Working Together. (Cooperative Ventures within the Charitable Sector)

Working Together (Cooperative Ventures within the Charitable Sector) DE JAGER VOLKENANT & COMPANY / LOEWEN KRUSE 4 th ANNUAL SEMINAR FOR CHARITIES AND NON-PROFIT ORGANIZATIONS Wednesday November 3, 2004 SHERATON GUILDFORD HOTEL, SURREY, BC KEN VOLKENANT De Jager Volkenant & Company

Changes to the Society Act Significant amendments to the Society Act were brought into force on November 1, 2004 (See Society Amendment Act, 2004 and sections 42 to 44 of the Finance Statutes Amendment Act, 2004) The purpose of these legislative amendments is to help reduce and streamline the filing process for societies and increase the efficiency of the registry. BYLAWS Corporate Registry staff no longer examine bylaws at the time of incorporation or when bylaws are changed. FINANCIAL STATEMENTS Societies are no longer required to submit a Financial Statement to the registry. Societies still have to produce Financial Statements and present them to the members at the Annual General meeting. Financial Statements to be kept at the society's address and be made available to the public upon request.

Changes to the Society Act ORDERS Societies no longer need to request an order from the registrar to approve the way they notify members regarding meetings or to approve a specific system or method of voting by members of a society. The society must follow what is stated in their bylaws. If the society wishes to change the method of notification or establish a new system of voting, it must amend its bylaws and file the amendments with the registrar. FORMS The Schedule A forms listed in the Act have been repealed. However, these forms in their current format will still be used until further notice. The exception is the Form 11 Annual Report form. ONLINE FILING In 2005 the registrar will offer societies the option to file their Annual Report over the Internet. Further information will be available closer to the date of implementation.

Principles of Charity Charities enjoy special privileges because the property of charities is applied to charitable purposes that benefit the public The charitable purposes of an organization are established in the constitution, trust document or letters patent establishing the organization Charitable purposes: Relief of poverty Advancement of Religion Advancement of Education Other purposes of a charitable nature that are beneficial to the community at large Trust principles all revenue and other assets of a charity are to be applied to charitable purposes as set out in the stated charitable objects of the organization Any arrangement between a charity and another party can not cause the charity to breach its obligations to use its resources for its own charitable purposes

Strategic Alliances the collaboration of two or more charities to accomplish a more effective and efficient outcome or result than if done independently need not be limited to similar purpose charities board of charity must be vigilant to prevent the charity from using its charitable property for activities outside its permitted charitable objects any strategic alliance or relationship a charity shares with another organization must recognize the requirement that the charitable purpose trust of the participants be honoured

Reasons for Strategic Alliances economies of scale maximize use of administrative facilities and staffing reduce or eliminate duplication of services more effective application of donor dollars to organizational purposes more effective use of skilled employees retention of future bequests through amalgamation rather than dissolution of charity

Types of Strategic Alliances Administrative Administrative functions for one organization undertaken by another entity Types of administrative strategic alliances: Sharing arrangements between charities e.g. facilities, staff, equipment Third party providing management services

Types of Strategic Alliances Operational Combination of all or portions of the operational activities to accomplish the charitable purposes of all participants more effectively and efficiently Types of operational Strategic Alliances include: co-operative partnerships joint ministries/ventures principal/agency agreements parallel foundations Amalgamation The contractual arrangement for two or more organizations to consolidate into one entity to carry on the common charitable purpose

INCOME TAX ACT PROVISIONS the term registered charity is defined in Subsection 248(1) of the Income Tax Act Organization must be created or established in Canada, be a resident of Canada and be either a charitable organization or a public or private foundation as defined in the Act and registered as such by the Minister of National Revenue A branch, division or congregation of such organization or foundation can also be a registered charity if it meets the residency requirement, is created or established in Canada and receives donations on its own behalf

INCOME TAX ACT PROVISIONS all the resources of the organization must be devoted to charitable activities which are carried on by the organization itself certain types of donations referred to in the Act are not included in the receipted income totals for purposes of calculating the disbursement quota: they include: bequests and inheritances gifts subject to a trust or direction that they be held for a period of not less than ten years gifts from a registered charity in the case of charitable organization, not more than fifty (50%) percent of its annual income is to be disbursed to a qualified donee a qualified donee is defined in the Act to include other registered charities, registered Canadian amateur athletic associations, the United Nations, and its agencies, Canadian municipalities, registered national art service organizations and other organizations

INCOME TAX ACT PROVISIONS the Income Tax Act has provisions to allow two separate charities to apply to the Minister for recognition as associated charities (e.g. National Head Office with local Provincial charity donations) when so designated, up to one hundred (100%) percent of the charitable organization s income can be transferred to an associated charity such applications are considered to be acceptable disbursements for purpose of determining if the charity has met its minimum spending requirements a registered charity can apply to the Minister to have a specified amount in a taxation year deemed to be an amount expended by the charity on its charitable activities for the year. Such approval is only considered if the deficiency cannot be corrected by utilizing disbursement excesses from prior years disbursement excesses can be carried back one year and forward five years from the year such excess occurred objects must promote a public benefit which is recognized as such by the courts

INCOME TAX ACT PROVISIONS The Income Tax Act expands the definition of charitable purposes to include the disbursement of funds by a charitable organization or foundation to qualified donee sets out the disbursement quota rules that require charitable organizations and foundations to spend specified amounts of receipted income and, in the case of foundations, a specified percentage of the value of investment assets, on charitable activities or gifts to qualified donees eighty percent receipted income for the immediately preceding taxation year must be spent by charitable organization in carrying out its charitable purposes must also comply with the requirement that all its resources must eventually be devoted to charitable activities carried on by the charitable organization itself

INCOME TAX ACT PROVISIONS Caution Regarding Compliance charity must comply with all of the above Income Tax Act provisions irrespective of the nature of the strategic alliance with other organizations non-compliance may result in sanctions, including penalties and possible revocation of charitable registration

ISSUES COMMON TO ALL STRATEGIC ALLIANCES

PRELIMINARY ASSESSMENT determine purpose of alliance and role of each party in it confirm that the charitable objects of each organization permit the interaction; ensure the proposed activities are not ultra vires the charitable objects of either organization determine impact of alliance on: the mission of the organizations and its programs donors employees facilities legal commitments and obligations (e.g. licensing arrangements) governmental funding agencies donor designation funds other special purpose trust funds legislative compliance

Perform Initial Due Diligence Review 1. Review constating documents of all parties to arrangement; check letters patent, constitutions, bylaws, board minutes to determine if proposed arrangement is permitted and the nature of any restrictions 2. Review policies of organizations mission/vision statements statement of Faith/Beliefs investment policies employee policies 3. Assess financial status of organization review financial statements and budget determine and assess liabilities and contingent liabilities review financial accounting standards 4. Assess and evaluate reputation of parties to arrangement

Perform Initial Due Diligence Review (Continued) 5. Conduct a human resources audit review employee and volunteer policies wages and benefits review determine compliance with applicable provincial employment legislation e.g. Employment Standards Act, Workers Compensation Act review employment agreements to identify any restrictions or limitations on employee participation in propose arrangement consider if the alliance will give rise to severance/termination claims; Will it be viewed as creating a new employer? Will it be seen as changing duties of employment and result in constructive dismissal claim? 6. Assess compliance with federal and provincial legislation Trustee Act; Income Tax Act; Society Act; Employment Standards Act; Gaming legislation

Perform Initial Due Diligence Review (Continued) 7. Material Contracts Review assess any contracts for supply of goods and services, funding arrangements, licensing of intellectual property, trademarks, copyrights, real and personal property leases review existing joint ministry, agency, co-operative partnership arrangements determine if any restrictive covenants contained in existing contracts to prohibit or otherwise affect proposed alliance consider impact of alliance on funding arrangements of both parties (foundation and government grants, gaming revenues) consider donor perception 8. Insurance Review general liability directors and officers liability

ADMINISTRATIVE ALLIANCE

Nature of Administrative Alliance used to effect cost savings and economies between organizations generally based on a contractual commitment between parties depending on the nature of the commitment, need not be limited only to arrangements between charities

Examples of Administrative Alliances sharing of leased facilities co-ownership of building co-ownership of other significant assets used in ministry activities (e.g. aircraft) provision of accounting and other management services sharing of personnel shared office manager, professional fund-raiser unified fund-raising campaign between charities

Considerations for Administrative Alliances details of arrangement to be set out in contract elements to be considered: degree of involvement of each organization in decisionmaking and control structure of management committee procedure for dispute resolution ownership of assets extent to which either party can bind the other duration/term of the arrangement method or formula to determine contribution to expenses maintenance and retention of records determine who is responsible and provide for access to records by all parties duties and responsibilities of each of the parties remedies in the even of default mutual indemnities between parties rights to terminate in event of default or on written notice rights of parties on termination

Parallel Foundation charities, usually with similar charitable objects, establish a public foundation to raise funds to support the charitable purposes of the charitable organizations should establish a contractual commitment between the charities to define their respective obligations and the manner in which funds are to be allocated to them by foundation develop functional bylaws that clearly define who controls the foundation define membership rights for election of directors and use of ex officio appointments establish control mechanisms (e.g. approval of members required for certain actions)

Parallel Foundation (Continued) need to define endowment programs, nature of fundraising to be undertaken, planned giving initiatives to be developed impose appropriate limitation on foundation s fundraising efforts to prevent interference or competition with charity s own fundraising campaigns define role of parallel foundation in receiving surplus funds from charities for purposes of protecting same; need for segregated funds combined effort of charities in establishing a foundation allows sharing of initial organizational expenses, draws on expertise from a larger base of skilled volunteers, permits charity to focus on its own programming efforts clarity of purpose required in constating document define charities to whom funds are to be transferred define who will receive funds on the dissolution or windup of the foundation

Caveat charity must ensure it uses its resources for its own charitable purposes and not those of other participants in the arrangement charity must not default in its existing contractual commitments e.g. inappropriate sharing of licensed software

OPERATIONAL ALLIANCE

Nature of Operational Alliance an arrangement for several charities to carry on charitable activities jointly for a defined or indeterminate period of time usually established by contract in most cases, each participant is autonomous nature of the alliance determines if parties must be Canadian registered charities alliances can be used for both domestic and foreign programming

Principal/Agency Arrangement not a true alliance in that the agent is carrying on the activities of the principal often used when agent is able to more effectively and affordably carry out specific programs or activities for the charity than the charity can do on its own a formal agreement should be in place which clearly demonstrates that direction, control and supervision of the funds and the activities to which they are applied rests with the principal board approval of projects and activities is further evidence that the activity is that of the principal principal agency agreements often used by Canadian charities in carrying out foreign programs or activities

Principal/Agency Arrangement (Continued) Information Circular 80-10R sets out the following conditions for the expenditure of funds where the services of an agent are utilized: The charity must maintain direction, control and supervision over the application of its funds by the agent the charity must maintain direction, control and supervision over the application of its funds by the agent the charity s funds must remain apart from those of its agent so that the charity s role in any particular project or endeavour is separately identifiable as its own charitable activity the financial statements submitted in support of the charity s annual information returns must include a detailed breakdown of expenditures made in respect of the charitable activities performed on behalf of the charity by its agent(s) adequate books and records must be kept by the charity and its agent(s) to substantiate compliance with the conditions outlined above. These conditions apply to any agency relationship, just not those involving foreign activities

Principal/Agency Arrangement (Continued) Canada Revenue Agency guidelines as to the elements to be included in an agency agreement include the following: the names and addresses of the parties; a comprehensive description of the specific activities (actual and proposed) for which funds will be transferred, in sufficient detail to clearly outline the limits of the authority given to the agent to act on behalf of the principal; provision to update the agreement as new projects are initiated by the principal in order to provide descriptions of the specific activities as per above; provision for written progress reports;

Principal/Agency Arrangement (Continued) provision for instalment payments by the principal based on confirmation of reasonable progress that the resources provided to date have been applied for the specific activities outlined in the agreement provision for the principal at its discretion, to withhold or withdraw the funds or other resources; provision for the principal s funds and property to be kept separate from those of the agent and for the agent to keep separate books and records; the date and signatures of the parties to the agreement; the agent only draws its authority from the agreement and serves as the charity s representative in carrying out the duties assigned to it.

Co-Operative Partnership parties to the agreement have similar charitable purpose desire to carry on an activity together which accomplishes the charitable purpose each party to the agreement assumes responsibility for one aspect of the project contribution of each party generally reflects its area of knowledge, available skills and resource availability parties can be qualified donees (e.g. other registered Canadian Charities) or non-canadian entities a formal agreement sets out terms and conditions under which the parties will cooperate in carrying out a define project role of each party is defined provision made for ownership of capital assets used to accomplish the charitable purposes

Co-operative Partnership (Continued) protocol established for making project decisions by the participants and for resolving disputes responsibility for books and records defined with each party having full access to same Rights to terminate, entitlement of either party to continue with project and the manner in which assets are dealt with on termination are defined in the agreement Care must be taken in agreement to reflect each participant maintains the requisite level of direction, control and supervision over the project in order to demonstrate it is devoting its resources to its own charitable activities

Joint Ventures/Joint Ministries Corporate Structure or Contractual Arrangement a registered charity may decide to carry on foreign or domestic activity in the furtherance of its charitable objects by pooling its resources with other organizations such organizations may be either Canadian charities or nonqualified donees a joint undertaking can be established by a contractual arrangement or a joint venture corporation Joint Venture Corporation joint venture corporation established by Canadian participants who wish to undertake a co-funded and co-managed project each party maintains its own identity and autonomy but cooperates with the other organization in carrying on jointly funded programs in fulfillment of their charitable purposes though the joint venture corporation

Joint Venture Corporations Advantages of joint venture corporation limited liability protection & formalized organizational structure establishes a greater sense of permanence for long-term projects and ministries creates a legal entity to enter into contracts, licence arrangements, etc. when activities are in a foreign jurisdiction, structure may minimize risk for Canadian founders if joint venture corporation seeks charitable registration it is a qualified donee. Such status may reduce restrictions on transferring funds from founding charities proper organizational structure gives certainty to participants as to management and control issues a members agreement, similar to a shareholders agreement in a for-profit venture, should set out the obligations of the participants to the joint activity as a distinct legal entity, not same concerns re property ownership and trust issues

Joint Venture Agreements joint venture agreement is a contractual arrangement between organizations to pool resources to carry out an activity to accomplish a charitable purpose joint venture agreements often used when Canadian charity carries on foreign activities with a nonqualified donee (i.e. non-canadian charity) joint venture agreements used when the project too large to be financed in its entirety by one of the parties each charity must be able to demonstrate it exercises direction, control and supervision over the application of its funds

Joint Venture Agreements (Continued) Canada Revenue Agency accepts that if an active participant in the venture has the right, in proportion to its resource input into the joint activities, to participate in long-term planning, financial commitment and on-going decision-making, the activities will be considered to be those of that entity only activities in pursuit of the charitable purposes of the charity should be carried on through the joint venture joint venture agreement should be in writing setting out the contractual commitments of the parties to the agreement to the co-funded activities

Joint Venture Agreements (Continued) In the case of a contract based joint venture, it is not a legal entity unto itself nor is it a partnership. Rather, the joint venture is merely an activity in which the various charities mutually participate. A formal agreement regulates the manner in which the activity is carried on and the obligations of each participant in such activity. Some joint venture agreements restricted to a single project in a specific country. Other arrangements regulate on-going foreign activity of the Canadian charity Only parties which contribute to the activity, either in the form of financial resources or human resources for which a dollar value can be assigned, should execute the joint venture agreement and have voting rights in the decision-making process Parties to the joint ministry agreement must have charitable objects or purposes which are similar in nature

Joint Venture Agreement Elements Management Committee/Board of Directors right of each party contributing to the programs and activities of the joint venture to appoint representatives to a managing body (i.e. the Board of Directors or a Management Committee) number of representatives on the Board/Management Committee and the manner in which they are appointed rights, powers and duties of the Board/Management Committee to include: regulating the application of funds to various projects and/or activities keeping proper records and financial statements selecting appropriate projects and monitoring the progress of same determining all other issues relating to the general conduct and management of the affairs of the joint venture preparing a budget which is to be submitted to the parties for their approval, with or without amendment

Joint Venture Agreement Elements Voting control issues to be decided by Board/Management Committee to be determined by vote voting rights based on either representation at the Board/Management Committee in proportion to the financial contributions of the parties to the joint activity or voting rights are proportional to the organization s percentage financial and resource contribution to the activities of the joint venture for the preceding fiscal period the parties to the joint venture must determine the required percentage necessary to pass a motion coming before the Board/Management Committee agreement can provide that certain decisions not to be made without the prior approval of the parties themselves, not just their representatives on the Board/Management Committee establish a dispute resolution provision

Joint Venture Agreement Elements Meetings of the Board/Management Committee set out the frequency of meetings, notice requirements for meetings and the requirement that each party have a representative in attendance for a Board/Management Committee meeting to be convened provide for conference call participation Reporting Obligations provide that minutes of all Board/Management Committee meetings be forwarded to the parties, together with any other materials that will reflect the participation of the various charities in the programs and activities carried on in accordance with the agreement Financial Statements annual financial statements of the joint activity must be prepared which fully disclose all funds received and the manner in which such funds have been applied statements must be distributed annually to the parties of the joint venture. Such statements form the basis for assuring the regulatory bodies in the various jurisdictions (e.g. Internal Revenue Service U.S.A.; Canada Revenue Agency Canada) as to the manner in which the funds contributed to the joint activity by the individual parties have been applied and that such application is consistent with the objects of each individual charity

Joint Venture Agreement Elements Term and Termination Provisions provisions to be set out in the agreement as to when and how the ministry may be terminated (e.g. at the conclusion of a specific project; at a specified date upon written notice) each party to have the unilateral right to withdraw or discontinue financial support provide for a complete accounting between the parties upon termination and the manner in which any remaining property is to be distributed among the parties/members Financial Arrangements parties commit to contribute to the joint activity in accordance with the approved budget budget process to be set out in the agreement. Such process should require each participating charity to first approve a draft budget. The first draft would be prepared by the Board/Management Committee and the charities would amend it as they deemed appropriate set out the manner in which capital assets are to be contributed to the joint ministry activity

Liability Joint Venture Agreement Elements in a contractual joint venture, provide that the costs and consequences of inappropriate actions, negligent acts or wilful misconduct by one party should be attributable to that party. If the action is not so traceable, liability should be borne in proportion to the contributions of the parties to the joint activity in the joint venture corporation, obtain comprehensive general liability insurance

Foreign Activities with Non-Qualified Donee Canada Revenue Agency looks to various indicators in determining if a Canadian charity is exercising the requisite level of control in joint venture arrangements with non-qualified donees. They include the following: presence of members of the Canadian charity on the governing board of the joint venture presence in the field of member of the Canadian charity joint control by the Canadian charity over the hiring and firing of personnel involved in the venture joint ownership by the Canadian charity of foreign assets and property input by Canadian charity into venture s initiation and follow-through, including the charity s ability to direct or modify the venture and to establish deadlines or other performance benchmarks Signature of the Canadian charity on loans, contracts and other agreements arising from the venture Review and approval of the venture s budget by the Canadian charity, availability of an independent audit of the venture and the option to discontinue funding Authorship of procedures manuals, training guides, standards of conduct, etc. by the Canadian charity On-site identification of the venture as being the work, at least in part, of the Canadian charity

AMALGAMATION

Amalgamation Definition of Amalgamation it is a contractual arrangement between the organizations to consolidate into one not the same concept of merger as exists in the USA where one organization acquires the assets of one organization and continues and the other organization (the merging corporation ) no longer exists. Such an arrangement is a merger by dissolution amalgamation is the fusion of the amalgamating entities such that the amalgamated entity has all the property, rights, privileges and franchises and is subject to the contracts, liabilities, disabilities, debts and obligations of each of the amalgamating entities requires the necessary due diligence of all the amalgamating entities to carefully review all such duties, responsibilities, liabilities and potential liabilities

Amalgamation (Continued) Procedure the organizational structure of the charity determines if it can consolidate its programs and activities with another charity if organized as a charitable purpose trust must review charitable purpose and, if permitted by the terms of the trust, the trustees may have to amend the purpose to allow the proposed activities if organized as an unincorporated association the membership must consent to the union of the two charities if incorporated must consider the applicable legislation federally incorporated charities cannot amalgamate as the Canada Corporations Act provisions re amalgamation do not apply to non-share capital corporations the only way two federal or a federal and provincial organization can amalgamate is by the dissolution of one organization following the transfer of its assets to the other entity alternatively, a new charity can be established, both charities transfer their assets to it and subsequently dissolve

Amalgamation (Continued) regulated by statute in BC Society Act sets out amalgamation requirements corporations must agree on new Constitution and Bylaws carry out appropriate due diligence review prior to amalgamation obtain requisite approvals: statutory approvals consents of professional associations governmental consents consents of any licensing bodies approvals required pursuant to organization s own governance provisions affiliated charity consents review trust obligations re donor directed gifts, endowment agreements and other obligations that affect amalgamating corporations; such obligations continue to bind the amalgamated corporation

DISSOLUTION Charitable Trust dissolves or terminates in accordance with provisions set out in trust agreement Non-Profit Corporation dissolve one of the two entities and carry on its activity in the other corporation can also dissolve both corporations and carry on their activities in a new entity referred to as merger by dissolution an analysis of the liabilities of the organizations and their assets assist in determining method to be used if one entity has significant liabilities or non-transferable assets, appropriate to dissolve other corporation provided it is willing to assume the liabilities

Dissolution of Non-Profit Corporation (Continued) at the time of dissolution, there must be no debts or liabilities, the corporation has made provisions for them or the creditors have consented to the dissolution dissolution does not release the corporation or free its assets from claims arising from a legal action commenced prior to the dissolution the organization must also request a voluntary revocation of its charitable registration from Canada Revenue Agency ( CRA ) CRA then publishes a notice of the intention to revoke the registration in the Canada Gazette

CONCLUSION Appropriateness of charities combining their efforts depends on many factors including: Good Stewardship of Resources Competition for donor support Availability of qualified staff and volunteers Desire for autonomy Mission and vision statements of the organizations Similarity of activities of other organizations Board commitment, ability and expectations Liability and Risk Management issues In the right circumstances, and with due diligence and appropriate legal structures, strategic alliances can produce a more effective and vibrant charitable organization