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Canadian & U.S. Ministry Relationships
Robert B. HayhoeMILLER THOMSON LLP, Toronto
Stuart J. LarkHOLME ROBERTS & OWEN LLP, Colorado Springs
IFMA Mission Administration SeminarOrlando, Florida
May 30, 2003
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 EuropeLatin
Am erica
C anada$
Field M inistryActivities
various countries
International Ministry Scenarios
HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP
C om bined fie ld m in istry activ ities:-U .S . em ployees-C anadian em ployees-G erm an em ployees
Africa Asia EuropeLatin
Am erica
C anada$ $
$
Multi-Lateral Integrated Ministry(possibly U.S. Centered)
U .S .
G erm any
International Ministry Scenarios
HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP
C anada U .S .
F ie ld m in istry activ ities consisting of m ateria lsacquired from U .S . and provided by C anada andservices rendered on behalf of C anada by U .S .
or C anadian em ployees
$
M ateria ls andServices $
Multi-Lateral Partitioned Ministry
HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP
Canadian Background 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
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
Registered Charity
Income Tax Act “registered charity” must be both “resident in Canada”; and “created or established in Canada”
Therefore non-Canadian charities (including mission agencies) cannot become registered charities
HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP
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
Grants by Registered Charities 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 revocation of
registration
HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP
Consequences of Revocation of Charitable Registration
No intermediate sanctions in Canada 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 Canadian Magen David Adom for Israel
HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP
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 as in Toronto
Direct foreign activities local or Canadian employees
HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP
CCRA Approach
Formerly very flexible Now increasingly complex and
stringent RC 4106 “Registered Charities
Operating Outside Canada” T3010 annual return questions T2050 application for registration
questions significant audit attention
HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP
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
Joint Ministry Agreement Core elements:
pooling of resources for common project
requires decision-making structure Canadian votes proportional to
monetary contribution joint liability stringent recordkeeping
requirements term and termination
U.S. Perspective on Joint Ministry Agreements
“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
HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP
HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP
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
Need invoices Need written contract unless
nominal amount (under $5,000 per year)
HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP
HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP
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
U.S. Legal Requirements
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
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
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
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 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 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
HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP
Choice of Arrangement Multi-Lateral Integrated Ministry
joint ministry arrangement may be limited to Canadian
participation
Multi-Lateral Partitioned Ministry joint ministry arrangement possible agency arrangement preferred
HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP
Choice of Arrangement Canadian Funding of U.S. Based
Ministry joint ministry arrangement possible agency arrangement preferred
HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP
Anti -Terror Law in Canada 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
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
Key General Legal Issues Allocation of liability risk should be
carefully considered: Activities conducted as an
independent contractor Activities conducted as an agent Activities conducted “jointly” Insurance coverage Indemnification
HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP
HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP
General Legal 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
Website integration issues Real and personal property
HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP
Recommended Approach Ministry structure should be driven by
institutional values (not Canadian tax law) Limit overhead and extraneous
processes An ignored arrangement is an
admission of wrongdoing Canadian legal compliance is a
spiritual obligation of Canadian ministries
Canadian & U.S. Ministry Relationships
Robert B. HayhoeMILLER THOMSON LLP, Toronto
Stuart J. LarkHOLME ROBERTS & OWEN LLP, Colorado Springs
IFMA Mission Administration SeminarOrlando, Florida
May 30, 2003