1. 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 stuart.lark@hro.com 719.473.3800 CMA Annual Conference Dallas, Texas April 27, 2004

2. International Ministry Scenarios HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

3. International Ministry Scenarios HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

4. International Ministry Scenarios HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

5. Canadian Legal Requirements General Rules 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

6. HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Canadian Legal Requirements 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

7. HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Canadian Legal Requirements Registered Charity Income Tax Act “registered charity” must be both - “resident in Canada”; and - “created or established in Canada” Therefore non-Canadian charities are not eligible to become registered charities

8. HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Canadian Legal Requirements Establishment of Registered Charity Create Canadian legal entity − majority Canadian board Apply for registration with Canada Customs and Revenue Agency − T2050 form

9. HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Canadian Legal Requirements Grants by Registered Charities Canadian 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 intermediate sanctions or revocation of registration

10. HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Canadian Legal Requirements Consequences of Revocation of Charitable Registration 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 for foreign activity − Canadian Magen David Adom for Israel

11. Canadian Background Intermediate Sanctions March 23, 2004 Canadian Federal Budget introduced intermediate sanctions − effective date remains unknown − penalty of 105% of gifts made to foreign charity director liability? − penalty payable to Canada Revenue Agency or to arm’s length charity

12. HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Canadian Legal Requirements 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 or New York City as in Toronto Direct foreign activities − local or Canadian employees

13. HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Canadian Legal Requirements Canada Revenue Agency Approach Formerly very flexible Now increasingly complex and stringent − RC 4106 “Registered Charities Operating Outside Canada” − T3010A annual return questions − T2050 application for registration questions − significant audit attention

14. HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Canadian Legal Requirements 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

15. HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Canadian Legal Requirements Joint Ministry Agreement Core elements: − pooling of resources for common project − requires substantive participation in decision-making Canadian votes proportional to monetary contribution; or Canadian veto power/double majority − Liability allocation − stringent recordkeeping requirements − term and termination

16. HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Canadian Legal Requirements 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

17. Canadian Legal Requirements Fee for Service Canadian charity may hire foreign charity for specific services - missionary training - evacuation facilities - supervision of short terms teams - airtime purchase - broadcast Need invoices Need written contract unless nominal amount (under $5,000 per year) HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

18. Canadian Legal Requirements 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 for agency agreements

19. U.S. Legal Requirements General Limitations 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

20. U.S. Legal Requirements Key Rules 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

21. U.S. Legal Requirements Discretion and Control 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

22. U.S. Legal Requirements Discretion and Control 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

23. U.S. Legal Requirements Private Foundations 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

24. U.S. Legal Requirements Private Foundations 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

25. Choice of Arrangement Multi-Lateral Integrated Ministry − joint ministry arrangement required − may be limited to Canadian participation Multi-Lateral Partitioned Ministry − joint ministry arrangement possible − agency arrangement preferred (possibly a fee for service arrangement)

26. HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Choice of Arrangement Canadian Funding of U.S. Based Ministry - joint ministry arrangement possible - agency arrangement preferred in some circumstances

27. HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Additional Issues Canadian Anti-Terror Law 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

28. Additional Issues 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

29. Additional Issues Allocation of liability risk should be considered carefully: - Activities conducted as an independent contractor - Activities conducted as an agent - Activities conducted “jointly” - Insurance coverage - Indemnification HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

30. Additional 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 necessary in agency context? − Website integration issues Real and personal property

31. Final Thoughts “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 U.S. must ensure Canada has substantive participation in all Canadian funded activities U.S. must provide complete reporting on use of Canadian funds HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

32. Final Thoughts Ministry structure should be driven by institutional values (not Canadian tax law) - Limit overhead and extraneous processes; focus on substance, but comply with form - An ignored arrangement is an admission of wrongdoing Canadian legal compliance is a spiritual obligation of Canadian ministries

33. Canadian / U.S. Ministry Relationships Stuart J. Lark HOLME ROBERTS & OWEN LLP, Colorado Springs stuart.lark@hro.com 719.473.3800 Robert B. Hayhoe MILLER THOMSON LLP, Toronto rhayhoe@millerthomson.ca 416.595.8174 CMA Annual Conference Dallas, Texas April 27, 2004