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Canadian & U.S. Ministry Relationships. Robert B. Hayhoe MILLER THOMSON LLP, Toronto rhayhoe@millerthomson.ca 416.595.8174 Stuart J. Lark HOLME ROBERTS & OWEN LLP, Colorado Springs larks@hro.com 719.473.3800 IFMA Mission Administration Seminar Orlando, Florida May 30, 2003.

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canadian u s ministry relationships

Canadian & U.S. Ministry Relationships

Robert B. Hayhoe

MILLER THOMSON LLP, Toronto

rhayhoe@millerthomson.ca

416.595.8174

Stuart J. Lark

HOLME ROBERTS & OWEN LLP, Colorado Springs

larks@hro.com

719.473.3800

IFMA Mission Administration Seminar

Orlando, Florida

May 30, 2003

international ministry scenarios
International Ministry Scenarios

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

international ministry scenarios1
International Ministry Scenarios

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

international ministry scenarios2
International Ministry Scenarios

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

canadian background
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
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
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
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
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
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
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
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
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
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

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

u s perspective on joint ministry agreements
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

agency agreement
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

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

fee for service
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

recordkeeping
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

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

u s legal requirements
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 requirements1
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 requirements2
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 requirements3
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 requirements4
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 requirements5
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

choice of arrangement
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 arrangement1
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
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

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

us anti terror and fraud law
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
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

general legal issues
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
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

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

canadian u s ministry relationships1

Canadian & U.S. Ministry Relationships

Robert B. Hayhoe

MILLER THOMSON LLP, Toronto

rhayhoe@millerthomson.ca

416.595.8174

Stuart J. Lark

HOLME ROBERTS & OWEN LLP, Colorado Springs

larks@hro.com

719.473.3800

IFMA Mission Administration Seminar

Orlando, Florida

May 30, 2003