A number of changes have been recently passed by government affecting charitable organizations. Changes worthy of taking note include:
Charities Directorate At the federal level, the Charities Directorate, indicates:
• It will no longer review, as part of applications for charitable status, ‘draft’ governing documents. Governing documents must be in final form.
• Online services will come on stream, starting November 2018, to enable charities to file their T3010 annual returns on line, and to make updates their charitable account information.
Ontario Corporate Reform In Ontario, corporate reform legislation, has now been passed. A couple of points for charitable organizations to note state:
• A person who is not a member of the organization, may be appointed a Director
• Member meetings may be held electronically ( as distinguished from regular board meetings )
• If approved by an extraordinary resolution of the Board ( 80% approval), the organization can decide not to have an audit if annual revenue is less than $100,000
Social Investments Draft legislation amending the Charities Accounting Act in Ontario provides clarity around ‘social investments’ being made by a charity.
‘Social or impact’ investments by a charity generally represent an investment that provides both a financial return and a ‘social’ return that benefits the public and an organizations’ charitable purpose. Example will be social investments that earn below market rate returns. While such investments have been made for many years, it was always unclear, whether social investments met the ‘prudent investor’ criteria set out in Trustee legislation.
The proposed changes to legislation now introduce the term ‘social investment’ – one that furthers the purpose of the charity, and achieves a financial return. To meet this definition, there are a number of provisions within the legislation to consider.
Charities are permitted to make social investments, subject to the following conditions:
• The investment can be made, unless the charity is restricted from the investment under its governing documents. If there is no authorization to spend original capital (an endowment), a social investment should not be made if the expectation is that original capital will be spent. A lower financial return is permitted so long as the original capital value is preserved.
• The social investment will not be subject to prudent investor standards, applicable to other/portfolio investments. A social investment does not have to be made with the expectation of earning a ‘market rate of return’, such as can be achieved from a marketable security
• A charity (the Board) must consider whether it needs ‘advice’ when making a social investment and to follow such advice. It must (as with any investment), periodically review its social investments from time to time.
• The board must be satisfied the investment is in the best interests of the charity
The changes will be helpful to provide clear legislative authority for a charity to make social investments. Boards will want also to look at such investments with a view to CRA’s view that a charity can’t make investments at below market terms to ‘non-qualified’ donees, which could be considered to be a ‘gift’ to the person/entity receiving the investment. It will be important to ensure that the social investment is structured as a ‘program related’ investment (one linked to the organization’s charitable purpose), or is made to a qualified done within CRA requirements.
Boards considering social investments within their mission/investment strategies should consider carefully the legislative changes, and move forward with the benefit of professional advice.
Limited Life Foundations vs Permanent Endowment Funds
September 19, 2017
There is a debate within the charitable sector focusing around foundations created to exist in perpetuity in contrast to a foundation having a specific life span. Both forms of endowment fund provide donors with the ability to transfer accumulated personal wealth to a foundation to support issues, causes, and organizations important to them. The Philanthropist article Point/Counterpoint: Limited life foundations ensure greater social impact illustrates the realities and benefits of both approaches to achieve personal philanthropy.
Our view is that both approaches have their place in the Canadian charitable landscape. Let’s highlight some of the drivers of both approaches to funding.
Limited Life Foundations Such foundations are structured by their founders to have their assets actively used within a short period of time. The thinking is that larger grants or funds will make a larger impact on current social, cultural, and environmental issues. The life span of such a foundation is limited by spending and granting capital a rate faster than investment returns or gifts received. The donor intentionally, creates a fund to support a particular cause with the objective of doing so, over a fixed period of time (say 10 to 20 years). Some philanthropists are deeply satisfied by seeing their gifts at work during their lifetime, and knowing that the impact of their gifts may secure big wins. The view is that larger investments now, will positively impact future generations, as opposed to spending only investment earnings. Through bigger bets, donors have the sense is that lasting, positive change is possible.
In some situations, the desire to move from long-term, permanent types of granting to more focused spending can come as the next generation of family members become involved with a family funded foundation. The article argues that “generosity is a renewable resource”. Future philanthropists will emerge to continue funding the important issues prevailing in our society by creating their own foundations.
Permanent Endowments The counter argument is that continuing grants and income from an endowment represent a dependable, cumulative support for an organization, or a cause. The creators of endowments worked hard to build wealth and want their gifts to be used towards a long-term legacy.
An endowment is a resource where the contributed property results in a fund whose returns support the programs and operations of charitable causes and organizations for many years to come. A healthy endowment can be an important resource to support persistent societal issues. Endowment revenue allows organizations to budget, plan and build a long-term strategy for their mission. The annual returns, over time are a resilient, continuing resource, important, when other sources of funding may vary from year to year, and cannot be fully counted on.
As an example of lasting, sustained value, one of the Ontario Arts Foundation funds was established in 2000, with capital of $107,000. The fund value has grown to $145,000, and importantly has paid out over $80,000 in income or 75% of the original capital. The income will continue, and will increase over time and is a valuable resource for this arts organization.
A permanent endowment can also be a flexible resource over time. If it is structured, and the Board has the authority to shift the area of focus, the permanent fund can (1) continue to support issues and organizations as originally intended, and (2) adapt its purpose as social and cultural issues change, or are resolved and new issues arise over the long-term. The ability of an endowment fund to support emerging needs and priorities, which the founder may not have anticipated, can ensure that long-term support follows the issues of the day. The world and its concerns evolve, do not stay static.
The uniqueness and vision of donors as they create vehicles for long term charitable support are addressed by both forms of charitable entity. Both have their place and are to be encouraged.
A donor advised fund is a gift by an individual to a charitable foundation (typically community foundations, or foundations created by financial institutions) to establish a fund to express the donors personal philanthropy. Money or securities are contributed to an endowment, which is held and invested to create income which is disbursed to one or more charities.
Benefits for the donor and charity The donor benefits by receiving an immediate tax receipt. The donor can then advise on the selection of charities who will receive a distribution each year from the fund. For the donor, it is a fairly simple means of achieving part of their estate plan. They can identify charities to support, and achieve a tax credit now versus a future bequest through their estate. The charitable foundation handles all administrative details, communications with charities, and issues the cheques.
For financial institutions, donor advised funds represent an additional investment product generating investment management fees. The charitable foundation administering funds earns fee revenue for administering the funds.
If a donor, as they establish a new fund, immediately identifies one or more fixed charities to receive fund distributions, the charities benefit from the knowledge that a donor has made the irrevocable decision to donate a part of their personal wealth to philanthropic goals that support their mission. While they may or may not know the identity of the donor, it is helpful to know a source of revenue will be recurring.
Criticism The critical commentaries of the articles focus on the grey areas in donor advised funds. There is little transparency or public accountability around how funds are disbursed. Questions may be raised about where the money is going. Charitable foundations often report at the macro or sector level, but not typically to the level where individual charities or communities are identified.
The beneficiary charity also loses the personal relationship with the donor. They may not know if a grant is one-time or recurring – something a direct conversation with a donor could have affirmed.
Questions are also raised over the degree of fiduciary oversight being applied with respect to advice and recommendations received from donors or their family. So long as the recipient entity is an eligible charitable organization, charitable foundations give great flexibility to the donor to identify donation recipients.
There is nothing inherently wrong with the concept of donor advised funds. The fund can either be a permanent endowment (annual payouts in perpetuity) or a fixed-term fund (capital and income are intended to be fully distributed over a period of time).
What perhaps doesn’t get effectively communicated, and some donors overlook, is that they have made a legal transfer of ownership of property from themselves to the charitable foundation. The donor no longer has ownership rights. The legal agreement establishing the fund provides for the donor to offer advice on distributions, but the final decision and legal responsibility rests with the charitable foundation.
Fiduciary responsibility At the Ontario Arts Foundation, we spend much time in conversation with our donors to ensure they understand the reality that once the donation is made, the ownership and control of the fund has passed to the Foundation. Our fiduciary responsibility is to ensure the fund is administered in a way that is consistent with its objectives. We may receive recommendations from a donor on disbursements, and if consistent with the charitable purpose of the fund, we will respond positively.
Charitable foundations must retain the right to decline a recommendation if it is contrary to:
thecharitable purpose of the fund (eg. the fund objective is to fund music organizations, and a recommendation is received for a distribution to a health care organization – laudable but contrary to the fund purpose)
public policy (Canadian courts have ruled against trustees disbursing funds for purposes that support racism, ethnic orientation or political purposes not considered charitable under our tax laws.)
therecipient’s eligibility (A donation cannot be made to a non-charitable organization.)
thecharitable foundation’s mission (Some foundations have a particular viewpoint on charitable or social issues as part of their mission. If a donor recommends a disbursement contrary to that mission, the foundation may respond by declining to follow the recommendation.)
It can take some time to develop comfort and trust between the donor and a charitable foundation about the distribution of funds from a donor advised fund. It is important that donors and the charitable foundation have a clear understanding of how decisions will be made, so that there are no future surprises….or disappointments.