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Understanding Endowments – Everything You Need to Know. Susan Manwaring Miller Thomson LLP 416.595.8583 smanwaring@millerthomson.com Brad Offman Mackenzie Investments 416.967.2189 brad.offman@makenziefinancial.com. CAGP GTA ROUNDTABLE September 20, 2012.

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Understanding Endowments – Everything You Need to Know

Susan ManwaringMiller Thomson LLP416.595.8583smanwaring@millerthomson.com

Brad OffmanMackenzie Investments


CAGP GTA ROUNDTABLESeptember 20, 2012

CAGP GTA ROUNDTABLESeptember 20, 2012

Defining Endowments

Do we have one? Should we have one?

The Strategic Decision to Build or Grow Endowments

The Regulatory Framework of Endowments

Endowments – From Theory to Practice

Operational Issues

Fundraising for Endowments

Investments – The Regulatory Framework

Case Studies – Real Examples from the Field

Endowments – From Theory to Practice


“Endowment funds for charities are, in my opinion, on the brink of change from a traditional investment fund of perpetual duration for the long-term support of a charity to a charitable fund of action.”

“The recent reforms of the disbursement quota rules, coupled with the ever-increasing sophistication of donors, will inevitably push traditional endowment funds from being plodding dinosaurs to fleet-footed gazelles.”

Calvin Fong, Vancity Community Foundation

What is An Endowment?

The Legal Definition

Not much guidance here

Is it in the Income Tax Act?

The Right Definition?

Capital Intact and Income used annually for Charitable Purposes

The Understandable Definition?

The Organization’s Savings Account

The Regulatory Framework – A Brief History

  • Donor’s Choice: Short or Long-Term

    • The “80-20” Rule

    • The “Ten-Year” Rule/Enduring Property

  • The Capital Accumulation Rule – 3.5%

  • How did endowments accumulate?

  • Strict Endowment Agreements

  • Board Directed Endowment Agreements

  • No Endowment Agreement

The Existing Regulatory Framework

  • DQ is highly simplified – only the 3.5% disbursement requirement still exists

    • The 80/20 rule is gone

    • The Ten-Year gift is gone

  • Massive implications for new charities and donors

    • Opens up the donor conversation

  • Potential implications for existing endowments

Regulatory Framework

  • Anti Avoidance provisions

    • Gifts between related parties must be spent within the following year unless a “designated” gift

    • Rules which prohibit a charity from engaging in transaction which delays the expenditure of funds on charitable activities

Groups of Charities – Take Note!

  • Transfers between non-arm’s length charities

    • Now 100% spending obligation unless designated

    • Remember to designate all intra-group transfers

The Case For Endowments

Long-term cash flow ensures continuity of programs

Smoothes out the peaks and valleys associated with traditional fundraising

Safety net

Reflects strength and stability of the organization

Decreases fundraising costs

The Case Against Endowments

Only a small portion of the donation actually goes to the “cause”

Donors getting full tax break for charitable funds not being put to full use

Will dissuade donors from supporting organization because it already has sufficient funding

The Case Against Endowments

Repeal of 80% expenditure requirement

3.5% disbursement requirement for charitable organizations – now applies only when investment assets exceed $100,000

Elimination of “enduring property”, “specified gift”, “capital gains pool”

Implications For Existing Endowments

  • Questions to ask:

    • Do the new rules mean we can spend existing endowments differently?

    • Do the new rules mean the charity can encroach on capital?

    • Do the new rules permit spending on different activity?

Implications for Existing Endowments

  • The answer requires consideration of:

    • Terms of Gift – Donor perspective

    • Terms of Restriction – Internal or External

    • Ten year gift tax concerns – now irrelevant?

    • Common law / trust law issues

    • Public reputation/Donor relations

Existing Endowments – Encroachment

  • If real trust exists, cannot encroach unless

    • the terms of the “trust” permit encroachment


    • Court Order – which, in effect, varies the trust – S.13 Charities Accounting Act (Ontario)

      • Public Guardian Trustee of Ontario has the authority in Ontario over the regulation of charities

      • Must be served if conclude court application required to vary terms of endowment

      • Parens patriae role filled by Attorney General in other provinces

Existing Endowments: Encroachment - Internally Restricted Funds

  • If the funds are internally restricted what can be done?

  • Donor contributions depend on the donor understanding of Fund

  • There should be flexibility in regards to the internally restricted funds unless the Board by its language created a trust

Implications For New Gifts

  • Greater Flexibility!

Flexibility - New Gifts

  • What is meant by capital?

  • What is meant by income?

  • Can the charity fund its commitments?

  • Can the charity encroach?

  • How should the charity invest?

    • total return model – no differentiation between interest, dividends and capital gains


  • Is it necessary?

    • Income tax requirements - gone

    • Donor

    • Charity

    • Donor-imposed or board designated

Endowment Strategy

Most charities sit somewhere in the middle of the two extremes

For endowment building to be successful, there must be a strategic decision to focus on it. There must also be a strategic imperative.

Board of Directors must support it

Senior staff must support it


Operational Readiness

  • Proper governance is critical

  • Policies

    • Gift acceptance

    • Endowment

    • Planned giving

    • Fundraising

    • Distribution/Disbursement

Raising Funds for Endowments

Endowment fundraising is often synonymous with planned giving/legacy fundraising

It doesn’t have to be that way…or does it?

Organization that successfully integrate legacy gifts into the existing fund development culture will benefit most

Bringing home the bacon

Board support is critical – is it the best deployment of organizational capital?

Is there a case for support? Does the organization truly want to build its endowment?

Who is responsible for endowment fundraising?

Major gift fundraisers

Planned giving officers

How is the endowment funded?

Investments – Regulatory Framework

  • Constating documents may establish considerations and limitations

  • Generally found in Provincial Trustee Acts

  • Other relevant acts (Ontario)

    • Charities Accounting Act

    • Religious lands

Investments – Regulatory Framework – cont’d

  • Rules have become less restrictive over time

  • Basic tenets:

    • Prudent investor rule

    • Basic criteria established

    • Allows for advice and delegation

Shaping Up Your Investment Policy

  • If you have investments, you should have a formal, written policy with respect to the oversight and management of these investments

  • This document should serve as a guide for the charity and its investment manager for the ongoing management of its investments

Shaping Up Your Investment Policy

  • It is important to recognize that a charity may have investments for different purposes – endowed funds, operating funds, other restricted funds

  • This is NOT a “one size fits all” policy

Case Study – The Chair

The Donor, Mackenzie Investments, wishes to make a gift to a large Canadian University to establish a new Chair at the Business School. Mackenzie has never made a gift to this organization.

It is Mackenzie’s wish that the new Chair in Financial Planning Research be established and filled as soon as possible.

The University has limited funding outside the gift to support the new position.

The size of the potential gift is $1,000,000.

The University estimates that the cost to recruit the Chair will be $50,000 and the “upfront” required costs of securing the position(salary, moving expenses, bonus) will be $250,000

The University also expects to receive support from other donors and some

matching funding to support the long-term sustainability of the new Chair

How should we structure the gift?

Case Study – The Chair

  • Here is what we did:

  • Mackenzie Investments made an upfront $1 million gift to the University.

  • The following spending arrangement was formally incorporated into the Gift

  • Agreement:

    • $50,000 would be spent in the first year on recruiting expenses

    • $250,000 would be spent in the second year on upfront costs

    • $700,000 would be permanently endowed to support the long-term

    • sustainability of the position with some flexibility built-in to the

    • arrangement.

  • Is this the correct structure?

Case Study: The Endowment Agreement

  • Major Foundation wants a precedent agreement

  • Fundraisers want agreement to reflect traditional notions of endowment

  • Internal operations and finance want flexibility as provided under the new ITA rules

Case Study: The Endowment Agreement


  • Delete all references to income and capital

  • Reference the fund as an Endowment but clearly define spending

  • Add flexibility for Foundation to alter spending if and when needed

  • Annual payouts can be determined by reference to charity policies in some way investment and expenses are set by reference to charities policy

  • Ultimately Donor decides and negotiates but if start with position of flexibility ultimate agreement will be better

Thank You

Brad OffmanMackenzie Investments


Susan ManwaringMiller Thomson LLP416.595.8583smanwaring@millerthomson.com

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