Editor: Rhonda Klosler, CA, Grant you three wishes

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1 NPO ALERT IN THIS ISSUE The changing face of fundraising for NPOs: Learning from the UK experience? Year End Planning for Canadian Sales Tax Accounting Standards Update for Not-for-Profit Organizations Charitable Activities Outside Canada December Grant you three wishes Editor: Rhonda Klosler, CA, rklosler@collinsbarrow.com THE CHANGING FACE OF FUNDRAISING FOR NPOs: LEARNING FROM THE UK EXPERIENCE? Banking crises; spiralling national debt; shortages of government funding; Not-for-Profit Organizations (NPOs) signalling concerns about donations: some are seeing these as scary times. Others, however, talk about policy windows and the changing face of public services, and see it as a time of opportunity, growth and positive change. Why is that, and where does the benefit lie for NPOs, and the public they serve? In the UK in 2009 some 67% of funding for NPOs came from the public purse. This was skewed towards the larger NPOs, and took three forms: core grants (payments to support the NPO in its core costs); purpose grants (to cover certain areas of activity); and contractual payments for services. At that stage core grants were already being cut back, pushing NPOs to rely on their delivery of services rather than just receiving payments for being there. What followed were widespread public spending cuts as the Conservative-Liberal coalition government reversed the previous labour policy of spending to stimulate growth. Public services, whether nationally- or locally-funded were cut back, and funding to NPOs cut, in some cases drastically. The NPOs faced a choice: change strategy, cut back or close. In some cases the NPO did not have the time or resources to make the change. In others, circumstances caused them to look afresh at the options. As they did, they saw opportunities, and a government apparently focused on encouraging more. It had a vision of a Big Society, in which philanthropy, volunteering, and services by communities for communities became a new way of life. Three key policy moves followed: changes to tax legislation to encourage giving; a legislation-backed shift towards outcomes-based commissioning; and the development of the Big Society Bank (subsequently named Big Society Capital ) to jump-start NPOs drawing in support from investment capital markets. The tax incentives for increased giving seem to have had little effect: perhaps they were not helped by the furor earlier this year when Jim Clifford, Head of NPO Advisory, Baker Tilly International the government announced a cap on the already effective gift aid under which a taxpayer (corporate or individual) receives tax relief for gifts made to NPOs in the year of the gift. This was subsequently withdrawn as it threatened to hit major-donor philanthropy, but donation income has recently been reported to have fallen by 20% anyway. The move towards outcomes in commissioning is changing funding for NPO-delivered services. The Public Services (Social Value) Act 2012 enshrined this focus in legislation, obliging the commissioner to consider this aspect. Further European Commission legislation and funding policy under the Social Business Initiative is going in the same direction. The response that has emerged to face NPOs is Payment by Results: Government will pay when results (some uncertainty here as to what is a result, and outcome, and from whose perspective it should be viewed) are achieved. The investment markets jump-start, Big Society Capital, was set up with C$950M of money from long-unclaimed private bank accounts sitting within the general UK banking system. It is funding a variety of investments into Social Enterprise (mostly by NPOs), requiring a variety of returns from the substantially philanthropic to the firmly commercial, with a trend towards the latter. In the same way that issues of stocks on the public market are led by subscription by key institutions, with others and then private investors following suit, other grantmaking institutions and funds are turning to this as an investment opportunity, with some allocating up to 5% of their assets to this type of investment. So where does that leave the NPO in its fundraising drive? There are now five broad sources of fundraising, each appropriate to certain types of organization or service. Three are substantially philanthropic: traditional donation; what I d term critical donation; and grants. The other two are investments: general social finance and a specific hybrid form that has emerged over the last two years, the Social Impact Bond (SIB).

2 2 Donations continue, as ever, and many hope they are on the rise. However, falling disposable income during an economic downturn is not helping. With a steadily improving ability to measure and track the effectiveness with which funds are applied to achieving social outcomes, donors (generally the larger ones) are starting to impose conditions on their ( critical ) donations around achieving these outcomes, or at least focusing the funding on achieving them. The grant funding market is certainly alive, but again focusing increasingly on measures of effectiveness in deciding where and how to apply its funds. This, together with a diversion of grants to the costs of getting ready for the social finance and SIB markets, is changing the face of grant application, and the traditional fundraiser s round. Increasingly we expect to have to explain and quantify the outcomes we will be targeting to achieve, setting milestones against which we can be judged, and in some cases further tranches of funding drawn down. Perhaps the most exciting move is the development of the social finance market. It has, to some extent, always been there. Arguably new Victorian towns such as Saltaire built around the dark Satanic mills of England s industrial North were Social Enterprises funded by financiers intending to achieve social good linked to repayment of their investment. Some investor disillusionment with returns from more conventional sources improved measurement, and the acceptance by NPOs of the need to pay returns on invested capital have opened up this new area for those seeking a new element to an investment portfolio. These investments are taking a variety of forms: senior (bank-type) debt; higher-risk debt (carrying a correspondingly higher return); equity-type investment; and guarantees and underwriting agreements for others investment. The Social Impact Bonds link the funding with the delivery of services by one or more given NPOs. As a distinct area within social investment they are characterized by being built closely around the service they fund, carrying some of the risks in it. They are being applied to provide working capital for Payment by Results contracts, capital for capital assets used in service delivery, and to provide guarantees. Of those announced to date (11 in the UK plus New York s), most are focused on Payment by Results. From the announcements in November and December, we have seen the first wholly originated by NPOs: our own co-development, with the Consortium of Voluntary Adoption Agencies, It s All About Me, a new service finding and supporting adoptive placements for harder-to-place children in the care system. This is expected to achieve 300 extra placements a year, requiring C$9M of working capital funding, and delivering over C$22M of social value (half of it in cashable savings to the placing Local Authority) for every C$100K invested for ten years. The financial models indicate a fundable service: repaying its capital at year ten, sustaining an annual 4% fixed yield to funders, and a with-profits element which could pay up to a further 4% per annum or more whilst carrying a fair proportion of the financial risk of delivery. This looks set, then, to change the Social Responsibility landscape. It comes at the same time as the emergence of social-sensitivity themes such as Michael Porter s shared value (Harvard Business Review, Jan/Feb 2011) in which corporates look to improve their viability and profitability by more socially-sensitive working. The corporate looking to its social responsibility policy now has four approaches from which it can build its preferred solution. It can, recognizing shared value, develop activities that help and support its communities: fair trade sourcing of raw materials, or working conditions for its staff, for example. It can give grants, with a greater ability to specify measurable deliverables. It can give gifts in kind: encouraging staff and others to volunteer, giving product, or delivering key services (such as the tarmac company building the new driveway for a special needs college). Finally, it can invest: making loan or equity capital available for delivery of missionaligned services. With the traditionally-recognized need for the NPO to be careful to manage the reputational implications of the associations it makes with funders, this surely is a time of huge opportunity. Like the Fairy Godmother in a favourite fairy tale, these difficult times have also brought us three wishes, and a whole list from which to choose. Let us hope we all choose wisely. Jim Clifford is Head of NPO Advisory at Baker Tilly, market leaders in the sector in the UK. He is a Visiting Research Fellow at Cass Business School, where he mixes lecturing on Social Finance and Social Impact Measurement on the specialist MSc programmes for NPOs with his research work into transactional and investment decision-making for NPOs. He was recently appointed to Chair a subgroup of the European Commission guiding it on Social Impact Measurement under emerging Social Business funding policy. Widely known as a speaker in UK children and families interventions, he has co-developed with the Consortium of Voluntary Adoption Agencies, a SIB-funded service for harder-to-place children, the first announced that originates wholly from the Voluntary sector.

3 3 YEAR END PLANNING FOR CANADIAN SALES TAX Altaf Sarangi, Indirect Tax Partner, Collins Barrow Toronto Alex Kwong, Indirect Tax Senior Associate, Collins Barrow Toronto As we near the end of 2012, charities and non-profit organizations (NPOs) operating in British Columbia (BC), Prince Edward Island (PEI), and Québec will need to review their internal sales tax policies in preparation for the changes coming in Significant changes will take place in BC and PEI, while there will be slight adjustments in Québec. Re-introduction of the 7% PST in BC on April 1, 2013 Due to the results of a referendum held in 2011, the BC government will remove the province from the HST system it joined on July 1, 2010 and re-introduce the provincial sales tax (PST) effective April 1, As the BC government has drafted new PST legislation instead of re-implementing the old legislation, charities and NPOs operating in BC should not simply refer back to their pre- July 2010 policies as the rules may have changed. General transitional rules Organizations planning significant purchases around the April 1, 2013 PST implementation date should be sure to review the impact the transitional rules may have on the transaction. Generally for goods and taxable services purchased where the consideration is due or paid before April 1, 2013, the 12% HST will still apply. For consideration due on or after April 1, 2013, the transaction will be subject to the 5% GST and the 7% PST. Taxable and exempt supplies In general, the 7% PST will apply to most goods purchased for consumption with exemptions for items purchased for resale by registered vendors. A notable category of goods exempt from the PST is food and drink for human consumption. There will be significant changes for services as only those services specifically identified as taxable will be subject to the PST, legal services for instance. If a significant purchase of non-taxable services is expected in the near future, the organization might consider holding off until after April 1, 2013 to limit the tax cost to the 5% GST. End of HST rebates for charities and qualifying NPOs 57% of the provincial portion of the BC HST as a rebate, thereby reducing costs for such organizations. There will be no rebates available for the 7% PST paid by charities and NPOs after April 1, This represents an added cost. For tax planning purposes, charities and qualifying NPOs should consider paying for significant purchases prior to April 1, 2013 to ensure that a portion of the sales tax paid can be recovered as a rebate. The 50% rebate for the 5% federal GST will still be available after April 1, HST implementation in PEI on April 1, 2013 On the same day that BC leaves the HST, PEI will be moving in the opposite direction to end its PST system in favor of the HST. Currently supplies that are made in PEI are subject to a combined sales tax of 15% (5% GST, 10% PST), but after harmonization HST will reduce slightly to 14%. Similar to the changes introduced in Ontario and BC on July 1, 2010, the HST will be administered solely by the Canada Revenue Agency (CRA), reducing the administrative burden of dealing with two separate tax agencies for charities and NPOs operating in PEI. General transitional rules Generally for purchases of goods, the HST will be applicable if ownership of the goods is transferred to the customer after the HST implementation date of April 1, For services, if over 90% of the service is completed after April 1, 2013, it will be subject to the HST. Otherwise, the service will be subject to the old 5% GST and 10% PST, where applicable. Similar to other HST provinces, for charities and qualifying NPOs, there will be a rebate available for the provincial portion of the HST paid. However, as of November 2012, the PEI government has yet to announce what the rebate percentage will be. Regardless, charities and qualifying NPOs planning large expenditures should consider making them after April 1, 2013 as in addition to the overall tax rate being reduced from 15% to 14% there will be a rebate of a certain percentage of the tax paid. Currently charities and NPOs are entitled to claim back

4 4 Further harmonization of the QST effective January 1, 2013 Although the QST rules are generally in line with those for GST/HST, further harmonization will be introduced on January 1, Unless your organization is involved in the provision of financial services, the changes will be minimal. Unlike the other harmonization provinces, the CRA will not take over administration of the sales tax in Québec. It will remain under the authority of Revenu Québec. Change of nominal QST rate from 9.5% to 9.975% Invoices issued after December 31, 2012, but not paid before January 1, 2013, will have to show the new QST nominal rate of 9.975%. Although the nominal QST rate has increased from 9.5%, there is no actual increase in the amount of QST charged. The change is a reflection of a revision of the Québec Sales Tax Act so that the QST will no longer be charged on top of the 5% GST which had previously turned the nominal QST rate of 9.5% to its effective rate of 9.975%. The changes in the QST rate will now simply show what the effective QST rate has always been since the last actual increase on January 1, Charities and NPOs registered for the QST must ensure that invoices issued after January 1, 2013 show the QST at 9.975%. ACCOUNTING STANDARDS UPDATE FOR NOT-FOR-PROFIT ORGANIZATIONS Stephen McCourt, Assurance Partner, Collins Barrow Toronto As Not-for-Profit Organizations (NPOs) embark into 2013, they must consider the impact of the transition to the new accounting standards that will be effective for fiscal periods beginning on or after January 1, Prior to starting the transition process, it is important for NPOs to determine if they are Private NPOs or Government NPOs. Private NPOs will have the choice to adopt either: International Financial Reporting Standards (IFRS) without modification; or Accounting Standards for Not-for-Profit Organizations (ASNFPO) in conjunction with Accounting Standards for Private Enterprises (ASPE). Government NPOs have the choice to adopt either: Public Sector Accounting Standards in conjunction with ASFNPO, or Public Sector Accounting Standards without consideration for ASFNPO. If you are unclear of the criteria for the type of NPO you represent, feel free to contact your Collins Barrow representative for further clarity. Given the lack of guidance in IFRS on fund accounting and accounting for contributions, it is anticipated that the majority of Private NPOs will choose ASNFPO. The following discussion will focus on the impact of the new standards on Private NPOs, assuming they elect to report in accordance with ASFNPO in conjunction with ASPE. The following is a summary of the unavoidable differences under ASNFPO (i.e. there are no choices available): Accounting and disclosure for financial instruments could potentially be simplified since: Financial instruments previously designated as available-for-sale, with changes in the fair value recorded directly in net assets, will no longer be designated as such. Future changes in fair value will now be recorded in the statement of operations. The tainting rules related to heldto-maturity fixed income securities are no longer within the standards. Accounting for intangible assets will now be governed by the guidance in HB As such, there may be more limitations

5 5 on what can be capitalized and there will be some additional considerations for the impairment testing of intangible assets. Long term receivables should be recorded at their discounted cash flows. Government remittances payable will now be disclosed separately in the financial statements (either on the face of the statement of financial position or in the notes). All organizations must now present a statement of cash flows. The note disclosures related to capital management and future accounting policies are no longer required. Some of the common choices or options under ASNFPO include: Organizations will need to consider if the auditor s report will include comparative years. This is available on a property by property basis. Will the NPO elect to recognize at the transition date unrealized actuarial gains or losses related to defined benefit pension obligations? Now is the time to ensure your organization understands the impact of the new standards and the choices available. In addition, consideration should be given to educating the preparers and users of the financial statements in advance of the yearend audit to reduce time pressures on finalization of your audit. The above discussion only highlights some common issues and care should be taken to understand the impact of all the new standards on a given organization. If you have any questions on how these new accounting standards affect your organization, please contact your Collins Barrow representative. Will the NPO elect to increase the transition date value of the capital assets? CHARITABLE ACTIVITIES OUTSIDE CANADA Judy Moore, Tax Partner, Collins Barrow Toronto Canadian charities can carry on their charitable activities both inside and outside Canada. Any charity considering activities outside Canada should carefully review the Canada Revenue Agency s (CRA) Guidance CG-002, which replaced the former Guide RC4016 as of July 21, There are rules requiring the charity to maintain control over activities carried out in foreign countries. These rules may present substantial challenges and require significant ongoing effort in order to comply with the requirements to maintain charitable status under the Income Tax Act (the Act). The same common law principles apply to assessing whether activities are charitable, both domestically, and in the international arena. They generally require that a benefit be conferred on the public (i.e. the public benefit test). Additionally, the courts have established that a charity s activities must not violate official Canadian public policy. The Act allows a charity to operate, both inside and outside Canada, in three ways: By carrying on its activities though its own staff (including volunteers, employees and directors); By using an intermediary that is separate from the charity but works with the charity to carry out its activities; or By making gifts to qualified donees. Qualified donees are described in Guidance CG- 010 and include the following: Another registered charity (including registered national arts service organizations); A registered Canadian amateur athletic association; A listed housing corporation, resident in Canada, constituted exclusively to provide low-cost housing for the aged;

6 6 Collins Barrow publishes a quarterly NPO Alert for its clients and associates. While the NPO Alert suggests general planning ideas and technical updates, we recommend professional advice always be sought before taking specific planning steps. info@collinsbarrow.com Clarity Defined. A listed Canadian municipality; A listed municipal or public body performing a function of government in Canada; A listed university outside Canada that is prescribed to be a university, the student body of which ordinarily includes students from Canada; A listed charitable organization outside Canada to which Canada has made a gift*; The government of Canada or a province; and The United Nations and its agencies. *There are currently only seven charities outside Canada to which Canada has made a gift. This information is reported and updated on the CRA website. Clearly the CRA will more closely scrutinize situations where an intermediary is involved, as opposed to the use of the charity s own staff. An intermediary situation might arise where the charity hires an entity or person to do its work (such as an agent or contractor), it might enter into an agreement with a non-profit organization to deliver specific programs, or it might pool its resources with another organization to complete a project. In all cases, the CRA states that, at a minimum, the following three conditions must apply in order to consider the charity as carrying out its own activities when it transfers resources to non-qualified donees: The nature of the property being transferred is such that it can reasonably only be used for charitable purposes (e.g. medical supplies, school supplies, food, etc.); Both parties agree that the property is to be used only for the specified charitable activities; and Based on an investigation into the status and activities of the intermediary, it is reasonable for the charity to expect that the organization will use the property only for the intended charitable activities. Furthermore, the charity must ensure that it exercises direction and control over the intermediary s activities. This is particularly crucial where cash is being transferred. The form and type of control that the charity exercises will vary depending on the following factors: The amount involved; The complexity and location of the activity; The nature of the resources; Previous experience with the intermediary; and The capacity and experience of the intermediary. The following are some of the steps that CRA recommends to direct and control the use of a charity s offshore resources with intermediaries: Written agreements between the Canadian charity and the intermediary; Clear and complete communication from the Canadian charity of the activity to be carried out, along with detailed instructions on an ongoing basis; Monitoring and supervision by the Canadian charity; Separate bank accounts and accounting records to be kept by the intermediary for the Canadian charity s assets; and Making periodic transfers of assets - based on performance. Charities must report foreign activities on Schedule 2 of the Registered Charity Information Return (T3010). Failure to ensure that the charity s resources used in foreign countries meet the charitable purposes test can lead to sanctions by the CRA, and in the worst case, cancellation of the charity s registration. For more information feel free to contact the Alert contributors at: Jim Clifford, jim.clifford@bakertilly.co.uk Altaf Sarangi, asarangi@collinsbarrow.com Alex Kwong, atkwong@collinsbarrow.com Stephen McCourt, smccourt@collinsbarrow.com Judy Moore, jmoore@collinsbarrow.com