2011 NATIONAL CHARITY LAW SYMPOSIUM

May 6, 2011

LAURA E. WEST

FASKEN MARTINEAU DuMOULIN LLP

416-865-5463

lwest@fasken.com

CONSIDERATIONS AND STRATEGIES IN CORPORATE GIVING

In Canada, corporate charitable giving has become increasingly important to the charitable

sector. As such, the number of issues that could potentially be explored under the heading of

“considerations and strategies in corporate giving” is significant.

Such potential issues include all of the relevant tax rules governing corporate donations, as well

as the charitable donation planning issues relevant to corporations and their shareholders.1

Relevant issues could also include an analysis of the nature and scope of corporate charitable

investment practices in Canada.2

Since many of these tax, planning and analytical issues have been covered in detail in other

publications,3 this paper will instead focus on a number of discrete issues relevant to corporate

charitable giving, including:

(a) a comparison of corporate charitable gifts and sponsorship arrangements;

1 See Carole Chouinard, “Considerations in Corporate Giving” Canada Bar Association National Symposium on

Charity Law, May 10, 2007, Toronto, Ontario and Teresa L. Man, “Corporate Giving: A Tax Perspective”, September, 2006, online at www.carters.ca.

2 For more information on this topic, please see the various publications associated with the Business Contributions to Community (BCTC) research initiative of Imagine Canada, online at www.http://www.imaginecanada.ca/node/33.

3 See supra notes 1 and 2.

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(b) a discussion of issues may be advisable to incorporate into gift acceptance and/or

sponsorship policies; and

(c) a consideration of the relevant issues that should be canvassed when creating a

corporate parallel charitable foundation.

The following discussion does not represent an exhaustive overview of the aforementioned

issues, but instead is meant to provide a discussion of some of the relevant considerations in this

important, but sometimes overlooked, area of charitable giving.

1. Corporate charitable giving vs. Corporate sponsorship arrangements

Generally speaking, there are two main ways in which corporations can receive tax benefits

when transferring property to registered charities.

Certain tax benefits are available to corporations that make charitable gifts to registered charities.

Subsection 110.1(a) of the Income Tax Act,4 provides that a corporation, when computing its

taxable income, is entitled to deduct the eligible amounts of gifts made to qualified donees.5

Generally speaking, this tax deduction is capped at a maximum of seventy-five percent (75%) of

the corporation’s net income, plus twenty-five percent (25%) of certain taxable capital gains and

capital cost recapture.6 Charitable tax deductions can be carried forward by the corporation for a

period of five years.

Certain other tax benefits are also available to corporations that transfer property to registered

charities for marketing, promotional or advertising purposes, because, provided that certain tests

are met, such expenses can be deducted as business expenses by corporations pursuant to section

18 of the Income Tax Act. The relevant tests include whether the expense was incurred for the

purpose of earning income, was reasonable in amount, was not a personal expenditure and was

4 R.S.C. 1985, c. 1 (5th Supp.), as amended (hereinafter referred to as the “Income Tax Act”). 5 See paragraph 110.1(1)(a)(i) through (viii) of the Income Tax Act for a description of what constitutes a qualified

donee, including registered charities, registered amateur athletic associations, municipalities, etc. See paragraphs 110(1)(a)(i) to (d) for specific rules regarding “gifts of medicine”, “gifts to her Majesty”, “gifts to institutions” and “ecological gifts”. See subsection 110.1(3) for provisions relating to gifts of capital property made by corporations.

6 See subsection 110.1(a) of the Income Tax Act. See also Teresa L. Man and Carole Chouinard, supra note 1.

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not expressly prohibited by the Income Tax Act.7 Jurisprudence has supported the ability of

corporations to deduct certain donations made to registered charities that were incurred for

advertising and publicity purposes in this manner.8

Although there are many ways in which corporations can support registered charities, some of

which will be discussed in more detail below, important sources of corporate support for

registered charities in Canada often take one of two different forms: (i) charitable donations; and

(ii) sponsorship arrangements, both of which have different tax consequences.

The difference between corporate charitable gifts and sponsorship arrangements, and their

treatment for tax purposes, used to be relatively more simple before the advent of the new split-

receipting regime. Previously, charitable gifts were considered to be transfers of property made

by corporations without consideration and sponsorships were arrangements whereby the

corporate sponsor received greater than de minimis publicity, advertising or other business or

economic benefits in consideration for the transfer of funds to the registered charity.9 The

former would entitle the corporation to a charitable receipt and corresponding related tax benefits

and the latter, although not entitling the corporation to a charitable receipt, could still result in

certain positive tax benefits if the expenditure qualified as a deduction for business purposes.10

The definition of the term “sponsorship” was considered to be somewhat murky even before the

advent of the split-receipting regime, with the ability to attract multiple definitions and

interpretations.11 Notwithstanding this past and current uncertainty, the term “sponsorship” is

still generally used to refer to arrangements whereby corporations or other businesses provide

funds to registered charities and, in return, receive advertising or promotion of their brand,

products or services.12

7 Teresa L. Man, supra note 1. 8 Carole Chouinard, supra note 1, and as quoted in her article, see Olympia Floor & Wall Tile Ltd. v. MNR [1970]

C.T.C. 99 (Exch) and Impenco Ltd. v. MNR [1988] 1 C.T.C. 2339 (TCC). 9 See Canada Revenue Agency, Employee Speech CES-012 “CCRA Update” October 3, 2000. 10 Ibid. 11 Ibid. See also Teresa L. Man, supra note 1, where she notes that “sponsorship” is not a defined term in the

Income Tax Act. 12 CRA, Online at: http://www.cra-arc.gc.ca/chrts-gvng/chrts/prtng/gfts/spnsr-eng.html.

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What is now potentially problematic about the ongoing confusion over the meaning of the term

“sponsorship”, is that transfers of property can still qualify as gifts notwithstanding that the

donor receives something in return pursuant to the new split receipting regime. Therefore, in the

circumstances of corporate charitable donations, instead of a two option analysis (charitable gift

vs. sponsorship), a three option analysis may be required (charitable gift, sponsorship, or part

charitable gift and part sponsorship).13

In essence, the split-receipting regime rebuts the common law definition of a gift (i.e., a

voluntary transfer of property made without consideration) to allow those voluntary transfers of

property made with consideration to qualify as gifts provided that the provisions of proposed

subsection 248(30) of the Income Tax Act are met.14 Subsection 248(30) provides that

consideration will not rebut the existence of a gift for charitable receipting purposes, provided

that the amount of the advantage does not exceed 80% of the fair market value of the transferred

property and the transferor of the property establishes to the satisfaction of the Minister that the

transfer was made with the intention to make a gift. For the purposes of the split receipting

regime, when determining the eligible amount of gifts for charitable receipting purposes,

proposed subsection 248(31) of the Income Tax Act provides that the “eligible amount of the

gift” is equal to the fair market value of the property donated net of the “amount of the

advantage” the donor or a person non-arm’s length to the donor receives.15

The definition of what constitutes the “amount of advantage” of a gift made to a registered

charity is set out in proposed subsection 248(32) of the Income Tax Act, which provides as

follows:

13 Teresa L. Man, supra note 1. 14 Although these proposed changes have not been enacted, the CRA released Income Tax Technical News No. 26

on December 24, 2002, concerning proposed new rules and administrative guidelines for issuing split-receipts involving various fundraising events premised on these proposed changes, such as golf tournaments, fundraising dinners, charity auctions, lotteries, etc. Furthermore, the British Columbia Supreme Court in Richert v. Stewards’ Charitable Foundation [2005] B.C.C.J. No. 279 (appeal to the B.C.C.A. dismissed in [2006] BCCA 9.) up-held compliance with Technical News No. 26, as required by the CRA in spite of the fact that the split-receipting rules have yet to be enacted as law. In this regard, the CRA’s Registered Charities Newsletter No. 17 specifically indicates that the proposed guidelines in Income Tax Technical News No. 26 “can be relied on now, despite the fact that the proposed legislation is not yet law.”

15 The exact wording of proposed subsection 248(31) is as follows: “The eligible amount of a gift or monetary contribution is the amount by which the fair market value of the property that is the subject of the gift or monetary contribution exceeds the amount of the advantage, if any, in respect of the gift or monetary contribution.

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The amount of the advantage in respect of a gift or monetary contribution by a

taxpayer is the total of:

(a) the total of all amounts other than an amount referred to in paragraph (b),

each of which is the value, at the time the gift or monetary contribution is made,

of any property, service, compensation, use or other benefit that the taxpayer, or a

person or partnership who does not deal at arm’s length with the taxpayer, has

received, obtained or enjoyed, or is entitled, either immediately or in the future

and either absolutely or contingently, to receive, obtain or enjoy

(i) that is consideration for the gift or monetary contribution,

(ii) that is in gratitude for the gift or monetary contribution,

(iii) that is in any other way related to the gift or monetary contribution,

(b) the limited-recourse debt, determined under sub-section 143.2(6.1), in

respect of the gift or monetary contribution at the time the gift or monetary

contribution is made.

This is a very expansive definition that necessitates a consideration of whether the donor, or a

person with whom he or she does not deal at arm’s length, has received, obtained, enjoyed or is

entitled to, either immediately or in the future or either absolutely or contingently, any property,

service or compensation that is in any way related to the donation.16

The Canada Revenue Agency (the “CRA”) has indicated in Technical News No. 26 (December

24, 2002) that any advantage received or obtained “must be clearly identified and its value

ascertainable.” It further indicates that “if its value cannot be reasonably ascertained, no

charitable tax deduction or credit will be allowed.” As such, the CRA recommends that “in

relation to valuations, the donee should consider obtaining a qualified independent valuation of

the amount of the advantage.”

16 For a more thorough consideration of these issues, please see M. Elena Hoffstein, Theresa Man and Laura West,

“When is an Advantage not an Advantage: Issues Arising from the Proposed Split-Receipting Regime” CBA Fourth Annual Symposium on Charity Law (May 2006). This section of the paper relies, in part, upon that publication.

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As a result of the split receipting regime, it appears that there may be three categories of

corporate giving:17 (i) charitable gifts where no advantage is received by the corporate donor that

is greater than the administrative de minimis level established by the CRA;18 (ii) sponsorship

arrangements where the value of the advantage received by the corporate donor is greater than

eighty percent 80% of the contribution made; and (iii) part sponsorship arrangements and part

charitable gifts where an ascertainable advantage is received by the corporate donor which has a

value that is greater than the de minimis standard but less than 80% of the contribution made and

where the corporate donor’s intention to make a charitable gift is present.

It may be possible to issue charitable receipts for gifts falling into categories (i) and (iii) but not

for gifts falling into category (ii). However, as with most matters of regulatory compliance, the

devil is in the details of each particular gifting scenario.

In the regard, the current policy of the CRA appears to be that the provision of sponsorship to a

“charity or to a charitable event is not a gift, and a charity generally cannot issue a receipt for

sponsorship.”19 This appears to be based on the CRA’s position that if a business receives

special recognition for its donation, or if it receives more than nominal recognition, this usually

constitutes sponsorship. Because it “is difficult, if not impossible to establish a fair market value

for sponsorship, and when the fair market value cannot be determined, a receipt cannot be

issued”, in most cases sponsorship arrangements will not be considered gifts and will not be

eligible for charitable receipts.20

In this same policy statement the CRA acknowledges, however, that if a business or corporation

“receives the same level of recognition as all other donors, with no special treatment, and the

recognition is nominal, this usually constitutes a simple acknowledgment, and a receipt may be

issued for the full amount of the donation.”21 However, it should be noted that in certain

circumstances, what constitutes an advantage for a business or corporation may not constitute an 17 Teresa Man, supra note 1. 18 The CRA has acknowledged in Technical News 26 (December 24, 2002) that an amount of the advantage

received by the donor that does not exceed the lesser of 10% of the value of the property transferred to the charity and $75 will not be regarded as an advantage for the split receipting regime. Note that the revised de minimis threshold will not apply to cash or near cash advantages.

19 CRA, Online at: http://www.cra-arc.gc.ca/chrts-gvng/chrts/prtng/gfts/spnsr-eng.html. 20 Ibid. 21 Ibid.

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advantage for an individual. For example, according to CRA policy, naming opportunities for

individual donors do not constitute a formal advantage for the purpose of the split receipting

regime whereas naming opportunities where there is an “economic benefit” to the donor arising

from the naming opportunity, such as those afforded to a business or corporate donor, may

constitute an advantage.22

As the foregoing demonstrates, potential issues will arise when registered charities are offered

corporate donations that contain mixed elements of sponsorship and charitable gift. How and

when should charitable receipts be issued by registered charities? How should the advantage

arising from the economic benefit of publicity and/or advertising be valued? What policy

guidance should registered charities be following when dealing with such matters? As of the

date of this paper, the CRA is still developing a formal policy to provide clarification in this

regard and has sought input from the charity community as to the subject matter of such policy.23

In Registered Charities Newsletter No. 22 (Spring 2005), the CRA commented as follows:

The Charities Directorate has received many questions about situations where a donor receives advantages (promotion, advertising) as a result of making a donation. Does such an advantage negate the gift entirely? If there is an advantage, should the rules of split-receipting apply so that only part of the donation may be considered a gift? Or can the entire amount be receipted? These questions apply principally to business donors as well as to some individual donors who are synonymous with a business.

If the benefits provided to business donors make it impossible to consider the transfer of property a gift, donors may still benefit from the ability to write off the transfer as an advertising expense.

We want your input to help draft a policy on the types and value of advantages received by a donor. We are particularly interested in hearing your comments on the value of benefits that may be considered to be nil in some cases (e.g., simple recognition or thanks). Have you encountered specific scenarios in dealing with the issue of advantage received by a donor when there is some form of promotion, advertising, or sponsorship at issue? What logic or criteria do you think we should use to determine when donor recognition constitutes an advantage and its value?

22 See for example CRA document numbers 2005-0110701R3, dated March 16, 2005; 2005-0130381R3, dated July

13, 2005; and 2003-0043013, dated December 10, 2003 and Advance Ruling 2005-0110701R3. 23 Note that the official policy on “sponsorship” CSP-S13 (September 3, 2003) is currently described as being “under revision” on the Charities Directorate website. See online at: http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/csp/csp-s13-eng.html.

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The Newsletter goes on to reference particular policy issues that will no doubt will be reflected in the final policy that is issued by the CRA:

We currently consider these situations on a case-by-case basis, but we would like charities to have a better understanding of when an advantage will reduce the eligible amount of a gift. Here are some of the many factors or questions that charities officers consider in these cases:

Purpose: Is one of the purposes of the donation to obtain recognition?

Source: Is the donation from an individual or a business?

Contracting: Is there a contract (a written or unwritten understanding concerning the benefits the donor will receive in return for the donation)? Does such an understanding, whether or not it is formally written, indicate that the donor expects and receives an economic benefit in return for the donation?

Valuation: Can the value of the exposure (promotion, advertising, sponsorship) be determined? How much is the equivalent exposure worth?

Token recognition or not?

Naming

Is simply being named as a donor necessarily a benefit (e.g., newsletters, plaques, cards)?

If the recognition takes place in a newsletter or similar publication, is the publication available to members only, or is it distributed externally?

Does making donor recognition cards available constitute a benefit?

Does it make a difference if a donor company’s logo, rather than just its name, is used?

Even where there is a benefit, does it have value?24

The determination of whether a corporate donation is a charitable gift or a sponsorship, or partly

a charitable gift or partly a sponsorship, may not have any tax implications for the donating

corporation due to the potential ability of the corporation to write off any portion of the corporate

donation not constituting a charitable gift as a business expense.25

24 This quotation has been shortened and redacted in part. 25 The tax differences between a charitable donation and a business expense to a corporation is that the deduction of

charitable donations is limited to a percentage of the income of the corporation, whereas the deduction of business expenses is not so limited and the charitable donations can be carried forward for five years whereas the

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However, the determination of whether a corporate donation is a charitable gift, sponsorship or

part sponsorship and part charitable gift should be important to registered charities because if

they issue a charitable receipt otherwise than in accordance with the Income Tax Act, this could

trigger the imposition of intermediate sanctions by the CRA, such as fines and other

administrative penalties pursuant to section 188.1 of the Income Tax Act. Penalties and

sanctions can be assessed under subsections 188.1(7) and 188.1(8) for issuing receipts with

incomplete or incorrect information and under subsection 188.1(9) and 188.2(1) for issuing

receipts with false information.26

As a result, it is important that registered charities establish appropriate protocols and procedures

in order to ensure that the charitable receipts that are being issued to corporations appropriately

record the eligible amount of the gifts (i.e., the fair market value of the gift less the advantage

received) and that if a particular advantage cannot be ascertained, as may be the case in most

sponsorship arrangements, a charitable receipt is not issued or a professional valuation or other

advice is sought. As further guidance pertaining to these issues is released by the CRA in due

course, registered charities should adapt and update their charitable receipting policies to ensure

that they are in compliance with CRA polices with respect to these matters.

2. Corporate Charitable Giving: Gift Acceptance and Sponsorship Policies

In light of the increasing size and sophistication of registered charities and the increasing

regulatory oversight that they face in carrying out their charitable activities, it has become

increasingly important for registered charities to consider the necessity of developing and

implementing gift acceptance policies and ensuring that the rules and due diligence practices

established in such gift acceptance policies are adhered to by staff, management, officers and

directors on an ongoing basis.

business expenses usually have to be applied in the year in which they are made. Also, See Teresa L. Man, supra note 1 and Carole Chouinard, supra note 1.

26 If it is the former, the registered charity could face a 5% penalty of the eligible amount on the incorrect receipt or 10% penalty upon repeat infractions within 5 years. If it is the latter, the registered charity could face a 125% penalty of the eligible amount on the false receipt, as well as suspension of its receipting privileges if the total amount of penalty for issuing false receipts exceeds $25,000 in the taxation year. In addition to the possibility of imposing the said penalties, gross mismanagement or continued inaction in this regard could result in the revocation of the registered charity’s registered status under the Income Tax Act.

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Corporate charitable giving should not be forgotten when registered charities engage in the

development and implementation of gift acceptance policies and corporate sponsorship issues

should either be specifically highlighted in the gift acceptance policy or set out as a separate

independent policy.27

Formal gift acceptance and sponsorship policies pertaining to corporate charitable giving and

sponsorship arrangements can provide many benefits to registered charities, including:

(a) providing discipline and consistency to the gift acceptance and sponsorship

process;

(b) promoting risk management and helping to avoid unanticipated costs associated

with such gifts or sponsorships from arising in the future;

(c) helping to ensure that practices and procedures with respect to gift acceptance are

not either reliant on imperfect institutional memory or made on an ad hoc basis;

and

(d) managing donor and sponsor expectations by providing corporate donors and

sponsors, and their advisors, with a pre-existing transparent and accessible set of

guidelines, prior to the gift or sponsorship negotiation process.

The breadth of this paper does not allow for a fulsome analysis of all of the potential components

of an effective gift acceptance policy or sponsorship policy for registered charities. Instead, in

the comments that follow, some of the specific issues relevant to corporate giving and

sponsorship arrangements that can sometimes be overlooked when charitable policies are being

formulated will be discussed.

27 This section of the paper relies, in part, upon the author’s paper for the Canadian Bar Association and Ontario Bar

Association’s 2009 National Charity Law Symposium held on May 7, 2009, entitled “Considerations in Gift Acceptance Policies.”

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(a) Corporate Charitable Giving – Specific Considerations for Gift Acceptance

Policies

In addition to the charitable receipting issues referred to above in the discussion comparing

charitable gifts to sponsorships, gift acceptance policies should provide registered charities, and

their employees, officers and directors, with certain procedures to follow when determining

whether to accept a corporate donation, how to (or how not to) issue a charitable receipt for the

corporate donation, and how to deal with the corporate donation and the corporate donor on an

ongoing basis.

(i) Determining which Corporate Gifts are Acceptable

When determining whether to accept a gift, a certain amount of due diligence needs to be carried

out by the registered charity in order to allow it to reach a determination whether the gift is

acceptable to the charity and thereby ensure that the acceptance of the gift will not expose the

registered charity and its directors to potential loss, liability and/or reputational damage.

As a preliminary matter, certain gifts may be unacceptable because of concerns of exposure to

liability or public condemnation, because they will or are likely to cause unacceptable

expenditures by the charity, or because they have restrictions or terms that either conflict with

the purposes, activities, mission and/or values of the charity, are contrary to law or public policy

(i.e. illegal or discriminatory gifts) or are impossible for the charity to carry out. The due

diligence necessary for the registered charity to reach this determination should be set out in its

gift acceptance policy.

In this regard, registered charities should consider whether policies need to be put in place to

ensure that sufficient information is obtained about the corporate donor in order to protect the

charity and its directors from issues (and potential liabilities) arising in the future as further

information about the corporate donor comes to light. For example, the corporate donor may be

associated with persons, products or institutions that are repellent to the objects or mission of the

charity. If the charity accepts a significant gift from such a corporate donor, even if unaware of

these negative attributes or associations, negative publicity and loss of goodwill may result.

Although due diligence will never uncover every potential issue pertaining to the donor which

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could negatively impact the charity, some consideration should be had as to what, if any,

investigations should be carried out by the charity in order to protect itself from issues arising in

the future in this regard.

Registered charities may also with to ensure that they have policies and procedures in place that

ensure that gifts are not accepted from corporations and businesses whose philosophies and/or

values are inconsistent with the overall philosophy and values of the registered charity. To

achieve this aim, the gift acceptance policy should set out the steps required to figure out who

exactly the donor is. This may seem self-evident in some circumstances. However, confusion

can potentially arise. For example, the registered charity may be lead to believe that a particular

corporation is making a gift only to find out later that the donor is actually a subsidiary

corporation or even the owner/manager of the corporation. The registered charity may even find

out eventually that the donor is actually the corporation’s parallel foundation. Different

receipting, acknowledgement and other issues will be applicable depending on whether the gift

in question is from a business corporation, an individual or another registered charity and this

identification should occur early in the gift acceptance process.

(ii) Determining when Charitable Receipts can be issued for Corporate Donations

Although a registered charity is not required to issue an official donation receipt for every gift it

receives, it is prudent that registered charities make potential corporate donors aware of any

circumstances in which they will not issue a charitable receipt. These circumstances could also

be outlined in the gift acceptance policy. This will help to alert donors to the receipting policy of

the registered charity and prevent any potential issues from being raised or potential claims

instigated by disappointed donors when they are unable to claim the relevant charitable tax

deduction for the gift. Specific types of issues that could be highlighted in this regard include:

(A) Gifts of Services

As has been noted research carried out by Imagine Canada,28 corporations are increasingly

providing registered charities with gifts of services, whether by employee volunteer hours or

28 For more information, see the various publications associated with the Business Contributions to Community

(BCTC) research initiative of Imagine Canada, online at www.http://www.imaginecanada.ca/node/33.

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gifts of professional or other services. A registered charity’s gift acceptance policy should

specifically note that registered charities are unable to provide charitable receipts for gifts of

services provided by corporations. According to CRA policy,29 and relevant case law,30

volunteered contributions of services are not property and therefore the provision of such

services to a registered charity does not constitute a transfer of property that qualifies as a gift for

the purposes of the Income Tax Act.31

(B) Rent Free Use of Property

According to current CRA policy, if a corporation provides a registered charity with use of a

property without charging any rent (e.g., the use of the corporation’s business premises for

various charity functions), no charitable receipt is available. The CRA has taken the position

that the mere granting of a right to use property for a limited time does not constitute a sufficient

transfer of property to qualify as a gift for charitable receipting purposes.32 A registered charity’s

gift acceptance policy should draw attention to the fact that charitable receipts cannot be issued

when a corporation offers the registered charity the right to use a property, or equipment, without

charge.

(C) Private Benevolence

Corporations may wish to make gifts that are directed to specific families or individuals. For

example, a corporation may wish to make a gift to a charitable organization for the purpose of

supporting a former employee who has been the victim of a natural disaster. However,

registered charities are unable to provide charitable receipts for gifts made for the purpose of

private benevolence, i.e. gifts made subject to a direction by the donor that the charity transfer

29 See CRA, Policy Number CPC – 017 (March 29, 2000) and CRA, Registered Charities Newsletter No. 27 (Fall

2006). 30 Rodolfo Jose Slobodrian v. Minister of National Revenue 2003 FCA 350 (Federal Court of Appeal). 31 CRA policy provides, at supra note 2, that a “charity may issue an official donation receipt if a person provides a

service to the charity, the charity pays for the service, and the person then returns the payment to the charity as a gift. In such circumstances, two transactions have taken place, the first being the provision of a service and the payment flowing therefrom, and the second being a gift proper.”

32 See, for example, CRA, Registered Charity Newsletters No. 18 (Spring 2004).

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the funds to a specified person or family. In such circumstances, the CRA’s position is that the

donor has made a gift to the person or family and not to the registered charity.33

(D) Gift Certificates

According to CRA Summary Policy CPS-018 (October 9, 2002), registered charities cannot issue

official donation receipts for gift certificates they receive directly from the issuer of the gift

certificate at the time the donation is made,34 although the issuer may be eligible for an official

donation receipt when the charity redeems the certificate in exchange for property.35 If the

charity does not redeem the gift certificate but passes it to a third party, such as at an auction or

raffle, the redemption of the gift certificate by the third party does not entitle the issuer to a

receipt. However, in this scenario, the CRA notes that while no donation deduction or tax credit

can be claimed, where the “issuer has donated and redeemed a gift certificate for property for the

purpose of earning income in its business, a reasonable deduction may be available in respect of

the cost of the property.”36 When valuing gift certificates for charitable receipting purposes, care

should be taken that the gift certificate is valued correctly as the CRA has “determined that in

some instances, the fair market value of a gift certificate may not be the equivalent of its face

value.”37 Gift acceptance policies should include references to these different considerations

regarding donations of gift certificates.

(iii) Management of Corporate Donors and Corporate Donations

Issues pertaining to corporate donor acknowledgement and management may also form part of

the gift acceptance policy in order to ensure that complaints or potential litigation do not arise in 33 See CRA, RC4108 “Registered Charities and the Income Tax Act” and “Gifts and Official Donation Receipts” IT-

110R3 (June 20, 1997). 34 Note that registered charities can issue official donation receipts for gift certificates when the donor is not the

issuer of the gift certificate and the donor has obtained the gift certificate for valuable consideration either from the issuer or other third party.

35 Note that a receipt cannot be issued if the charity redeems the gift certificate for a contribution of services, because these are not property and do not qualify as charitable donations.

36 CRA, Summary Policy CPS-018 (October 9, 2009). 37 According to the CRA, ibid, factors to consider might be: (a) the flexibility of the certificate - does the coupon expire after a certain time, is it usable only within a specific

timeframe, does it restrict the purchaser to specific merchandise within the store, and (b) its usefulness - does the retailer offer merchandise for the amount of the gift certificate, or will the certificate

account for a portion of regular selling property, for example, a $50 gift certificate at a car dealership.

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the future as a result of mistaken and/or unfilled corporate donor expectations. Such information

may also form part of a separate sponsorship policy for corporate donors. For example, the gift

acceptance policy could establish what type of donor acknowledgement is appropriate for what

value of gift. Consideration may also be given to the form that the donor acknowledgment will

take and the period of time during which the donor acknowledgement must be carried out or

recognized. In this regard, some charities are often too willing to provide donors with

“perpetual” recognition – consideration must be had as to whether this is really in the charity’s

best interests so to do.

The donor acknowledgement and management section of a gift acceptance policy may also

provide guidelines with respect to donor agreements, i.e., when they are necessary, what specific

terms and/or conditions they must or should have, etc. For example, consideration should be

had, when preparing donor agreements pertaining to restricted or specific charitable purpose

gifts, whether to provide for an alternate disposition of the funds upon the impossibility or

impracticality of the specified charitable purpose in order to prevent an application from having

to be made to court to vary the specified charitable purposes. In addition, consideration should

be had as to whether donor agreements should provide for the manner in which the charitable gift

is to be dealt with in the event of the dissolution or winding-up of the charity. The type and form

of corporate donor imposed restrictions that the registered charity is willing to accept should also

be considered. Finally, this section of the gift acceptance policy may also outline when the

charity should seek professional assistance in the planning or documentation of charitable gifts.

Furthermore, the donor acknowledgement and management section of a gift acceptance policy

may remind the charity and potential donors that once a gift has been received by the registered

charity and a charitable donation receipt issued, the property becomes a charitable asset and

cannot be returned to the donor. This may allow the charity to more readily deal with donors

who attempt to coerce or pressure the charity in to returning a charitable gift after a change in

financial circumstances or a falling out with the charity.

(iv) Determining how to deal with specific types of corporate gifts

A gift acceptance policy of a registered charity may include specific provisions regarding certain

types of corporate gifts that require additional consideration from both a charitable receipting

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and a due diligence perspective. For example, it may be advisable for gift acceptance policies to

highlight some of the potential issues that can arise for charities when they receive gifts of

business interests or business related property such as inventory. Although the scope of this

paper does not allow for a thorough consideration of all of the relevant issues that can arise in

this regard, a brief list of some of the relevant issues that may be adverted to in a charity’s gift

acceptance policy has been set out below.

1. Registered charities that have been designated private foundations for the purposes of the

Income Tax Act that receive gifts of securities must ensure that they are in compliance with the

monitoring, reporting and divesture requirements of the excess corporate holdings regime

imposed on private foundations pursuant to the provisions of the Income Tax Act.38

2. Registered charities that have been designated public foundations and private foundations

for the purposes of the Income Tax Act must ensure that they are not acquiring control of a

corporation as a result of a receipt of a gift of business interests, as in doing so, they may run the

risk of de-registration.39

3. Registered charities that have been designated public foundations and charitable

organizations for the purposes of the Income Tax Act must ensure that a gift of business interests

will not result in them being considered to be carrying on a business that is not a related business

for the purposes of the Income Tax Act. Otherwise, they run the risk of de-registration.40

Private foundations cannot carry on any business pursuant to the provisions of the Income Tax

Act and therefore they must ensure that the receipt of a gift of business interests will not result in

this outcome.41 In particular, it is important to note that the CRA currently takes the position

that any registered charity that holds units of partnership will be seen to be carrying on a

38 See s. 149.2 of the Income Tax Act. 39 See s. 149.1 and 149.1(12) of the Income Tax Act of the Income Tax Act. For these purposes, “control” occurs

when the foundation, or the foundation and persons with whom it does not deal at arm’s length, owns fifty percent (50%) or more of a corporation’s issued share capital, having full voting rights under all circumstances. However, as a specific exception, “control” will not occur when a public foundation which has not bought more than five percent (5%) of the relevant shares of the corporation is given a bloc of shares that brings up its total holding to more than fifty percent (50%).

40 See s. 149.1(2) and s. 149.1(3) of the Income Tax Act. 41 See s. 149.1(4) of the Income Tax Act.

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business, regardless of whether the registered charity is a limited or general partner or whether

the business of the partnership is limited to the investment of funds.42

4. Gifts of inventory by corporations or businesses are subject to specific rules, which

should be set out in a registered charity’s gift acceptance policy.43 Gifts of other types of

business interests can raise complex tax, valuation and due diligence issues. It may be important

for a charity’s gift acceptance policy to highlight that if a registered charity is offered certain

types of property, additional due diligence should be carried out and/or professional assistance

should be sought. For example, gifts of private company shares, exchangeable shares, limited

partnership units, hedge fund interests and flow-through shares are all complex types business

interests that may require additional due diligence and assessment to take place.

(b) Corporate Sponsorship – Considerations for Policies and Agreements

Various considerations will impact whether a registered charity considers it advisable to enter

into a specific sponsorship arrangement and the terms and conditions of such sponsorship

arrangement that it will find acceptable. Various issues that a sponsorship policy, whether

forming part of a registered charity’s gift acceptance policy or existing independently, should

highlight include, but are not limited to, the following.

(i) Documenting of Sponsorship Arrangement in Written Agreement

Documenting sponsorship arrangements entered into by corporations and registered charities is

an important due diligence and risk management exercise in which registered charities can

engage. Setting certain parameters for when written sponsorship agreements will be entered into

by the registered charity and the corporation (e.g., sponsorships of a certain value) and

establishing processes for the internal and/or external review of such agreements, where

necessary, is an important component of the creation and implementation of a sponsorship

policy. Having regard to the sponsorship versus charitable gift discussion highlighted above,

care should be taken when documenting a sponsorship arrangement to highlight that the

arrangement is in fact a true sponsorship and no portion of the sponsorship is meant to constitute

42 For a discussion of the CRA’s policy on what constitutes the carrying on of a business and what constitutes a

“related business” see Policy CPS-019, “What is a Related Business?” (March 31, 2003). 43 See Canada Revenue Agency, Policy Commentary CPC-018 (March 29, 2000).

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a charitable gift. Conversely, if a registered charity is entering to a gift agreement with a

corporation, and a charitable receipt is being issued for the donation made by the corporation,

care should be taken to ensure that the gift agreement specifically adverts to the fact that a

charitable gift is being made and that the language of the gift agreement does not inadvertently

suggest the indicia of a sponsorship arrangement or the conferring of an advantage that is not in

fact being conferred.

(a) Acceptable and Non-Acceptable Sponsorship Arrangements

Like a gift acceptance policy, a sponsorship policy should likely provide the charity with policies

and procedures to follow when determining whether a sponsorship arrangement with a

corporation will be acceptable to the registered charity. The reputation and goodwill associated

with specific charities are important and valuable assets and steps should be taken to ensure that

these assets are not damaged by hastily arranged sponsorship arrangements. For example,

charities may wish to establish procedures to ensure that they do not enter into sponsorship

arrangements with corporations that would jeopardize the financial or legal standing of the

charity or impact negatively on the charity’s standing and reputation in the eyes of the public.

Procedures in this regard should be consistent with all other policies governing the operation of

the charity.

(b) Specificity with respect to the Parameters of the Sponsorship Arrangement

Considerations relating to the parameters of sponsorship arrangements will likely be dependant

upon the particular facts involved in each sponsorship arrangement. For example, sponsorship

arrangements may involve permanent and/or long-term naming opportunities related to specific

buildings or spaces, to particular charitable programs or to various events carried on by the

registered charity. However, sponsorship policies should ensure that any sponsorship

arrangement that is entered into by the charity has specific guidelines and that the roles and

responsibilities of both the charity and the sponsor are appropriately documented in a

sponsorship agreement.

A review of the general literature in this area reveals that provisions that may be found in

sponsorship agreements include, but are not limited to, the following: (i) a description of the

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funding and timeline of the funding being provided by the sponsor; (ii) a description of the

recognition being provided to the sponsor; (iii) the term of the sponsorship arrangement and

procedures and possibilities for potential early termination; (iv) provisions relating to whether it

is an exclusive sponsorship opportunity for the particular donor or whether it is an unlimited

sponsorship opportunity; (v) a description of the obligations of the parties to one another; (vi)

various representations and warranties with respect to the ability of each party to enter into the

sponsorship agreement; (vii) notice, communication and dispute resolution provisions; (viii)

provisions relating to the clarification of the relationship between the parties, such as the

inability to assign rights under the agreement or specific provisions declaring that the agreement

does not constitute a partnership, etc.; and (ix) liability and/or indemnity provisions.

(c) Protection of Intellectual Property.

In addition to the foregoing, registered charities should ensure that their sponsorship policies set

out positive steps to be taken by the registered charity to protect the use of its trademarks, brand,

name, goodwill and intellectual property when engaging in sponsorship arrangements.

Registered charities may wish to ensure that the use of its name, marks, logos and insignia by the

sponsor is prohibited without the written approval by the charity and that all written

communications related to the sponsorship are subject to the charity’s approval. It is likely that

this will also be an aim of the sponsoring corporation. As an author has noted, “[t]he whole

point of the sponsorship relationship, in most cases, is to enhance the goodwill and reputation of

the sponsor from its association with the event….If at the end of the day, the sponsor loses the

ability to control the use of its trade-marks, or otherwise loses value in its name or brand, then

the sponsorship becomes a dangerous liability to the sponsor, instead of having the intended

effect.”44

3. Corporate Foundations

As noted above, corporate support for registered charities in Canada is becoming increasingly

important to both registered charities and corporate Canada. As Imagine Canada’s research has

44 Jolan Storch, “The Evolution of Sponsorship Agreements” (March 2006). Online at:

www.macleoddixon.com/.../Evolution_of_Sponsorship_Agreements.pdf.

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revealed, although there are many reasons that businesses support charitable endeavours,45 “there

is a general consensus among businesses that it is important to make corporate contributions

because it is a good thing to do, irrespective of the financial returns to your company.46

As corporate support of registered charities grows, the sophistication of approaches taken by

corporations to philanthropic endeavours appears to be increasing as well.47 Corporations may

have dedicated corporate philanthropy officers, committees or departments, specific corporate

philanthropy policies, benchmarks and planning and/or in some cases, may establish parallel

foundations to serve as the independent vehicles for the corporation’s charitable giving.

(a) Determining whether to establish a parallel foundation

There are certain factors that may militate for or against a corporation deciding to create a

parallel foundation to serve as an independent vehicle for a corporation’s charitable giving. Such

factors include:48

Potentially Positive Factors

A. Centralization, Cohesiveness and Coordination – A parallel foundation allows for better

coordination by centralizing all of the charitable giving engaged in by the corporation and

providing a single vehicle for this purpose. It allows for the day to day administrative burden of

charitable giving decision-making, policy formulation and other related matters to be removed

from the responsibility of the management of the corporation and transferred to dedicated

decision-makers responsible for the operation of the parallel foundation. It may also provide a

vehicle for charitable giving engaged in by employees and/or partners of the corporation as well.

45 See Steven Ayer “Insights for Strategic Corporate Fundraising – Further Findings from the Canada Survey of

Business Contributions to Community” Online at: http://www.imaginecanada.ca/node/33. “Across industry sectors, the motives for supporting charities are relatively consistent ….., with most businesses citing a desire to create strong relationships with the community, build healthy communities that are, in turn, good for business, or support causes that are consistent with their company’s own traditions and values.”

46 Ibid. 47 See Judith Chopra, “The Changing World of Corporate Donations: Clarica, A Case Study” The Philanthropist,

Volume 17, No. 3. See also Raymond Dart, “Charities in Business, Business in Charities, Charities and Business – Mapping and Understanding the Complex Nonprofit / Business Interface” The Philanthropist, Volume 18, No. 3.

48 This next section of the paper is indebted to Teresa Man, supra note 1. See her more detailed discussion of these and other factors.

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B. Flexibility – A parallel foundation allows a corporation the flexibility to make charitable

gifts to the foundation when necessary and/or advisable for tax purposes while still allowing

grants to be made to registered charities by the foundation at different times. The timeline of

actual distributions made to registered charities does need to be bound to the timeline mandated

by the tax requirements of the corporation in any year. The corporation can make endowed gifts

to the parallel foundation to allow for uninterrupted giving by the parallel foundation in years

when corporate profits are reduced or the tax benefits of charitable giving are not required.

C. Control – A parallel foundation, depending upon the manner in which it is organized and

the control exerted over it by the corporation, may allow the corporation to retain control over

the charitable gifting engaged in by the foundation and to direct its overall administration. This

would allow the corporation to coordinate the foundation’s overall goals and outcomes with

those of the corporation. A parallel foundation may also more easily allow a corporation to

monitor the registered charities that are the recipients of its largesse over time and to engage in

research regarding the outcome of its charitable giving.

D. Publicity – A parallel foundation that bears a corporation’s name allows for publicity,

marketing and branding consequences that may not be available to a corporation engaged in

charitable giving on its own. A parallel foundation allows a corporation to show the importance

that it places on charitable giving and potentially allows it to more significantly associate itself

with philanthropic goals.

Potentially Negative Factors

A. Administrative and Regulatory Compliance Burden – A parallel foundation will involve

ongoing administrative and regulatory compliance burdens, including the incurring ongoing

expenses and the requirement for ongoing oversight and professional advice. The regulatory and

administrative compliance regime governing the parallel foundation will be different from the

regulatory regime or regimes to which the corporation is subject.

B. Potential for Negative Publicity – If a corporation establishes a parallel foundation it runs

the risk of negative publicity in the event that the parallel foundation is not administered properly

and runs afoul of the regulatory regimes to which the parallel foundation will be subject.

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(b) Considerations in Establishing a Parallel Foundation

The establishment of a private foundation is a two stage process: (i) the legal entity comprising

the foundation must be established (i.e., non share capital corporation or charitable trust); and (ii)

an application must be made to the Canada Revenue Agency to register that legal entity as a

registered charity for the purpose of the Income Tax Act. In the event that a corporation wishes

to establish a parallel private foundation, various issues pertaining to both the organizational

structure and the charitable goals of the anticipated foundation need to be considered, some of

which are linked and may influence each other in the final analysis.

The breadth of this paper does not allow for a fulsome analysis of all of the considerations

involved in establishing a parallel foundation and therefore the discussion that follows merely

provides an overview of some of the relevant issues requiring review when establishing a parallel

foundation.49

1. Form – Will the parallel foundation be a charitable trust or a non-share capital

corporation? Non-share capital corporations are generally the norm for corporate parallel

foundations, although all options should be considered, and depending upon the purpose of the

parallel foundation, a charitable trust may be appropriate.50

2. Jurisdiction – Will the parallel foundation be incorporated federally or under a provincial

statute? If the corporation is national in scope, or if the parallel foundation is intended to be

national in scope, a federal jurisdiction may be more appropriate. Certain provincial

jurisdictions may have specific laws governing registered charities incorporated in, or operating

in, the province.51 These should be reviewed prior to a jurisdiction being chosen.

49 See Jane Burke-Robertson, “Establishing a Parallel Foundation: Why? Why Not? How?” The Philanthropist,

Volume 13, No. 2. 50 See for example CRA Summary Policy CSP-E0 (September 3, 2003) where an employee charity trust is described

as a “special trust developed to administer group donations by employees in a company. The arrangement is one where the employees of a company pledge contributions to various registered charities and authorize their employer to withhold the amount pledged through payroll deductions. The amounts withheld are held in trust for the employees. The employer, as trustee, in turn remits the total amount withheld from the employees to the designated charities. An employer operated employee’s charity trust can qualify for registration as a charity.”

51 See for example in Ontario, the Charities Accounting Act R.S.O. 1990, c. C.10. Note that incorporating in a provincial jurisdiction like Ontario may invite an extra layer of regulatory scrutiny, in the form of the Public Guardian and Trustee of Ontario.

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3. Charitable Purposes – Will the charitable purposes of the parallel foundation be

restricted to the making of gifts to other registered charities or qualified donees or does the

parallel foundation intend to carry on some charitable activities directly, such as a scholarship

program?

Will the charitable purposes of the parallel foundation be broadly drafted, to encompass a wealth

of possible recipients of foundation funds or will the charitable objects be restricted to certain

charitable purposes that are aligned with strategic planning goals (i.e., distributions will only be

made to charitable organizations in Canada that advance education). What will happen to the

charitable funds of the parallel foundation upon dissolution?

4. Control and Funding – Preliminary issues include whether the corporation wishes to

ensure that it controls the parallel foundation, perhaps by instituting a structure whereby the

directors of the corporation from time to time are the directors and members of the parallel

foundation. Other issues include how will the parallel foundation be funded – entirely from the

corporation, from the corporation and its employees, by the public through fundraising efforts

engaged in by the foundation?

5. Designation as a Registered Charity - Determinations with respect to the corporation’s

control over the parallel foundation and the source of the parallel foundation’s funding will help

to determine whether the parallel foundation, when registered as a charity, will be designated as

a charitable organization or a charitable foundation (and specifically either as a private

foundation and a public foundation). Generally speaking, most charitable organizations carry out

charitable activities directly, and are required to disburse at least fifty percent (50%) of their

income in each year for that purpose,52 while charitable foundation disburse the majority of their

funds by making gifts to qualified donees. It is likely that most corporate parallel foundations

will engage primarily in making gifts to qualified donees and not carrying on charitable activities

directly and therefore will most likely either be designated public or private foundations.

52 See subsection 149.1(6) of the Income Tax Act and the definition of “charitable organization” in subsection

149.1(1)

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Pursuant to the provisions of the Income Tax Act, a private foundation is a charitable foundation

that is not a public foundation.53 Under the new “control” test that was recently introduced to

replace the “contribution” test, a public foundation is a charitable foundation of which more than

50% of the directors or trustees deal with each other and with each of the other directors or

trustees at arm’s length and the charity is not controlled by a person, or group of persons who do

not deal with each other at arm’s length, who contributed more than 50% of the capital to the

foundation.54 Generally speaking under this new test, a charity will not automatically be

designated a private foundation based solely on the source of its funding. Instead, a person, or a

group of persons not at arm’s length to one another, may contribute more than 50% of the

foundation’s capital provided that they do not control the charity in any way and this person or

members of this related group do not represent more than 50% of the directors, trustees, officers

and similar officials of the charity. As noted by one author, “as long as the donor who

contributes more than 50 percent of the capital does not control the foundation (directly or

indirectly in any manner whatsoever), the foundation will be classified as a public foundation.”55

Private foundations are subject to much greater regulatory scrutiny then public foundations and

charitable organizations and the scrutiny to which private foundations are subject, including but

not limited to the excess corporate business holdings regime and the inability to carry on related

businesses, should be canvassed prior to determining which charitable designation the parallel

foundation seeks to obtain.56

53 See the definition of “private foundation” in subsection 149.1(1) of the Income Tax Act. 54 See definition of “public foundation” in subsection 149.1(1) of the Income Tax Act. 55 For more information, see Cindy Radu, “Public/Private Foundations – Issues and Planning Opportunities”

Canadian Tax Journal / Revue Fiscale Canadienne (2009) Vol. 57 No. 1, 1-23. 56 For more information pertaining to the regulation of private foundations see M. Elena Hoffstein and Robin P.

Roddey “Private Foundations and Community Foundations Canadian Tax Journal (2001), Vol. 49, No. 5.