Canadian and U.S. Ministries Working Together Robert B. Hayhoe, Toronto rhayhoe@millerthomson.com 416.595.8174 Stuart J. Lark HOLME ROBERTS & OWEN LLP, Colorado Springs stuart.lark@hro.com 719.473.3800 CCCC Annual Conference Calgary, Alberta September 24, 2008
International Ministry Scenarios Canadian Funding of U.S. Based Ministry Canada $ U.S. Field Ministry Activities Field Ministry Activities by U.S. Employees various countries Africa Asia Europe Latin America
International Ministry Scenarios Multi-Lateral Integrated Ministry (possibly U.S. Centered) Canada U.S. $ $ $ Germany Combined field ministry activities: -U.S. employees -Canadian employees -German employees Africa Asia Europe Latin America
International Ministry Scenarios Multi-Lateral Partitioned Ministry Canada $ U.S. Materials and Services $ Field ministry activities consisting of materials acquired from U.S. and provided by Canada and services rendered on behalf of Canada by U.S. or Canadian employees
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
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
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
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
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
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 Numerous recent high profile revocations for foreign activity Canadian Magen David Adom for Israel Bayit Lepletot
Canadian Background Intermediate Sanctions 2004 Canadian Federal Budget introduced intermediate sanctions 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 Requirements 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
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
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 - service contracts - capital purchases
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
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
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 - broad charitable services? Need invoices Need written contract unless nominal amount (under $5,000 per year)
Canadian Legal Requirements Capital Purchases CRA policy requires Canadian ownership CRA policy also contemplates other structures where necessary CRA seems to accept purchase funding agreement where foreign charity agrees to use building for charitable purposes and return property to Canadian ownership on termination
Registered charities must keep records in Canada to show charitable nature of all activities ebay case Canadian Legal Requirements Recordkeeping 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
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 making of such grants; - maintains records regarding the exempt uses of the funds; and - makes grants only for specific projects that further its exempt purposes
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 asneeded basis
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
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 - The organization must make full and detailed reports to the IRS regarding the grants
U.S. Legal Requirements New IRS Reporting Rules Activities in other countries Related Parties Exemptions for Churches Offshore holding companies
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 CRA targeting Islamic charities, not Christian aid or mission agencies
Additional Issues US Anti-Terror and Fraud Law Bank Secrecy Act Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities (e.g., screening grant recipients) Whistleblower and document retention
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
Immigration Law Additional Issues Visa requirements for ministry staff transfers NAFTA Religious Worker Visas 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 and U.S. Ministries Working Together Robert B. Hayhoe, Toronto rhayhoe@millerthomson.com 416.595.8174 Stuart J. Lark HOLME ROBERTS & OWEN LLP, Colorado Springs stuart.lark@hro.com 719.473.3800 CCCC Annual Conference Calgary, Alberta September 24, 2008