Canadian / U.S. Ministry Relationships

Canadian / U.S. Ministry Relationships

Robert B. HayhoeMILLER THOMSON LLP, Toronto

[email protected]

Stuart J. LarkHOLME ROBERTS & OWEN LLP, Colorado Springs

[email protected]

CMA Annual ConferenceDallas, TexasApril 27, 2004

International Ministry Scenarios

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

Canadian Funding of U.S. BasedMinistry

U.S .

F ie ld M in istry Activ ities by U .S . Em ployees

Africa Asia Europe LatinAm erica

Canada$

Field M inistryActivities

various coun tries



C om bined fie ld m in is try activ ities :-U .S . em ployees-C anad ian em ployees-G erm an em ployees

Africa A s ia E urope LatinA m erica

C anada$ $

$

Multi-Lateral Integrated Ministry(possibly U.S. Centered)

U .S .G erm any



C anada U .S .

F ie ld m inis try activ ities consis ting o f m ateria lsacquired from U .S . and prov ided by C anada andservices rendered on beha lf o f Canada by U .S .

or C anadian em ployees

$

M aterials andServices $

Multi-Lateral Partitioned Ministry


Canadian Legal Requirements

General Rules • Any foreign charity can fundraise in

Canada

• Only donations to “qualified donees” result in a Canadian individual tax credit/corporate tax deduction- exceptions in Canada US tax treaty

• US college attended by a family member• donations to US charities tax-recognized

against Canadian taxes on US-source income



Qualified Donees• Canadian Registered Charities• UN

− agencies• Crown (Canadian federal or provincial

government)− agencies

• Foreign charities with Canadian government patronage

• Prescribed foreign universities customarily attended by Canadians



Registered Charity• Income Tax Act “registered charity” must

be both- “resident in Canada”; and- “created or established in Canada”

• Therefore non-Canadian charities are not eligible to become registered charities



Establishment of Registered Charity• Create Canadian legal entity

− majority Canadian board

• Apply for registration with Canada Customs and Revenue Agency− T2050 form



Grants by Registered Charities• Canadian registered charities

− must devote their resources to their own charitable activities, or

− make grants to qualified donees

• Canadian registered charities may not make grants (gifts) to foreign charities− explicit grounds for intermediate sanctions

or revocation of registration



Consequences of Revocation of Charitable Registration

• Loss of tax exempt status• Loss of tax recognition for donors• Imposition of penalty tax equal to 100% of

charity’s assets− capital punishment

• Two recent high profile revocations for foreign activity− Canadian Magen David Adom for Israel

Canadian Background

Intermediate Sanctions• March 23, 2004 Canadian Federal Budget

introduced intermediate sanctions− effective date remains unknown− penalty of 105% of gifts made to foreign

charity• director liability?

− penalty payable to Canada Revenue Agency or to arm’s length charity



Foreign Activities by Registered Charities• Canadian registered charities can operate

anywhere in the world− consistent with charitable purposes

• mission activities are just as charitable in Nairobi or New York City as in Toronto

• Direct foreign activities− local or Canadian employees



Canada Revenue Agency Approach• Formerly very flexible

• Now increasingly complex and stringent− RC 4106 “Registered Charities Operating

Outside Canada”− T3010A annual return questions− T2050 application for registration questions− significant audit attention



Indirect Foreign Activities by Registered Charities

• Always subject to “own activities” test

• RC 4106 “Registered Charities Operating Outside of Canada”- need binding written agreements- agency/joint ministry arrangements



Joint Ministry Agreement• Core elements:

− pooling of resources for common project− requires substantive participation in

decision-making• Canadian votes proportional to monetary

contribution; or• Canadian veto power/double majority

− Liability allocation− stringent recordkeeping requirements− term and termination



Agency Agreement• Principal (Canadian charity) hires agent

(foreign charity) to complete some task

• Project choice is made by principal

• Operational decisions can be made by agent

• Liability flows from agent to principal


Fee for Service• Canadian charity may hire foreign charity

for specific services- missionary training- evacuation facilities- supervision of short terms teams- airtime purchase- broadcast

• Need invoices

• Need written contract unless nominal amount (under $5,000 per year)




Recordkeeping• Registered charities must keep records in

Canada to show charitable nature of all activities

• Foreign indirect activities:- agency or joint venture agreement- operational reports- financial reports (with backup)- segregated bank accounts for agency

agreements

U.S. Legal Requirements

General Limitations• Private contributions to foreign

organizations are generally not deductible

• U.S. organizations may not serve as a mere conduit for grants to foreign organizations



Key Rules• U.S. tax-exempt organizations may grant

funds to foreign organizations provided the U.S. organization:- exercises control and discretion as to the use

of the funds;- maintains records regarding the exempt uses

of the funds; and- makes grants only for specific projects that

further its exempt purposes



Discretion and Control• Indicators of sufficient discretion and

control include:- Board approval of grant after thorough

review of proposed activities and recipient organization

- Periodic reports and/or auditing regarding use of funds

- Funds for approved projects are released on an “as-needed” basis



Discretion and Control• Indicators of sufficient discretion and

control include (cont’d):- Donor designated contributions are subject

to same controls and processes as general funds

- Recipient organization enters into a written agreement regarding its use of the funds



Private Foundations• Private Foundations are subject to

additional “expenditure responsibility” rules:- Adequate procedures to ensure grant is

spent solely for the purpose for which made

- The organization must obtain full and complete reports from the recipient on the use of the funds



Private Foundations• Private Foundations are subject to

additional “expenditure responsibility” rules (cont’d):- The organization must make full and

detailed reports to the IRS regarding the grants



Choice of Arrangement

• Multi-Lateral Integrated Ministry− joint ministry arrangement required− may be limited to Canadian participation

• Multi-Lateral Partitioned Ministry− joint ministry arrangement possible− agency arrangement preferred (possibly a

fee for service arrangement)


Choice of Arrangement

• Canadian Funding of U.S. Based Ministry- joint ministry arrangement possible- agency arrangement preferred in some

circumstances


Additional Issues

Canadian Anti-Terror Law• Post 9/11/01 Bill C-36

• Refuse or revoke charitable registration for:− making any resources available to a

terrorist organization (directly or indirectly)• secret appeal process

• CCRA initially targeting specific Islamic terrorist fundraising charities, not aid or mission agencies

Additional Issues

US Anti-Terror and Fraud Law• Bank Secrecy Act

• Announcement 2003-29: Additional standards, controls and reporting related to diversion for non-exempt uses

• Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities

• Sarbanes-Oxley


Additional Issues

• Allocation of liability risk should be considered carefully:- Activities conducted as an independent

contractor- Activities conducted as an agent- Activities conducted “jointly”- Insurance coverage- Indemnification



Additional Issues• Immigration Law

− Visa requirements for ministry staff transfers

• NAFTA

• Intellectual property law− Possible to deal with trademark licensing

issues to confirm ownership of names• necessary in agency context?

− Website integration issues

• Real and personal property

Final Thoughts• “Joint Venture” terminology may be

misleading- suggests a separate entity under US Law- may create additional tax and liability

issues• Agreements must be drafted carefully• U.S. must ensure Canada has substantive

participation in all Canadian funded activities

• U.S. must provide complete reporting on use of Canadian funds



Final Thoughts

• Ministry structure should be driven by institutional values (not Canadian tax law)- Limit overhead and extraneous processes;

focus on substance, but comply with form- An ignored arrangement is an admission of

wrongdoing• Canadian legal compliance is a spiritual

obligation of Canadian ministries

Canadian / U.S. Ministry Relationships

Stuart J. LarkHOLME ROBERTS & OWEN LLP, Colorado Springs

[email protected]

Robert B. HayhoeMILLER THOMSON LLP, Toronto

[email protected]

CMA Annual ConferenceDallas, TexasApril 27, 2004

Canadian / U.S. Ministry Relationships

Documents

Transcript of Canadian / U.S. Ministry Relationships