Charitable Foundations

Canadian Lawyer, ©Jennifer Crump

Like most lawyers, Susan Manwaring, a partner with Miller Thomson in Toronto, supports more than her share of charitable causes. She sits on the planned giving committee of the St. John's Rehabilitation Hospital, has volunteered for the world games for the Special Olympics and for a local theatre board. Her most visible charitable contribution, through, is her association with the Miller Thomson Foundation.

The Miller Thomson Foundation was created by the firm's partners in 1995 and funds approximately one hundred, $1000 scholarships for graduating high school students in the province of Ontario each year. "Most lawyers generally do a lot of community work and give a lot of donations," says Manwaring, who is Co-Chair of the Charities and Not-For-Profit Group at Miller Thomson. "This is something that we as a firm can all identify with, it is a firm initiative and we can be proud of it as a firm."

Lawyers are much sought after as members of boards of directors for charities and charitable foundations because of the specific expertise and knowledge they bring to the boardroom. It seems logical that they might also want to use this expertise and knowledge in setting up foundations of their own.

William Pashby is head of the Not-For-Profit Practice Group at Borden, Ladner and Gervais. He also sits on the boards of a number of charities including The Toronto East General Hospital, Smartrisk Foundation and The George Cedric Mecalf Charitable Foundation and believes that lawyers are frequently called upon to support fund raising efforts. "For firms with several partners," he suggests, "a firm foundation allows these requests to be handled centrally and when a decision is made to support a charity, the firm will receive credit in the community." The donation will also be larger, and subsequently more effective and visible, since the funds of many firm members can be aggregated."

While few law firms have moved to set up their own charitable foundations, many Canadian corporations are seeing the value of having their name attached to a foundation. More importantly, they see value in attaching their product to a cause. It is this belief that has Microsoft supporting children and technology initiatives and the Canadian Imperial Bank of Commerce creating the Canadian Youth Business Foundation.

Says Manwaring of the Miller Thomson Foundation, "Is it (The Miller Thomson Foundation) a marketing aspect -- not really, but it is on our website and defines our personality for the general public."

Involving employees in the set up and running of a corporation's charitable foundation can also be a great team builder. Employees help fund the foundation and then have a say in where there money is spent. Corporations such as Sears, Ontario Hydro and the Royal Bank of Canada have all set up employee charitable trusts that provide millions of dollars to charity each year. The combined funds, of both the employer and employees, result in a much larger charitable impact and subsequently greater public attention. In 1995, for instance, the Canadian Centre for Philanthropy estimated that the more than 600 employee charitable trusts in Canada contributed about $90 million dollars to charity.

For both employees and corporations, one of the main attractions of a charitable foundation is the fact that it is a vehicle that allows the donor to retain control over his or her donations.

There are three kinds of registered charities under The Income Tax Act: Charitable Organizations, Public Foundations and Private Foundations. There are also a variety of charitable trusts that can be set up. Each of these has specific rules governing the transfer of assets, tax benefits and liabilities and who may sit on their board of directors. There are also different reporting rules and rules for the distribution of proceeds. For the most part, Private Foundations are the vehicles of choice for corporations and for many individuals. Most of these foundations, says Manwaring, are set up as non-share capital corporations.

Opinions are mixed over the tax advantages of setting up charitable foundations. Arthur Drache is a recognized expert in the fields of tax law and laws related to charities. He is the author of, "Canadian Taxation of Charitable Donations" and, "Non-Share Capital Corporations", co-authored with his law partner Jane Burke Robertson. "The Budget of 1998", says Drache, "made the use of private foundations less attractive than the use of public foundations from a pure tax point of view."

Settlors need to strike a balance between their charitable intent and the charitable structure that will provide them with the best tax advantage. Pashby believes that, "the use of foundations is a tax effective and organized way to be involved in private charity."

Private foundations are, like most legal work, a technique that can be effective given the right circumstances.

Explains Drache, "if want you want to do is give a huge chunk of money to a hospital or university, you don't need a foundation to do it. If, however, you want to take a more hands on approach to charitable giving or get involved where there are no charities active or you want to help out numerous smaller organizations then setting up a private foundations makes sense."

Private charitable foundations can be cost-prohibitive for some individual and corporate clients due to the costs associated with setting up and registering the foundation and also the annual expenses associated with operating the foundation.

Karen Rackell is a partner with Lavallee and Rackel in Edmonton. She regularly sets up foundations as part of her estate planning practice. She says that for clients who may not have sufficient resources for setting up their own foundations she arranges for an Endowment Fund to be contributed in their name to an existing foundation such as the Edmonton Community Foundation. Community Foundations allow donors to retain control over who benefits from their donation and will establish named funds for relatively small donations of $5000-$10000 or more. They also take on the cost of administering and investing the funds for the donor.

Estate planners, like Rackel, are seeing a tremendous growth in interest in setting up private foundations as are many corporate, tax and not-for-profit lawyers. The pubic interest is spawning a corresponding interest in the legal community as well and while Drache says there are "probably no more than ten lawyers" practicing full-time in the field in Canada, that could soon change. "It is a huge field of practice", says Manwaring and increasingly, an interesting one. Governments are pulling back from supporting charitable endeavours, people have more money and there is massive transfer of wealth currently happening in Canada. At the same time there is an increasing reluctance on the part of corporations and individuals to simply hand over cash to charities.

Both individual and corporate clients are demonstrating an interest in establishing foundations and firms are responding. Larger firms like Borden, Ladner and Gervais and Miller Thomson are creating groups to respond to this interest and smaller firms like Drache, Burke-Robertson and Buckmeyer are creating a niche market for themselves in the practice of charitable law.

The growing field of charitable and non-profit law, which includes private and public foundations, has also attracted the interest of the Canadian Bar Association. The CBA recently established National Charities and Non-Profit Law Section of the Canadian Bar Association. Jane Burke-Robertson is a partner with Drache, Burke-Robertson and Buckmeyer in Ottawa and is the Section Chair. "The section was formed", says Burke-Robertson, because, "a small number of practitioners felt that a national section would b beneficial in providing support to practitioners across the country and most importantly, to have influence over changes in legislation and policy at the federal level in the charitable non-profit field.

Lawyers from the section have been instrumental in the creation of the "Working Together Report" issued by the Voluntary Sector Roundtable. Laird Hunter of Worton, Hunter and Callaghan in Edmonton, is Vice-Chair of the section. He is also a Member of the Regulatory Table of the National Voluntary Organizations and the Federal Government, which issued the "Working Together" report. The report recommends, among other things, achanges in tax laws and regulations that apply to charities and private foundations.

Like most lawyers in the field, Hunter came into this area of law from another field. After a long career working with non-profits and charities, he became familiar with the rules pertaining to charitable trusts and was approached by individuals to help on the other side of setting up foundations and structuring donations for individuals.

Most lawyers working in this field come into it from a tax or estate planning practice and occasionally from corporate law says Hunter. "You wouldn't graduate from law school and say, 'I'm going to start a charities practice'", he says. In fact, no law schools in Canada offer courses in charity law and laws pertaining to foundations are covered only within the general context of estate or tax law.

Corporate sponsored private foundations are just one of the many areas of foundation law. Operating charities, such as hospitals and universities, are setting up private foundations to preserve capital and to deal with specific bequests. Wealthy individuals are also discovering the use of private foundations in estate planning and in tax planning.

The growing interest in private foundations means that they will also be attracting the interest of government and regulators, which can be both a good and bad thing. On one hand, people will have to be more careful, and lawyers will get more calls. Pashby estimates that, "75% of the charities that retain us are in serious breach of the statutes under which they are incorporated." Manwaring also sees some problems but prefers not to speculate on a number since, "lawyers generally get calls only when there is a problem."

Historically, the charitable sector has not been under a high degree of scrutiny -- there are not, for instance, a large degree of tax audits", she says. "People are busy doing good works and sometimes their legal documents get out of date and they do change direction." This occasionally puts them into breaches of their by-laws or statutes of incorporation and then lawyers are called in to fix the problems.

One reason for potential problems, according to Hunter, is that the organizational form of charitable endeavours involves the use of limited objects. While a private or public corporation has few limitations on the kind of work it can engage in. A public or private foundation can only do what its objects allow.

Also, according to Pashby, given recent legislative changes in Ontario and other provinces, "it is essential that all foundations set up a formal investment policy. "You need a high degree of scrutiny of investments to ensure that they are reasonable and prudent and cautious to preserve capital for the charitable foundation", says Manwaring.

Occasionally lawyers are asked to handle setting up these policies but more sophisticated foundations will have people on their boards with knowledge in this area. Both Manwaring and Pashby suggest foundations consider hiring an investment counsellor or director if they have sufficient assets to warrant it. Another area of concern for charitable foundation law is the time it takes to establish a foundation. There are applications for letters patent, the actual creation of the non-share capital corporation, drafting of the charitable object and preparing the application for approval a s a registered charity by Revenue Canada. There is also a process for provincial approval, which in some provinces is quite involved. Finally the entire system has to be set up including by-laws and boards of directors.

Pashby suggests that lawyers familiar with the use of non-share capital corporations and tax rules and policies be brough into help. "There are instances", he says, "where 'in-house' lawyers or those with general practices have tried unsuccessfully to set up foundations. Clients are not happy when they hear six or seven months after they gave instructions, that they must start again."

Once the foundation is established, there a host of new legal issues with which firms can be involved. "The variety of work under the general rubric charitable", says Drache, "has exploded." Lawyers dealing with private foundations may also find themselves doing tort work, labour law, and general business work including issues involving members, directors, annual meetings and corporate records.

Foundation lawyers also need to stay abreast of recent developments in the area of vicarious liability of charities. Recent decisions made by the Supreme Court of Canada (Curry) and the Ontario Court of Appeal (Mount Cashel) have opened up the assets of charitable foundations to victims. These decisions will have far-reaching implications in both tort law and in charitable law.

Increased interest in charitable foundations on the part of governments may have a hidden benefit in that it could lead to a consensus among provinces and the federal government with regard to how charities are legislated. Currently charitable foundations are covered by the federal Income Tax Act but provinces have jurisdiction over charities and their activities.

Explains Hunter, "a good example is that a charity that operates in all provincial and territorial jurisdictions is registered under the Income Tax Act and then operates in thirteen different jurisdictions. An unwary charity can mount a national campaign and then it's only by luck that ift finds itself complying with all the rules."

Lawyers working with foundations and charities are finding the work both challenging and interesting. "It's not the hardest stuff in the world", according to Drache, "but it takes time to learn what the parameters are of the charities and not-for-profit world." As in corporate law there is an infinite variety of work but the difference lies in the number of statutory and common law constraints that charities must operate under. These constraints don't exist in the corporate world.

Lawyers working with foundations are finding some creative ways of working under these constraints. One of these ways involves taking a multi-disciplinary approach to foundation work. Borden, Ladner and Gervais established the first multi-disciplinary partnership and Pashby says the members of his group work closely with accountants, fundraisers and other consultants who work in the foundation sector.

While Miller Thomson does not have a formalized multi-disciplinary practice, Manwaring says that her work often involves working closely with non-legal personnel at the request of a client or where a specific situation demands their involvement. Manwaring is also a member of the multi-disciplinary Planned Giving Association of Canada.

While the field of practice is definitely a booming area of law, Drache, Burke-Robertson and Hunter all say that it may not be a terribly profitable one. Most of the people working for foundations are making less than what they would in the corporate world and even corporate clients setting up private foundations are trying to get the most out of their donation dollars. "You may have to lower your expectations with regard to hourly rates and billable hours", says Drache.

While it may not be the most profitable are of law, all of the lawyers practicing in this field seem to feel a passion for their work. This stems in part from the variety this field of law presents. It also comes from working with individuals and corporations who are committed to philanthropy and to giving something back to the communities in which they live and work. "There's something very positive about that", says Manwaring.