By: Arthur B. C Drache C.M., Q.C.
When the Income Tax Act was re-written back in 1976 to create a whole new regime for charities (what is now embodied in section 149.1) one of the most far-reaching changes was the requirement for all charities to file public information returns, though by today’s standards the forms were simple and almost primitive. The changed law also brought into being the notion of an annual disbursement quota and the concept of a “tax” on the wind-up of a charity which would be avoided if the assets were distributed to another registered charity.
What was discovered at that time was that there were literally hundreds of private foundation in existence, most with modest assets. In a huge number of cases these foundations were created as part of estate plans, the idea of which was that a portion of an estate would go upon death to the foundation. Of course, essentially all of these foundations were viewed at the time of creation as being private in every sense of the word. Don’t forget that this was long before the advent of the internet and the ability of anybody to get information about the foundations.
When the impact of the tax changes were absorbed, a very large percentage of the “owners” of these foundations wanted to walk away from them either because they found the annual reporting requirements onerous or because they did not want to provide information which was available to the public.[1] In some cases, the new rules precluded investments which had been part of the planning or put other limitations on activities.
Except in cases where there was virtually nothing in the foundation, the tax on wind-up created a barrier to walking away from the foundation.
So what a lot of “owners” did was to arrange to transfer the assets to another charity, most often a public foundation. In many cases, the logical destination was a Community Foundation. In the early days, there were many fewer such foundation though there were long established ones in Vancouver and Winnipeg for example.
But the model for community foundation was already established in in the late 1970’s and early 1980’s, there was an explosion of these charities across the country. And as they were being established, they became the obvious destination for funds from (now) unwanted smaller private foundations. One of the attractions (beyond being able to shed onerous compliance problems) was that named donor-advised funds could be created so that a long-term vehicle for private giving with a family name attached could be implemented.
While we have no data available, our instinct is that in the early decades of the establishment of community foundations, much of their core funding came from the wind-up of private foundations.
We recently had some discussion with people at the Ottawa Community Foundation and in the course of those talks found that with a major variation, that phenomenon is continuing. The variation is that the transferred funds are not coming from private foundations (the creation and operation of which these days is much more sophisticated than in the 1970s) but from charities which find that they cannot efficiently raise new money but which have capital.
Their inability to grow (often because they operate in small communities which are shrinking) makes the option of wind-up appealing. They also find that the stringent rules relating to continuance of a federal corporation or in Ontario, the upcoming changes for Ontario Non-profit corporations creates an incentive to wind-up. But they do have capital which was earmarked for specific charitable purposes, often based on helping local agencies. The solution they have found in many cases has been to do a wind-up and transfer the funds to the larger community foundations in their area where they benefit from professional investment and are relieved of all the reporting requirements.
Example from the Ottawa Community Foundation include the Ottawa Deaf Centre, the Ottawa Public Library Foundation, and the North Hatley Village Improvement Society Fund to give a flavour of organizations which saw the benefit of this form of winding-up.
As with individuals who set up donor advised funds, negotiations with the community foundation can create specific rules which will ensure than annual income will be used within the community which was the beneficiary of the original charity. And of course the name of the original charity can be incorporated into the name of the specific fund which is created so that continuity with the original charity is created. Usually, members of the original charity will be “advisers” to help determine how annual income is used within the original community.
Of course, the benefits are not limited to small town charities. We often run into situations where charities for one reason or another no longer wish to continue to operate. But a transfer of funds to a community foundation offers a road to walking away while ensuring that the accumulated capital will still be used in a manner which is consistent with the purposes for which it was raised.
Charities which are contemplating a wind-up for whatever reason should contemplate the community foundation option. It is important that those operating the charity negotiate terms with the foundation to ensure (is that is desired) that the funds be used in an appropriate manner and that the name of the charity is linked to the fund which is created. Our experience has been that all community foundations will work diligently to try to accommodate the wishes of a winding-up charity, just as they do with individual donors who wish to set up a fund within the foundation.
[1] In those days one had to write to Revenue Canada (as it was) to ask for a copy of the public information return, a time consuming exercise which few undertook.