4 d is a corporate foundation for you karen cooper

Is a Corporate Foundation for You?

By Karen J. Cooper, LL.B., LL.L., [email protected]

1-866-388-9596

© 2011 Carters Professional Corporation

IMAGINE CANADA

AND VOLUNTEER CANADA

2011 Canadian Business & Community

Partnership Forum & Awards

Montebello – June 9, 2011

www.charitylaw.cawww.carters.ca

A. BACKGROUND

• 3 Types of Registered Charities

1. Charitable Organizations

2. Public Foundations

3. Private Foundations

• A charity will be designated a "charitable

organization," a "public foundation," or a "private

foundation," depending on its structure, its source

of funding, and the way it operates

• Amendments to the Income Tax Act have blurred

the distinction between the types of registered

charities

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1. Charitable Organization

• All resources devoted to charitable activities carried

on by it – 149.1(6)

• No personal benefit

• No control by related persons and no control by a

person who has contributed more than 50% of the

capital or someone related to such person

• May carry on limited political activities and related

businesses

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2. Public Foundations

• Not a charitable organization

• May disburse funds to qualified donees (other

registered charities) – more than 50% of

expenditures on disbursements vs activities

• No control by related persons

• No control by a person who has contributed more

than 50% of the capital or someone related to such

person

• May only carry on a related business and limited

political activities, may not acquire control of any

corporation or incur certain debts

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3. Private Foundations

• Not a charitable organization

• May disburse funds to qualified donees (other

registered charities) – more than 50% of

expenditures on disbursements vs activities

• May be closely held and controlled

• May not carry on any business, acquire control of any corporation or incur certain debts

• Subject to excess corporate holdings regime and difficulties with non-qualifying securities

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• Disbursement Quota

– 2010 Federal Budget eliminated the 80%

disbursement quota

– Also, repeal of 80% DQ related concepts

Enduring property (including ten-year gifts)

Capital gains pool

Specified gifts

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– Foundations must still expend 3.5% of assets

not used directly in charitable activities or

administration (“investment assets”)

– Based on the average value of assets in 24

months immediately preceding the taxation year

– 3.5% DQ does not apply if property is $25,000 or

less

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– Transfer between non arm’s length charities - to

be expended by following year, unless designated

gift

Not transfers between arm’s length charities

When to designate a gift

◦ If gift would not be expended by transferee

charity the following year

Effect of designating a gift

◦ Transferor charity has to meet its own 3.5%

DQ with other expenditures

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• CRA Fundraising Guidance

– With 80% DQ repealed, more focus on compliance

with CRA’s Fundraising Guidance

– 2010 Budget indicates that part of CRA’s

Fundraising Guidance has strengthened CRA’s

ability to ensure that a charity’s fundraising

practices are appropriate

– Regulates fundraising practices

– Regulates fundraising costs

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– Fundraising ratio: fundraising costs to fundraising

revenue in a fiscal year

35% or less - unlikely to generate questions or

concerns

35 to 70% - CRA will examine average ratio

over recent years to determine if there is trend

of high fundraising costs

Over 70% - will raise concerns with CRA and

will likely result in revocation

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– Guidance provides information on current

treatment of fundraising under ITA and common

law (not a new CRA policy position)

Distinguishing between fundraising and other

expenditures

Allocating expenditures for T3010 reporting

Dealing with activities that have more than one

purpose

Understanding how CRA assesses what is

acceptable fundraising

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B. ADVANTAGES

• Protection of assets

– Assets are separate from operating entity which

is more likely to be sued

– But, must be an arm’s length board to be

effective

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• Segregation of Funds

– Distinguish between annual and capital

fundraising

Two campaigns can be run at the same time

for a different purpose

Options for donors to support the

organization are expanded

– Creation of endowment(s)

Can produce a flow of income to the charity

in the future by gradually building up a large

capital base

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– Perceived need to separate surplus from control

of operating entity

Ensures that the funds are protected for use

by the charity in the future

– Government funding decisions

Provides future protection in the event of

government cutbacks

– Perpetuating the names of particular donors

Establishment of a named fund is much

easier within a foundation than a charity

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• Attracting Board members with specific skills:

– Fundraising

– Fund management & investment

• Allows operating organization to focus on own

mission and operations

• Affirmation of longevity

• Greater likelihood of an increase in volunteerism

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• Potential to receive more funding than a charitable

organization

• Not required to devote all resources to own

charitable activities in a given year, subject to the

disbursement quota requirements

• Centralization, cohesiveness and coordination of

the organization

– Provides a single vehicle for the purpose of

charitable giving

– Day-to-day administrative burdens of decision-

making, policy formulation and other related

matters are transferred to the decision-makers of

the foundation

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• Increased flexibility in charitable gifting

• Increased publicity

– A parallel foundation provides more publicity and

marketing consequences for a corporation that

may not be available to a corporation that is

engaged in charitable giving on its own

• Boost employee morale

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• Other advantages of a Private Foundation

– Can be closely or family-held

– Can borrow for purpose of investing

– Provides significant control to establishing group

or individual

– Provides retention of control over investment of

its assets

– Maintenance of privacy regarding the gifts made

to the foundation

– Control over timing of gifts made and to whom

gifts are made to and by a foundation

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• Advantages of Donor Advised Funds

– No administrative and managerial requirements

– Not required to report annually

– No compliance obligations

– Costs to set up a corporation or trust are not

applicable

– Not required to register with CRA

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C. CHALLENGES

• Increased administrative and regulatory compliance

burden

– Incurring ongoing expenses and the requirement

for ongoing oversight and professional advice

– Record-keeping, filings, audits

– Staffing?

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• Who is in control?

– Fundraising priorities

– Mission, goals and objectives may diverge

– Unrealistic expectations, performance

measurement

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• Audit Issues

– If a non-arm’s length board may be required to

consolidate

– Restrictions on funds may not move them off the

balance sheet

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• Disbursement Quota

– 3.5% may be difficult to meet, particularly in

initial years and depending upon terms of

endowments with respect to capital

encroachment

– Compliance with technical anti-avoidance rules

regarding “designated gifts”

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• Fundraising Guidance

– If all fundraising expenses are in the Foundation

may be difficult to keep fundraising ratio under

35%

– But, may be easier to isolate fundraising best

practices into separate organization

• Transfers of existing long-term or restricted gifts

may be difficult

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• Potential for negative publicity

– When parallel foundation is not administered

properly and runs afoul of the regulatory regimes

• Disadvantages of a Private Foundation

– Cannot carry on any related business

– Can be expensive and more complicated than

donor advised funds

– Additional tax rules such as non-qualified

investments, non-qualified securities and excess

corporate holding rules

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D. SOME QUESTIONS FOR DISCUSSION

1. Do the existing and future assets warrant protection

and management in separate corporation?

2. Where would fundraising expenditures be incurred?

To what extent?

3. What would be the implications of consolidation for

the organization?

4. What about intellectual property licensing?

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5. Would there be difficulties with the transfer of

existing gifts and funds? To what extent?

6. What level of control would be required by the

operating/sponsoring organization?

7. Who would be responsible for establishing

fundraising priorities?

8. Will you be able to recruit a separate board with the

required skill set or are you simply diluting the

strength of the existing board?

9. How will staffing and administrative support be

provided

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THANK YOU

Karen J. CooperCarters Professional Corporation

(613) 235-4774 or [email protected]

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This handout is provided as an information service by Carters Professional Corporation. It is

current only as of the date of the handout and does not reflect subsequent changes in the law.

This handout is distributed with the understanding that it does not constitute legal advice or

establish a solicitor/client relationship by way of any information contained herein. The

contents are intended for general information purposes only and under no circumstances can

be relied upon for legal decision-making. Readers are advised to consult with a qualified

lawyer and obtain a written opinion concerning the specifics of their particular situation.

© 2011 Carters Professional Corporation

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4 d is a corporate foundation for you karen cooper