Is a Corporate Foundation for You?

Transcription

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 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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 decisionmaking, policy formulation and other related matters are transferred to the decision-makers of the foundation

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

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

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

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?

21 21 Who is in control? Fundraising priorities Mission, goals and objectives may diverge Unrealistic expectations, performance measurement

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

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

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

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

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?

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

28 28 THANK YOU Karen J. Cooper Carters Professional Corporation (613) or

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 Carters Professional Corporation