All About Estates

The Two-Charity Structure

In its Income Tax Act, Canada has two basic types of registered charity: charitable organizations and foundations.  These charity types are often paired to work together in a complementary fashion – ying and yang – to achieve shared purposes. This article is a short primer on the prevalence of this structure and how it can be used for charitable planning.

Doing and Funding

Charitable organizations are the most common charity type, representing about 87% of the 85,500 registered charities.  They are “doing” charities, that is, operating entities that carry out their own charitable activities.  By contrast, foundations – both private and public – are granting or funding charities.  A by-product of medieval trusts, foundations typically hold capital and make annual payments (grants) to operating entities.

Many readers of this blog will hear echoes of corporate structure.  There are operating companies and holding companies.  In the business world, opcos and holdcos work in tandem. The charitable equivalents of opcos and holdcos – charitable organizations and foundations – also work in together and have several planning applications.

Parallel Foundations

The most common charitable pairing in Canada are hospitals and hospital foundations. The first is The Hospital for Sick Children Foundation, which dates from 1973.  The need arose because Sick Kids had money from bequests and the invention of ground-breaking nutritional products like Pablum and Sun Wheat Biscuits. The foundation invested the endowment and became the fundraising arm for the hospital.

Many subsequent hospital foundations were established for the purpose of protecting donated assets.  When healthcare funding started to tighten in the late 1980s, Ministries of Health demanded that hospital use endowments for operating purposes, or risk getting funding cuts. The hospital countered that these were charitable trusts.  The workaround was to create a separate public foundation to hold and manage the assets. Over time these foundations became effective fundraising units.

The use of parallel foundations has subsequently spread to every hospital in the country, many arts organizations, churches, schools and colleges, and social service organizations. The motivation is often protecting assets from the long-arm of government funders, but there are other reasons.  Some independent schools and churches, for example, have used parallel foundations to protect assets from liabilities that may arise from their charitable activities, such as sexual abuse claims.

Agency Funds

Another pairing of foundations and operating charities turns on investment management.  Community foundations have traditionally offered small local charities with low-cost investment management through an offering called agency funds.  This structure is so common that the use of public foundations is a requirement of government endowment programs, such as the long-running Heritage Canada arts endowment matching program.

Historically, agency funds were structured as a pure investment offering by the public foundation, which means the operating charity still owns and reports on the funds. This arrangement is under scrutiny by provincial securities regulator, however, due to the perception that foundations are acting as unlicensed investment managers.

Agency arrangements are being replaced by a structure where the operating charity transfers ownership of the funds to the foundation, but the funds have a flexible mandate and can transferred to another foundation.  Now a variety of public foundations provide this service.  These include the Ontario Arts Foundation and Aqueduct Foundation. Some charities report another benefit.  By transferring capital “off-book” to a public foundation it make their balance sheet look less “rich” to certain funders.

Charitable Purpose Property

Recently in my practice, we have worked with several donors who want to donate a piece of real estate – a house or rural property – for a specific charitable use.  For example, an artist residency program or a therapeutic riding camp.  Specifically, they want to establish a charitable organization to carry out these activities.  This is typically a small, volunteer-run, niche charity with community leadership.  Often it is a combination life and estate plan.

Rather than donate the real estate to the operating charity, which may have a limited lifetime, the donor establishes a donor advised fund at Aqueduct Foundation to hold, manage, and maintain charitable purpose real estate.  Often there are also investments – a flexible endowment – that provide annual operating funds to the “doing” charity.  Aqueduct also has aligned charitable purposes, which means the property is used for charitable activities and not subject to the disbursement quota.

There are several reasons for this two-charity structure.  They include assets management, protection of charitable property, long-term support for the operating charity, and reducing administrative burden on family and community volunteers.  Moreover, as many of these operating charities are small, passion projects there is a chance they will cease to exist within 10 or 20 years.  The use of a two charity structure enables the donor to both protect and repurpose the charitable property in the future – often well after they are gone.

Malcolm is a philanthropic advisor with over 30 years of experience. He is head, philanthropic advisory services at Scotia Wealth Management and founder of Aqueduct Foundation. Views are his own. malcolm.burrows@scotiawealth.com

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