Blackmore v The Queen: Separate Tax Treatment of Communal Religious Organizations Not Available to Polygamous Mormon Group

Section 143 of the Income Tax Act (ITA), colloquially known as the “Hutterite rule”, provides for the separate tax treatment of communal religious organizations that satisfy the definition of a “congregation” as defined in subsection 143(4). This section was enacted in response to litigation undertaken by a number of Hutterite colonies in 1977. Following its enactment, it was not until this year that this rather obscure section (unknown even to many tax professionals) of the ITA was subject to litigation..

In Blackmore v The Queen, 2013 TCC 264, a decision released by the Tax Court of Canada on August 21, 2013, the court found that a well-known polygamous Mormon group based in Bountiful, British Columbia did not meet the definition of “congregation” and, as such, could not reap the benefits accorded to qualifying religious organizations under section 143 of the ITA. This case is interesting because, unlike the vast majority of tax cases, the evidentiary issues of concern do not relate to tax at all. Instead, they focus “on religious doctrines, principles, beliefs, and practices, particularly as they relate to the broad tradition of Mormonism, episcopal polity and apostolic succession” (Ibid at para 57).

Legislative History

Litigation concerning the Hutterites arose following an agreement between a group of Hutterite colonies and the Canadian government that outlined how the colonies would be taxed. Subsequent to this agreement, other Hutterite colonies not privy to these discussions refused to be bound by the agreement. In Wipf v The Queen, 73 DTC 5558 (FCTD), the colonies in disagreement challenged their tax assessments, which were affirmed by the Tax Review Board in 1972. In 1973, this decision was appealed to the Federal Court – Trial Division, where the court found that “total profits from a colony’s business activities should be apportioned in equal shares among its members, notwithstanding that they had assigned or deposited their share with the colony’s leadership as its trustee or their corporation” (2013 TCC 264 at para 15).

The tides turned in favour of the Hutterites following an appeal to the Federal Court of Appeal, [1975] FC 162 (FCA), where the court found that because profits within a Hutterite community are distributed on a needs basis (as opposed to a per capita basis), community members could not be said to earn any income. The colony’s farming activities and profits were found to be attributable to the trustee of each colony rather than the members themselves. As such, members’ income should be either the value of the subsistence provided by the trustees of the communities or, alternatively, members should be found to have no income at all.

Following a two-line decision by the Supreme Court of Canada upholding the Federal Court of Appeal’s ruling in this case, section 143 was introduced into the Income Tax Act in 1977 as a means to address the taxation of religious organizations. It was not until the aforementioned polygamous Mormon group sought to benefit from the communal trust rule that this section was subject to litigation.

The Community of Bountiful and its Taxation

While its main site is located in Lister, British Columbia, Bountiful is comprised of many physical localities. If you looked for “Bountiful” on a map, you would not find it; instead, it is the “colloquial name given primarily to Lister” (2013 TCC 264 at para 60). Winston Blackmore, the Appellant in this case, is the leader of the community, which was settled by his father’s nephew, Harold Blackmore.

The appeal to the Tax Court of Canada in this case concerned the determination of who is liable to pay tax assessed against the Appellant – the Appellant or the members of the Bountiful community? The Appellant argued that because the community meets the definition of a “congregation” defined in subsection 143(4), shares of a company, J.R. Blackmore & Sons Ltd., held in his name (and in the name of other family members) were beneficially owned on behalf of the members of the congregation and should be taxed as such. This company conducted a variety of activities at different locations, including a logging operation and farming activities, and most of its employees were community members.

The Court’s Analysis of the Statutory Definition of “Congegration”

The success of the Appellant’s argument was entirely dependent on the community of Bountiful meeting the definition of “congregation” prescribed by subsection 143(4) of the ITA, and thus this was the primary issue addressed by the court. The court found that this would require a textual, contextual, and purposive interpretation of the section, with reference to and comparison of the Hutterite community where appropriate.

There are four facets to the statutory definition of “congregation” in subsection 143(4). The court’s analysis of each facet will be outlined in turn below.

1. Do the members of the Bountiful community live and work together?

On its plain meaning, this first aspect of the definition of “congregation” was found to mean that community members must be together most, if not all, of the time. The court found that the Bountiful community did not satisfy this requirement. The community members did not “live together”, as residences of Bountiful were spread out over a vast area, with some members residing in sites across British Columbia and Alberta (often living 100 kilometres away from the main site). The community members also did not “live together”, as they were encouraged to work outside of the community, with many operating independent businesses.

2. Does the community of Bountiful adhere to the practices and beliefs of and operate according to the principles of the religious organization of which it is a constituent part?

The court outlined a variety of religious organizations that the Bountiful community may be a member of, including Mormonism and the Fundamentalist Church of Jesus Christ of Latter-day Saints (which is an offshoot of the Church of Latter-day Saints distinguished on the basis that the FLDS Church practices polygamy). The court dismissed each of these possibilities in turn, finding that Mormonism is a tradition (and not a religious organization) and the FLDS Church is not a religious organization because the lines of priesthood authority have been broken.

The court found that Parliament intended the provision to apply to established and definable religious organizations with an underlying common purpose. The members of the Bountiful community, however, were determined to be a group of independent Mormon fundamentalists, and not members of any religious organization.

3. Does the community of Bountiful prohibit any of its members from owning any property in their own right?

The court found that there was no evidence to support a finding that there was a prohibition by the community against its members owning any property. The Hutterite community, on the other hand, included a clear prohibition against owning property in their Articles of Incorporation. The court stressed the importance of the finding of a strict prohibition: one of the primary reasons for section 143 is that members of groups falling within the ambit of the section do not operate pursuant to the ordinary and usual rules of private property ownership and, as such, are not taxed in the same manner as other Canadian taxpayers. If individuals in the Bountiful community are free to obtain and sell property, “it is logical that they would be and expect to be taxed in the same manner as other Canadian taxpayers. Allowing a group, that does not explicitly prohibit private ownership of property of any kind, to benefit from the application of section 143 would be contrary to, and in direct contravention of, the purpose for which this section was enacted” (Ibid at para 276).

4. Does the community of Bountiful require its members to devote their working lives to the activities of the congregation?

The court found that while there was a general expectation that individuals within the community would contribute towards the activities of the community by working within the company, such an ongoing requirement was not made explicit (again, this is unlike the Hutterite community, which includes such a requirement in their Articles of Incorporation).

In short, then, the court found that Bountiful did not satisfy any of the requirements to constitute a “congregation” for the purpose of section 143, and therefore, could not reap its benefits.

What This Decision Means

This decision was highly fact based and, as such, may not have significant precedential value. However, had the court ruled in favour of the Appellant, the implications for the Appellant and the members of Bountiful would have been significant. The provision would have deemed the existence of an inter vivos trust, which would have been superimposed on the community. For tax purposes, this would have meant that all of the community’s assets and property, as well as income from property or business activities undertaken by the community, would have been deemed to be assets and property of the deemed trust.

The community could then have elected to have its income allocated among its members, who would then have been individually taxed. The Appellant’s significant tax burden would have been shifted to the members of Bountiful. Such a finding would have recognized the lack of personal ownership of property and assets within the community.