from donations to corporate foundations: corporate ... events...4 good works outside charity sector...

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From Donations to Corporate Foundations: Corporate

Philanthropy at SMEs (Small and Medium Enterprises)

A presentation to Financial Executives International – March 23, 2011

Mark Blumberg, Blumberg Segal LLP ([email protected])

GlobalPhilanthropy.ca

mailto:[email protected]

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Blumberg Segal LLP is a law firm based in Toronto, Ontario Mark Blumberg is a partner at Blumbergs who focuses on non-

profit and charity law Assists charities from across Canada with Canadian and

international operations and foreign charities fundraising here www.canadiancharitylaw.ca and www.globalphilanthropy.ca

Free Canadian Charity Law Newsletter. Sign up at: http://www.canadiancharitylaw.ca/index/php/pages/subscribe

(416) 361 – 1982 or 1-866-961-1982 [email protected] www.twitter.com/canadiancharity

Blumberg Segal LLP


http://www.canadiancharitylaw.ca/

http://www.globalphilanthropy.ca/

http://www.canadiancharitylaw.ca/index/php/pages/subscribe


http://www.twitter.com/canadiancharity

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Legal information not legal advice

Views expressed are my own

Questions during and at end

Logistics and timing

Introduction


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Good Works Outside Charity Sector

Personal donations of cash or in kind items to foreign charities, no tax receipt

Doing business in developing countries

Corporate social responsibility (CSR), donations, sponsorship, advertising, etc…

For-Profit “non-profit” – google.org, micro-loans

Non-profit without charitable status – if no need to issue tax receipts

Avoiding abusive transactions and paying fair share of taxes


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Volunteering – at home and abroad

Remittances – gifts to family, friends, former employees abroad

Encourage Canadian government to fulfill commitment of 0.7% of GNI

Encourage Canadian companies operating outside of Canada to do so legally and ethically

Our own actions – the goods we consume, environmental footprint, what we buy

Good Works Outside Charity Sector


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What is CSR?

Corporate self-regulation as part of its business model

Identifying stakeholders and treating fairly

Concern for public interest

Caring for the environment and society

Risk management and reputation management

Ethical purchasing/supply chain

Ethical investing

Education about ethics

Employee conduct


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Why practice CSR?

You care about the world we live in

Goodwill

Good business practice/Risk management

May be mandated by some countries officially

May be expected in other countries

Win/win (Corporation and charities/beneficiaries)

Staff morale and retention

Stakeholder interests


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Continuum

Social Mission

Charity Social Enterprise CSR

Commercial Purpose


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How do we do CSR?

Can be as simple or complicated as we want

Donate cash or goods to local charity

Work with foreign charity as intermediary

More complicated arrangements

Many many options


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CSR Legal Structures


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XYZ For Profit Corporation

Project in Canada or Elsewhere

XYZ For Profit Subsidiary

Corporation

XYZ Foundatio

n

XYZ Non-Profit

Canadian Charity

Foreign Intermediary

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1) Use For Profit Corporation (Existing or New) (“XYZ Corporation”)

Flexibility of for-profit corporation

Familiarity with for-profit

No new structure if use existing corporation

Limited liability

With new corporation easy to establish and maintain compared to non-profit

Can pay dividends and directors fees

Pays tax on profit and cannot issue donation receipts

Can have notional “foundation”


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2) Non-Profit Corporation (with registered charity status) (“XYZ non-profit”)

Limited liability

Exempt from Income Tax but cannot issue official donation receipts

Very few restrictions on activities but no dividends

Have to keep within objects, but objects do not have to fall into charitable categories

Almost no restrictions on business, political, fundraising, social, administration and other expenses unlike registered charity.


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3) Non Profit Corporation (WITH CHARITABLE STATUS) (“XYZ Foundation”)

Tax exempt, can also issue official donation receipts

XYZ Corporation can get tax deductions in profitable years

Secure funding for project even if M&A with XYZ Corporation

Some foundations require status for funding

Some corporations only grant to registered charities

Some government funds only available to charities

Benefits of charitable status - GST rebate, property tax rebate

More public disclosure, transparency and credibility, status

Dissolution only to qualified donees (like another charity)

Restrictions on activities, cost of establishing/maintaining


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4) Work with existing Canadian registered charities

Donation to charity, contractor or sponsorship arrangement

Large variety of different charities – different values, outlook

Goodwill in Canada

Goodwill in other countries

Communications staff in Canada

They have infrastructure and experience in Canada to handle project and monitor, evaluate

They take responsibility for project

May provide more likelihood for sustainability and easier exit strategy


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5) Work with existing foreign charity

Can be sponsorship, contractor arrangement

They have experience and credibility

They have goodwill in country, perhaps in Canada as well

They may be closer to local stakeholder groups


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Some commonly used non-profit or charity structures that should generally be avoided

Unincorporated Association

Trust Agreement


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For-Profit (OBCA) –2 hours

Federal Non-Profit (CCA) –1 month

Application for Charitable Status with CRA –4-6 months

Timelines


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Incorporation

Organization

Charity Application

Cost is 6-8,000 depending on time and complexity for incorporation, organization and application.

Process


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Incorporation


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federal vs. provincial

documents and information required

Name

Objects

directors

Preliminary issues


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will you be operating only in one province vs. in more than one province, internationally

Ontario Corporation Act(1953) –under review

Canada Corporations Act(1917) –under review

review of non-standard charitable objects or changes to objects by Public Guardian

usually federal CCA incorporation is best

Federal vs. Provincial incorporation


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Application for Letters Patent

By-laws

Affidavit of Bona Fides

Director’s Consents

NUANS

$200

Documents Needed for Federal Incorporation


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3 Names of Directors –address, occupation

Name of Charity

Object of Charity

Address of Corporation

later more information –eg SIN #, tel #

Basic Information Required for Federal Incorp.


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for charity all objects must be charitable

not too narrow or too broad, see Travel Just case

cannot act outside objects (ultra vires)

Common object for foundations that is very narrow To receive and maintain a fund or funds and to apply all or part of the principal and income therefrom, from time to time, to charitable organizations that are also registered charities under the Income Tax Act(Canada).

Objects


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Relief of Poverty-To relieve poverty in developing nations by providing food and other basic supplies to persons in need.

Health-To develop or promote public health in developing nations by educating and instructing the public on prevention of, and curative measures for, health problems and by researching and documenting changes in the health of the community.

Drinking Water-To improve the quality of drinking water in developing nations by constructing wells and water treatment, irrigation and sewage treatment systems.

Agriculture-To improve skills in forestry, agriculture and horticulture and to assist in the preservation of the environment in developing nations.

Disaster Relief-To provide necessities of life to victims of disasters.

Source: Ontario Not-For Profit Incorporator's Handbook. www.attorneygeneral.jus.gov.on.ca/english/family/pgt/nfpinc/appendixg.asp

Charitable Objects –eg. International Development


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three directors minimum

majority arms-length, unless private foundation

qualifications –18, sound mind, not bankrupt

director cannot receive compensation in Ontario, also not good idea elsewhere

no residency requirement but…

mix of skills

Directors


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Organization of the Charity


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minute book and seal (eg. Teranet package)

organizing resolutions –directors, officers, members, pass by-laws, accountants, banking, authorize application for charity status, fiscal year end.

filing extra-provincial forms as required

bank account

Organization of Corporation


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Registered Charity Status in Canada


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T2050 –15 pages, 23 questions

no fee

schedules and governing documents (eg. constitution, trust or incorporating document)

difficulty –terminology, budgets, local and foreign activities, fundraising, political activities, all documents

lot harder than it looks, CRA more demanding

Application for Canadian Charitable Status


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1) The organization has one or more purposes that are not charitable.

2) The application does not have enough information about the organization’s activities.

3) The organization’s activities do not support the organization’s purpose.

4) The application does not include a clear statement that the organization’s activities are open to everyone.

Why Charity Applications Fail according to the Charities Directorate


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5) The organization does not seem to have the operational capacity (such things as people, structures, and materials) to carry out its activities in Canada or outside Canada.

6) The application lacks financial information, as well as details to support the organization’s purpose and activities.

7) The organization’s focus is on social or cultural activities.

Why Charity Applications Fail according to the Charities Directorate cont’d


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8) The application does not include supporting documents such as Web addresses, brochures, booklets, newspaper articles, or information about the organization’s current activities.

9) The organization seems to be devoting too many resources to political activities.

10) The application does not include any copy of an agreement with representatives who are supposed to help the organization to carry out its activities outside Canada

Charitable Work and Ethnocultural Groups -Information on registering as a charity

Why Charity Applications Fail according to the Charities Directorate cont’d


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Voluntary Sector In Canada

161,000 non-profits in 2003 (federal and provincial and unincorporated)

85,00 Registered Charities (as of 2011)

2 million on payroll

$182 Billion in revenue – 66% from Government, rest from earned income and fundraising (less than 10%)

2/3 of charities have revenue under $100,000


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Philanthropy, ODA And Remittances

Philanthropy $2.5 billion

Philanthropy (development) $1.5 billion (Hudson)

ODA (“foreign aid”) $5 billion

Remittances $12 billion

Foreign Direct Investment $82 billion (2008)


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Picking a charity in Canada

85,000 Registered charities

http://www.cra-arc.gc.ca/chrts-gvng/chrts/menu-eng.html

12,000 carried on ‘programs’ outside of Canada –humanitarian assistance, development, education, religious, arts, etc… 4000 spent funds outside Canada

Every charity is different – objects / areas of charitable work / / values / attitude towards resource extraction/ risk tolerance / public profile / donors / level of government support / independent vs. international affiliations / resources / knowledge / local vs. international activities










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How to Pick an Intermediary or Local Partner

Have they done this work before

Ability to communicate – language, technology etc.

See their work – site visits etc.

Really get to know them

References

Informal or formal advisory committee on selection

Background/internet searches

Do they have infrastructure, capacity to do work?

Do they have real connection with beneficiaries

Sectoral and geographic focus

“Do no harm” in conflict and post-conflict areas


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Canadian Charities By $ Spent Outside Of Canada

1. WORLD VISION CANADA $287,877,830.00

2. CARE CANADA $187,223,833.00

3. INT. DEVELOPMENT RESEARCH CENTRE $97,565,681.00

4. HAMILTON HEALTH SCIENCES CORP. $92,855,349.00

5. PLAN INTERNATIONAL CANADA INC. $54,146,626.00

6. THE CANADIAN RED CROSS SOCIETY $48,245,075.00

7. UNITED ISRAEL APPEAL OF CANADA INC $40,726,294.00

8. THE SAMARITAN'S PURSE ‐ CANADA $35,955,229.00

9. CHRISTIAN CHILDREN'S FUND OF CANADA $33,644,359.00

10. MENNONITE CENTRAL COMMITTEE CANADA $32,159,078.00


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All charities are not created equal

Being a “registered charity” does not mean a good,

effective, reliable charityGlobalPhilanthropy.ca

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Bad Ways To Pick A Charity

Name sounds good

Nice looking website

Financial numbers look ‘great’

Has a good ratio of funds going to cause rather than overhead

Someone told you a few years ago they are a good charity

They hold good cocktail parties

The executive director is an old college friend

The media has a glowing article on the charity


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Some factors

What are motives of each side in working together?

What is each expecting from the other?

“If you don't know where you are going, any road willtake you there.“

What type of corporate culture do you have?

Is your corporate culture compatible with the charity’stheory of change and culture?

Reputation of charity and company

Size of each organization?

Amount of resources/funds to devote?

Amount of time to devote?

Corporate gift acceptance limitationsGlobalPhilanthropy.ca

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Some factors

Do charity have geographic focus you are looking for?

Does charity have sectoral focus you are looking for?

How much time to complete project?

Are you looking for short term or long term relationship?

Is it partnership or subcontract?

Are you interested in learning from one another?

Financial Management abilities

Are they are registered charity?

Have they done this work before?

Do they have ability to communicate with you–language, technology etc.


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Some factors

Does charity have infrastructure, capacity to do work inthe field?

Does charity have infrastructure and experience inCanada to handle project and monitor, evaluate?

Does charity have real connection with beneficiaries?

Is this donation to charity, contractor, sponsorshiparrangement or combination?

Do they have goodwill in Canada?

Do they have goodwill in other countries?

Do they have communications staff in Canada?

Governance


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Some factors

Connections

Do they have a strong base of support in Canada andoutside?

Do they receive government funding?

Are you looking for matching funds/CIDA/othergovernments

Do they receive other corporate funding?

Do they receive foundation funding?

Do they receive funding from sources outside ofCanada?

Political involvement?


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Some factors

Will project be sustainable after end of your corporatefunding?

Exit strategy?


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Some ideas for due diligence

Do you really know your charity partner?

Have you seen their work?

References

Informal or formal advisory committee on selection

Background/internet searches

T3010 information and financial statements

Basic legal review of charity (objects, notification ofregistration, direction and control of foreign activities).


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CharityCan report on registered charity


49 GlobalPhilanthropy.ca

50 GlobalPhilanthropy.ca

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Red Flags with charities

If over 50% of revenue from gifts in kind such aspharmaceuticals (prone to exorbitant valuations)

High staff turnover

Involvement with abusive charity gifting tax shelterschemes

Unrealistic claims


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Working Together Well

If deal is one sided may not work out

Understand restrictions, limitations (legal or otherwise)and sensitivities of the other?

Have a good negotiated agreement with clearresponsibilities and reasonable expectations

Respect

Communicate


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Top Charity Compliance Concerns


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Canadian Registered Charities must file their T3010 Registered Charity Information Return every year

Within six months of the end of the charity’s fiscal period

For 2009 fiscal years on file T3010B

For December 2010 on file T3010-1

Transparency tool

Form is mailed with labels to charity – also can download form from:http://www.cra-arc.gc.ca/chrts-gvng/chrts/prtng/rtrn/flngb-eng.html

1. Failure to File T3010


http://www.cra-arc.gc.ca/chrts-gvng/chrts/prtng/rtrn/flngb-eng.html







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T3010 must be the correct form, accurate and complete including schedules and financial statements otherwise may be returned or considered incomplete

Lots of help on internet with T3010

CRA has fillable T3010

2. Mistakes with T3010


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Charities are required to issue correct receipts

Some receipts:

Lack mandatory information

Have mistakes

Include improper fair market value (FMV)

3. Incorrect Receipts


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Charities can only issue receipts for a gift.

A gift must be:

1. Voluntary – given of free will (not compelled)

2. Transferred – from donor to charity/qualified donee

3. Property – cash or gifts in kinds (not services)

4. Financial Sacrifice on the part of the donor (donative intent – advantage must be less than 80% of amount unless Minister agrees)

What is a “Gift”


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For gifts of cash: (Regulation 3501 of the Income Tax Act)

A statement that it is an official receipt for income tax purposes;

The name and address of the charity as on file with the CRA;

The charity’s registration number;

The serial number of the receipt;

The place or locality where the receipt was issued;

The day or year the donation was received;

Mandatory Elements of Receipts


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The day on which the receipt was issued if it differs from the day of donation;

The full name and address of the donor;

The amount of the gift;

The value and description of any advantage received by the donor (under proposed legislation);

The signature of an individual authorized by the charity to acknowledge donations; and

The name and Web site address of the Canadian Revenue Agency (www.cra.gc.ca/charities)

Mandatory Elements of Receipts


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For non-cash gifts (gifts in kind), these additional elements:

The day on which the donation was received (if not already indicated);

A brief description of the property transferred to the charity;

The name and address of the appraiser (if property was appraised); and

In place of the amount of the gift mentioned above, the deemed fair market value of the property (under proposed legislation).

Mandatory Elements for Gifts in Kind


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Sample Official Donation Receipts


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Charities in Canada have legal objects in their founding documents (eg. Letters Patent, Trust deed etc)

Charities must not act outside of these legal objects.

4. Acting Outside Legal Objects


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A registered charity must devote its resources (funds, personnel, and property) to charitable activities (the work that advances the charitable purposes).

Certain non-charitable activities are allowed within limits like administration, fundraising, related business, social and political.

5. Non-Charitable Activities


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Charities need “direction and control” over funds and resources.

Charities conduct activities in two ways:

1. By gifting to “qualified donees”; or

2. By carrying on its own charitable activities.*employees and volunteers

*using intermediaries who are not qualified donees (in Canada or abroad).

Canadian Registered Charities Carrying Out Activities Outside Canada

http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cgd/tsd-cnd-eng.html

6. Gifts to Non-Qualified Donees


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Qualified Donee, eg.

Canadian registered

Charity, UN, prescribed

University, Canadian

Municipality, etc

Employee

VolunteerIntermediary –

agency, JV,

partner,

contractor

Canadian Registered Charity

“Own Activities”

[Direction and Control]

Structured

Arrangement -Written

agreement


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When not working with qualified donee or own staff need tohave:

Due Diligence of Intermediary (investigate) Written agreement Detailed description of activities Monitoring and Supervision Ongoing Instruction for changes Periodic Transfers Separate Activities and Funds Books and Records showing above

“Own Activities” or “Direction And Control”


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Fundraising is important for charities but it is not a charitable activity

Lots of media and donor concern about costs and practices

CRA Guidance on Fundraising recently released

Must read for anyone very involved with fundraising:http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cps/cps-028-eng.html

7. Fundraising Costs and Practice


http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cps/cps-028-eng.html









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Prohibited fundraising conduct (illegal, main purpose, too much private benefit, misleading or deceptive)

Apportioning expenses between fundraising and charitable

Evaluation – Ratios, Best practices, Indicators of concern

Disclosure and transparency

CRA Guidance for Fundraising


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Sole-source fundraising contracts

Non-arm's length fundraising contracts

Fundraising initiatives that are not well-documented

Fundraising merchandise purchases that are not at arm's length, not at fair market value, or not purchased to increase fundraising revenue.

Most of the gross revenues for non-charitable parties.

Commission-based fundraiser remuneration

Misrepresentations in fundraising solicitations or in disclosures about fundraising or financial performance.

Indicators of Concern


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Fundraising Ratio of Costs to RevenuesRatio of Costs to

Revenues over Fiscal

PeriodCRA Approach (Cost to Revenue)

• Under 35%

• 35% and Above

• Above 70%

• Unlikely to generate questions or concerns.

• The CRA will examine the average ratio over recent

years to determine if there is a trend of high

fundraising costs. The higher the ratio, the more

likely it is that there will be concerns and a need for

a more detailed assessment of expenditures.

• This level will raise concerns with the CRA. The

charity must be able to provide an explanation and

rationale for this level of expenditure to show that it

is in compliance; otherwise, it will not be acceptable.


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People can donate to registered charities in Canada and get an official donation receipt which is very valuable and can cost the tax system a lot. Promoters and “charities” cannot, through various games and tricks, abuse the tax system to issue an inflated receipt.

Usually “investor” or “donor” is told that the tax benefits and deductions arising from the scheme will equal or exceed the costs of entering into the arrangement or the property.

8. Charity Gifting Tax Shelters


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Avoiding Abusive Charity Gifting Tax Shelters

Over $6 billion in gifting tax shelters over last 7 years

Over 175,000 Canadians being audited and denied deductions

If it sounds too good to be true, it probably is

Be careful of advice from people who have a financial benefit in the transaction


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Employee vs. Independent contractor - see CRA publication Employee or Self-employed?: http://www.cra-arc.gc.ca/E/pub/tg/rc4110/

Withholding source deductions (CPP, EI, Income Tax)

Remitting source deductions

Proper employment agreements

Excessive compensation / private benefit

9. Employment Issues


http://www.cra-arc.gc.ca/E/pub/tg/rc4110/



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A Canadian registered charity must keep adequate books and records, preferably in either English or French.

CRA must be able to:

Verify revenues, including all charitable donations received;

Verify that resources are spent on charitable programs; and

Verify that the charity's purposes and activities continue to be charitable.

10. Failing to Keep Adequate Books and Records


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Income Tax Act prohibits “unrelated business activities” by all charities

Charitable organizations and public foundations are permitted to engage in “related business activities” but private foundations may not engage in any business activity

“Carrying on business” - activity is commercial in nature (derive revenue and provisions of goods and services, intention to earn profit) and continuous

11. Unrelated Business Activities


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There are two kinds of related businesses that a registered charity can conduct:

1. Businesses that are linked to a charity’s purpose and subordinate to that purpose (for example, a hospital parking lot, church gift shop); and

2. Businesses that are run substantially (90%) by volunteers (for example, coffee shop run by volunteers).

For more guidance, see CRA’s CPS-019 “What is a Related Business?”

What is a Related Business?


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Tax receipts are sold for a small percentage of their face value

No donation, or small donation, to charity

No complicated scheme

Keep tight control over receipts

12. Fraudulent Tax Receipts


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In Ontario, the Public Guardian and Trustee takes the position that directors of charities can only be reimbursed for reasonable out of pocket expenses – directors cannot be consultants or employees of charity.

In other provinces, more scrutiny of salaries, loans to directors, investments in companies of directors, transactions with businesses owned by directors, etc…

13. Transactions with Directors


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Blumbergs Blumberg Segal LLP is a law firm based in Toronto, Ontario and

Mark Blumberg is a partner who focuses on non-profits and charities

Assists charities from across Canada with Canadian and international operations, foreign charities fundraising here, and Canadian corporations interested in CSR

www.canadiancharitylaw.ca and www.globalphilanthropy.ca

Free Canadian Charity Law Newsletter: http://www.canadiancharitylaw.ca/index/php/pages/subscribe/

416-361-1982 / toll free 1-866-961-1982 / [email protected]


http://www.canadiancharitylaw.ca/

http://www.globalphilanthropy.ca/

http://www.canadiancharitylaw.ca/index/php/pages/subscribe/


http://www.blumbergs.ca/