4 d is a corporate foundation for you karen cooper

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


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

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

• 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

– 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

– 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

• 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

– 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

– 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

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

• 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

– 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

• 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

• 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

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

• 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

• 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

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

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


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

• 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

• 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

• 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?


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


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

4 d is a corporate foundation for you karen cooper

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