Canadian / U.S. Ministry Relationships

Canadian / U.S. Ministry Relationships Robert B. Hayhoe MILLER THOMSON LLP, Toronto rhayhoe@millerthomson.ca 416.595.8174 Stuart J. Lark HOLME ROBERTS & OWEN LLP, Colorado Springs stuart.lark@hro.com 719.473.3800 CMA Annual Conference Dallas, Texas April 27, 2004

International Ministry Scenarios HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 charity’s assets • capital punishment • Two recent high profile revocations for foreign activity • Canadian Magen David Adom for Israel HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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) HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

U.S. Legal Requirements 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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

U.S. Legal Requirements 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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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) HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

Choice of Arrangement • Canadian Funding of U.S. Based Ministry • joint ministry arrangement possible • agency arrangement preferred in some circumstances HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

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 HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

Canadian / U.S. Ministry Relationships Stuart J. Lark HOLME ROBERTS & OWEN LLP, Colorado Springs stuart.lark@hro.com 719.473.3800 Robert B. Hayhoe MILLER THOMSON LLP, Toronto rhayhoe@millerthomson.ca 416.595.8174 CMA Annual Conference Dallas, Texas April 27, 2004

Canadian / U.S. Ministry Relationships