Canadian / U.S. Ministry Relationships

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Canadian / U.S. Ministry Relationships

• Robert B. Hayhoe
• MILLER THOMSON LLP, Toronto
• rhayhoe_at_millerthomson.ca
• 416.595.8174
• Stuart J. Lark
• HOLME ROBERTS OWEN LLP, Colorado Springs
• stuart.lark_at_hro.com
• 719.473.3800
• CMA Annual Conference
• Dallas, Texas
• April 27, 2004

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International Ministry Scenarios
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International Ministry Scenarios
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International Ministry Scenarios
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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

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Canadian Legal Requirements 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

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Canadian Legal Requirements 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

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Canadian Legal Requirements Establishment of
Registered Charity

• Create Canadian legal entity
• majority Canadian board
• Apply for registration with Canada Customs and
  Revenue Agency
• T2050 form

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Canadian Legal Requirements 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

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Canadian Legal Requirements 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
  charitys assets
• capital punishment
• Two recent high profile revocations for foreign
  activity
• Canadian Magen David Adom for Israel

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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
  arms length charity

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Canadian Legal RequirementsForeign 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

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Canadian Legal Requirements 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

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Canadian Legal Requirements 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

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Canadian Legal Requirements 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

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Canadian Legal Requirements 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

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Canadian Legal Requirements 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)

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Canadian Legal Requirements 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

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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

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U.S. Legal Requirements 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

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U.S. Legal Requirements 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

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U.S. Legal Requirements Discretion and Control

• Indicators of sufficient discretion and control
  include (contd)
• 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

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U.S. Legal Requirements 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

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U.S. Legal Requirements Private Foundations

• Private Foundations are subject to additional
  expenditure responsibility rules (contd)
• The organization must make full and detailed
  reports to the IRS regarding the grants

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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)

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Choice of Arrangement

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

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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

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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

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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

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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

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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

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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

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Canadian / U.S. Ministry Relationships

• Stuart J. Lark
• HOLME ROBERTS OWEN LLP, Colorado Springs
• stuart.lark_at_hro.com
• 719.473.3800
• Robert B. Hayhoe
• MILLER THOMSON LLP, Toronto
• rhayhoe_at_millerthomson.ca
• 416.595.8174
• CMA Annual Conference
• Dallas, Texas
• April 27, 2004