Charities and Tandem Entities
by Arthur Drache

Almost everybody who operates a charity of any size or advises charities is familiar with the notion that there are situations where it is useful to have a second organization, be it a corporation or a trust, to carry on activities separate from those of the main organization.

The most common of course is creating a parallel foundation which has as its purpose fundraising which ultimately will benefit the charity. Usually the foundation has got inherent powers that the charity does not have but it can focus on fundraising, most often of a capital nature, which does not derogate from the day to day activities of the organization.

Almost as common is the setting up of a (commonly) taxable corporation which will carry on business activities where the profits will go to a charity. This is usually done where the activities might not be considered to be a "related business" and thus might be risky for the charity itself to undertake. The usual cost is that distributions to the charity might only come from after-tax profits.

The third main area is where a separate (most often a non-profit corporation) is set up to carry on advocacy activities which are prohibited to a registered charity. The main problem in this situation is that the charity cannot transfer money to the non-profit by way of gift so that the funding of the advocacy activities is often difficult given that it cannot issue receipts for donations.

Very often when queried the CRA will observe that a particular activity might only be carried on by a separate entity. Such observations usually come when an organization asks the CRA for an opinion about a proposed course of action.

This is the factual background of how Canadian charities operate, fully within the law. So we were quite startled by some comments by Michael Chong, a Conservative MP at the Common Finance Committee meeting of November 30, 2010 in questioning  Cathy Hawara, the head of the Charities Directorate.[1]

"I have a question for you, Ms. Hawara, about related corporations. CRA currently requires the disclosure of the salary ranges of the top compensated executives at each charity. If Madam Guarnieri's bill becomes law and the compensation of the top five executives is to be publicly enumerated, what do you think about also including in a public enumeration the compensation of the top five executives at related corporations, in other words, corporations related to the registered charity?

Ms. Cathy Hawara:   I did take note of your question to Ms. Guarnieri earlier.  I'm not aware of this being an issue in this sector right now. I think what would be important from our perspective is to determine to what extent the CRA could require that kind of information.

 Michael Chong:   You had mentioned in your opening remarks that CRA ensures that charities don't give an undue benefit to individuals related to those charities. What is your opinion of an increasing trend where people who control charities are setting up for-profit share capital corporations that are cohabited with these charities? In other words, they share the same offices, the same phone numbers, the same addresses, the same office space, and resources, and they use similar branding, they use the charitable company's or organization's brand and goodwill in order to promote the for-profit share capital corporation's business.

Does CRA frown upon that kind of set-up?

Ms. Cathy Hawara:  Again, I'm not aware of this as being a trend. The law is very clear: a charity must devote all of its resources to its own activities and to charitable purposes. So in what you've described, depending on what the details would be, a charity would not be able to share its resources in that sense. It would need to maintain direction and control over its own resources. But I'm not aware of this being a trend that we've uncovered through our audit program.

Michael Chong: I don't want to name names here, but I am aware of certain charities that have set up for-profit share capital corporations by the same people involved with the charity, and these for-profit share capital corporations operate either in next-door proximity to these registered charities or in fact in the same offices, using the same phone numbers and addresses.

 It's a concern to me because I think they're using the goodwill of a charitable registration number in order to promote the activities of a for-profit share capital business. I don't think that's in the public interest or the intention of a charitable registration.

We thought Hawara did a good job in diplomatically saying that Chong's premise was wrong and that there is no problem. But the exchange reminded us that the Federal Court of Appeal dealt in part with this issue more than ten years ago. A bit of background is in order.

Alliance for Life (AFL), a pro-life registered charity was audited and Revenue Canada (as it then was) said that some of its activities were political, not educational. There was a subsequent agreement that the organization would set up a new organization, a non-profit corporation called Alliance Action(AA), to undertake advocacy.

AA shared space and equipment and staff with AFL and the organizations kept meticulous records (vetted by a national accounting firm) to apportion costs. After a false started, AA started sending out letter soliciting funds and said that donors could check a box to indicate if they wanted a charitable receipt. Where a receipt was to be issued, the funds were transferred to AFL which issued a receipt. Where a receipt was not requested, AA kept the funds for its own advocacy work.[2] This approach was necessary because AFL could not transfer funds to AA while there was no impediment to AA transferring funds to AFL.

In a subsequent audit, Revenue Canada attacked both the apportionment and the "shared" fundraising technique. They also took the position that the AFL activities still were "political" and not educational. In the event, AFL had its registration revoked, but it was extremely interesting to read what the court said about the arrangements between the two organizations.[3]

"The respondent[4]quarrelled with the methods employed in fundraising. For some time solicitations were made on the letterhead of Alliance Action. A donor was to make a payment to "Alliance", allowing donations to be deposited either in the bank account of the appellant or Alliance Action. The donor was left to decide in each case whether to require a tax receipt. The respondent took the view that these activities, in any event, were designed to promote pro-life points of view. The appellant agreed that the fundraising material would be altered to ensure that donations be made either to the appellant or to Alliance Action, and that tax receipts be issued only for donations made to the appellant. In the view of the respondent this new format did not "sufficiently segregate the activities of Alliance from AA and that it is designed to support the advocacy activities of AA". In addition, the respondent noted that monies raised through a Bank of Montreal "Affinity MasterCard", while advertised to be in support of the appellant, in fact were deposited into the bank account of Alliance Action. That this was so was acknowledged by the appellant"s accountants in a letter of April 19, 1995, where the appellant undertook to correct it

Nor am I persuaded that the methods employed in fundraising rendered those particular activities clearly non-charitable in the sense that they did not further the appellant"s stated purposes. The record no doubt indicates that as initially conceived and implemented in 1992 and 1993, these activities were intertwined with those of Alliance Action to such a degree that they could not be reasonably seen as charitable. The appellant accepted that this was so and agreed to alter its fundraising methods to ensure that it would receive only those donations that were intended to support its purposes and not those of Alliance Action and that tax receipts would be issued for those donations only. The same would appear to be true with respect to the monies raised through the Bank of Montreal"s Affinity MasterCard. The appellant gave an undertaking that none of these monies would be deposited in the bank account of Alliance Action. There is no evidence that the appellant has not made good on this undertaking. It is not clear to me that the appellant, by these techniques, devoted its resources to non-charitable activities, as the respondent asserts. In summary, I am not persuaded that the fundraising activities in question were, as the respondent asserts, "designed to support advocacy activities of AA" at the time the impugned decision was made."

So while the AFL lost the appeal and its registration was revoked, the Court accepted that the apportionment of expenses and the fundraising approaches were acceptable.

This decision is significant in that insofar as we can recall it is the only pronouncement by the FCA on this sort of organizational arrangement. It demonstrates that we care, a charity and a non-profit can share space, facilities and even staff with a non-charity and again, with proper care, joint fundraising can be undertaking without there being a concern that assets of the registered charity are being used for the benefit of a non-qualified donee.

In the event that a registered charity decides to work closely with a non-charity, be it for running a business or fort advocacy, a review of the AFL decision might be useful so that the organization is protected from attacks by an over-zealous auditor.

[1] This was at the initial meeting of the Committee dealing with Bill C-470 and took place before the substantial changes in the Bill were made, which happened at the next subsequent meeting.

[2] This form of funding for a non-profit works best when donors have a high level of commitment to the cause and want very much to have the advocacy activities carry on.

[3] Alliance for Life v. M.N.R. [1999] 3 F.C. 504