Canadian & U.S. Ministry Relationships Robert B. Hayhoe MILLER THOMSON LLP, Toronto Stuart J. Lark HOLME ROBERTS & OWEN LLP, Colorado Springs IFMA Mission Administration Seminar Orlando, Florida May 30, 2003

International Ministry Scenarios HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

International Ministry Scenarios HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

International Ministry Scenarios HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

Canadian Background n Any foreign charity can fundraise in Canada n Only donations to “qualified donees” result in a Canadian individual tax credit/corporate tax deduction u exceptions in Canada US tax treaty F US college attended by a family member F donations to US charities tax- recognized against Canadian taxes on US-source income

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Qualified Donees n Canadian Registered Charities n UN u agencies n Crown (Canadian federal or provincial government) u agencies n Foreign charities with Canadian government patronage n Prescribed foreign universities customarily attended by Canadians

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Registered Charity n Income Tax Act “registered charity” must be both u “resident in Canada”; and u “created or established in Canada” n Therefore non-Canadian charities (including mission agencies) cannot become registered charities

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

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Grants by Registered Charities n Registered charities u must devote their resources to their own charitable activities, or u make grants to qualified donees n Canadian Registered charities may not make grants (gifts) to foreign charities u explicit grounds for revocation of registration

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Consequences of Revocation of Charitable Registration n No intermediate sanctions in Canada n Loss of tax exempt status n Loss of tax recognition for donors n Imposition of penalty tax equal to 100% of charity’s assets u capital punishment n Two recent high profile revocations u Canadian Magen David Adom for Israel

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Foreign Activities by Registered Charities n Canadian registered charities can operate anywhere in the world u consistent with charitable purposes F mission activities are just as charitable in Nairobi as in Toronto n Direct foreign activities u local or Canadian employees

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP CCRA Approach n Formerly very flexible n Now increasingly complex and stringent u RC 4106 “Registered Charities Operating Outside Canada” u T3010 annual return questions u T2050 application for registration questions u significant audit attention

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Indirect Foreign Activities by Registered Charities n Always subject to “own activities” test n RC 4106 “Registered Charities Operating Outside of Canada” u need binding written agreements u agency/joint ministry arrangements

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Joint Ministry Agreement n Core elements: u pooling of resources for common project u requires decision-making structure F Canadian votes proportional to monetary contribution u joint liability u stringent recordkeeping requirements u term and termination

U.S. Perspective on Joint Ministry Agreements n “Joint Venture” terminology may be misleading u suggests a separate entity under US Law u may create additional tax and liability issues n Agreements must be drafted carefully HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

Agency Agreement n Principal (Canadian charity) hires agent (foreign charity) to complete some task n Project choice is made by principal n Operational decisions can be made by agent n Liability flows from agent to principal

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

Recordkeeping n Registered charities must keep records in Canada to show charitable nature of all activities n Foreign indirect activities: u agency or joint venture agreement u operational reports u financial reports (with backup) u segregated bank accounts

U.S. Legal Requirements n Private contributions to foreign organizations are generally not deductible n 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 Requirements n U.S. tax-exempt organizations may grant funds to foreign organizations provided the U.S. organization: u exercises control and discretion as to the use of the funds; u maintains records regarding the exempt uses of the funds; and u makes grants only for specific projects that further its exempt purposes HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

U.S. Legal Requirements n Indicators of sufficient discretion and control include: u Board approval of grant after thorough review of proposed activities and recipient organization u Periodic reports and/or auditing regarding use of funds u Funds for approved projects are released on an “as-needed” basis HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

U.S. Legal Requirements n Indicators of sufficient discretion and control include (cont’d): u Donor designated contributions are subject to same controls and processes as general funds u Recipient organization enters into a written agreement regarding its use of the funds HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

U.S. Legal Requirements n Private Foundations are subject to additional “expenditure responsibility” rules: u Adequate procedures to ensure grant is spent solely for the purpose for which made u 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 Requirements n Private Foundations are subject to additional “expenditure responsibility” rules (cont’d): u The organization must make full and detailed reports to the IRS regarding the grants HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

Choice of Arrangement n Multi-Lateral Integrated Ministry u joint ministry arrangement u may be limited to Canadian participation n Multi-Lateral Partitioned Ministry u joint ministry arrangement possible u agency arrangement preferred

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Choice of Arrangement n Canadian Funding of U.S. Based Ministry u joint ministry arrangement possible u agency arrangement preferred

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Anti -Terror Law in Canada n Post 9/11/01 Bill C-36 n Refuse or revoke charitable registration for: u making any resources available to a terrorist organization (directly or indirectly) F secret appeal process n CCRA initially targeting specific Islamic terrorist fundraising charities, not aid or mission agencies

US Anti-Terror and Fraud Law n Bank Secrecy Act n Announcement : Additional standards, controls and reporting related to diversion for non-exempt uses n Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities n Sarbanes-Oxley HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

Key General Legal Issues n Allocation of liability risk should be carefully considered: u Activities conducted as an independent contractor u Activities conducted as an agent u Activities conducted “jointly” u Insurance coverage u Indemnification HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP

General Legal Issues n Immigration Law u visa requirements for ministry staff transfers F NAFTA n Intellectual property law u Possible to deal with trademark licensing issues to confirm ownership of names u Website integration issues n Real and personal property

HOLMES ROBERTS & OWEN LLP MILLER THOMSON LLP Recommended Approach n Ministry structure should be driven by institutional values (not Canadian tax law) u Limit overhead and extraneous processes u An ignored arrangement is an admission of wrongdoing n Canadian legal compliance is a spiritual obligation of Canadian ministries

Canadian & U.S. Ministry Relationships Robert B. Hayhoe MILLER THOMSON LLP, Toronto Stuart J. Lark HOLME ROBERTS & OWEN LLP, Colorado Springs IFMA Mission Administration Seminar Orlando, Florida May 30, 2003