children, the aged or the disabled and charitable organizations which have been approved by the Minister. An approved organisation may then apply to the Commissioner of Taxes for a refund of the tax paid.

Evidently, if an organisation wishes to be deemed a charity in relation to its formation and income, it must make several applications to a myriad of Ministries under various statutes and arguably satisfy a different litmus test for each. Therefore, one can well imagine a situation where an organisation falls within the purview of a charity under one statute and fails to satisfy the test under another. This decentralized process likely has significant adverse effects on stakeholders as they seek to navigate the process.

Fortunately, there appears to be proposed reform of the law as it relates to tax policy and this will likely affect charities. The International Monetary Fund's ("IMF") 27-month Stand-By Arrangement with Jamaica has performance criteria which include fiscal consolidation and institutional reform, public debt restructuring, and financial sector reform. Specifically, the IMF in their February 2011 Review under the Stand-By Arrangement attributed Jamaica's World Bank Doing Business index of 75 of 183 countries in 2010 to the high administrative costs in paying taxes which emphasized a necessity to simplify the complicated tax system, including various exemptions.  

Subsequently, the Ministry of Finance in their Green Paper entitled "Tax Reform for Jamaica" dated May 2011 proposed that the Minister spearhead "an Omnibus tax incentive legislation to bring all the pieces of legislation to do with the approval or granting of tax benefits under one umbrella and the pending Charities Act". It was indicated that this process will, among other things, harmonize existing taxes.

It is true, Christmas is indeed the season of giving and it is hoped that the current proposals to reform the law as it relates to charities will encourage the establishment of more charitable organisations, enhance the standard of life and make giving easier.

"Stephanie Sterling is an Associate at Myers, Fletcher & Gordon and is a member of the firm's Commercial Department. Stephanie may be contacted via stephanie.sterling@mfg.com.jm or  www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice."