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IMAGINE CANADA
                             AND VOLUNTEER CANADA
                  2011 Canadian Business & Community
                       Partnership Forum & Awards
                        Montebello – June 9, 2011



Is a Corporate Foundation for You?

      By Karen J. Cooper, LL.B., LL.L., TEP
                  kcooper@carters.ca
                    1-866-388-9596

         © 2011 Carters Professional Corporation
2


        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
www.carters.ca                                                 www.charitylaw.ca
3




        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



www.carters.ca                                                   www.charitylaw.ca
4


        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
www.carters.ca                                                   www.charitylaw.ca
5




        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


www.carters.ca                                               www.charitylaw.ca
6




        •        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




www.carters.ca                                                 www.charitylaw.ca
7




                 – 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




www.carters.ca                                              www.charitylaw.ca
8




                 – 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


www.carters.ca                                                 www.charitylaw.ca
9




        •        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



www.carters.ca                                             www.charitylaw.ca
10




                 – 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


www.carters.ca                                                 www.charitylaw.ca
11




                 – 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

www.carters.ca                                                www.charitylaw.ca
12




        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




www.carters.ca                                                www.charitylaw.ca
13


        •        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

www.carters.ca                                                  www.charitylaw.ca
14




                 – 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

www.carters.ca                                                 www.charitylaw.ca
15




        •        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



www.carters.ca                                                www.charitylaw.ca
16


        •        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
www.carters.ca                                                   www.charitylaw.ca
17




        •        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



www.carters.ca                                                 www.charitylaw.ca
18


        •        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

www.carters.ca                                                www.charitylaw.ca
19




        •        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




www.carters.ca                                                www.charitylaw.ca
20




        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?




www.carters.ca                                              www.charitylaw.ca
21




        •        Who is in control?
                 – Fundraising priorities
                 – Mission, goals and objectives may diverge
                 – Unrealistic expectations, performance
                   measurement




www.carters.ca                                             www.charitylaw.ca
22




        •        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




www.carters.ca                                              www.charitylaw.ca
23




        •        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”




www.carters.ca                                                 www.charitylaw.ca
24




        •        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



www.carters.ca                                                   www.charitylaw.ca
25




        •        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

www.carters.ca                                               www.charitylaw.ca
26




        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?



www.carters.ca                                           www.charitylaw.ca
27




        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

www.carters.ca                                            www.charitylaw.ca
28




                    THANK YOU
                  Karen J. Cooper
                 Carters Professional Corporation
                  (613) 235-4774 or kcooper@carters.ca




www.carters.ca                                           www.charitylaw.ca
Disclaimer


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

  • 1. IMAGINE CANADA AND VOLUNTEER CANADA 2011 Canadian Business & Community Partnership Forum & Awards Montebello – June 9, 2011 Is a Corporate Foundation for You? By Karen J. Cooper, LL.B., LL.L., TEP kcooper@carters.ca 1-866-388-9596 © 2011 Carters Professional Corporation
  • 2. 2 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 www.carters.ca www.charitylaw.ca
  • 3. 3 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 www.carters.ca www.charitylaw.ca
  • 4. 4 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 www.carters.ca www.charitylaw.ca
  • 5. 5 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 www.carters.ca www.charitylaw.ca
  • 6. 6 • 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 www.carters.ca www.charitylaw.ca
  • 7. 7 – 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 www.carters.ca www.charitylaw.ca
  • 8. 8 – 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 www.carters.ca www.charitylaw.ca
  • 9. 9 • 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 www.carters.ca www.charitylaw.ca
  • 10. 10 – 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 www.carters.ca www.charitylaw.ca
  • 11. 11 – 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 www.carters.ca www.charitylaw.ca
  • 12. 12 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 www.carters.ca www.charitylaw.ca
  • 13. 13 • 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 www.carters.ca www.charitylaw.ca
  • 14. 14 – 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 www.carters.ca www.charitylaw.ca
  • 15. 15 • 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 www.carters.ca www.charitylaw.ca
  • 16. 16 • 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 www.carters.ca www.charitylaw.ca
  • 17. 17 • 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 www.carters.ca www.charitylaw.ca
  • 18. 18 • 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 www.carters.ca www.charitylaw.ca
  • 19. 19 • 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 www.carters.ca www.charitylaw.ca
  • 20. 20 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? www.carters.ca www.charitylaw.ca
  • 21. 21 • Who is in control? – Fundraising priorities – Mission, goals and objectives may diverge – Unrealistic expectations, performance measurement www.carters.ca www.charitylaw.ca
  • 22. 22 • 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 www.carters.ca www.charitylaw.ca
  • 23. 23 • 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” www.carters.ca www.charitylaw.ca
  • 24. 24 • 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 www.carters.ca www.charitylaw.ca
  • 25. 25 • 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 www.carters.ca www.charitylaw.ca
  • 26. 26 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? www.carters.ca www.charitylaw.ca
  • 27. 27 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 www.carters.ca www.charitylaw.ca
  • 28. 28 THANK YOU Karen J. Cooper Carters Professional Corporation (613) 235-4774 or kcooper@carters.ca www.carters.ca www.charitylaw.ca
  • 29. Disclaimer 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