Canadian & U.S. Ministry Relationships

Canadian & U.S. Ministry Relationships

Robert B. HayhoeMILLER THOMSON LLP, Toronto

[email protected]

Stuart J. LarkHOLME ROBERTS & OWEN LLP, Colorado Springs

[email protected]

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



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



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


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


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


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


Establishment of Registered Charity Create Canadian legal entity

majority Canadian board

Apply for registration with Canada Customs and Revenue Agency T2050 form


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


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


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


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


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


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



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)



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



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



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



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



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



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



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


Choice of Arrangement Canadian Funding of U.S. Based

Ministry joint ministry arrangement possible agency arrangement preferred


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


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



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


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

[email protected]

Stuart J. LarkHOLME ROBERTS & OWEN LLP, Colorado Springs

[email protected]

IFMA Mission Administration SeminarOrlando, Florida

May 30, 2003

Canadian & U.S. Ministry Relationships

Documents

Transcript of Canadian & U.S. Ministry Relationships