Jamie Golombek wrote recently an article in the Financial Post on an audit initiative of CRA targeting high net worth individuals whose assets are over $50 million dollars and one of the items CRA is querying is related entities including private charitable foundations.
In the article he notes: “As part of the audit process, the CRA is asking individuals to complete a T997 “Audit Query Sheet” as well as a lengthy 20-page questionnaire. In reviewing copies of both obtained by the Financial Post, it’s clear the CRA is asking for information about a variety of related economic entities, including partnerships, trusts, corporations, joint ventures and private foundations.”[my emphasis]
The article goes on to say “The T997 asks targeted individuals to provide a copy of their company’s board of director minutes, the corporate minute book, a listing of all legal and accounting firms used by the corporation “including all correspondence files with them” as well as all tax-planning documents.” While clearly some of that material may be solicitor-client privilege - much of it will probably not be - such as correspondence between accountants and their clients that does not involve a law firm.
With the vast majority of private foundations there are no concerns and some very good charitable work and funding is done by private foundations.
However, there has been a proliferation of private foundations in Canada over the last decade compared to charitable organizations. The number of private foundations has grown by 28% during the last 10 years while during the same time, the number of charitable organizations has grown by only 4.2%.
There have been concerns expressed about private foundations and ownership of large number of a corporations shares and the connections between a private foundation and a for-profit business.(http://m.theglobeandmail.com/report-on-business/philanthropist-frank-giustra-hit-with-tax-penalty/article1803479/?service=mobile) There have also been concerns about some of these charities have been involved with abusive charity gifting tax schemes such as the Banyan Tree Foundation, Liberty Wellness, Destiny Health and Wellness Foundation and the Orion Foundation (although any charity with poor governance or poorly informed directors can be abused in that way and many of the participant charities are either charitable organizations or public foundations). The assumption that some make, which is not true, is that all private foundations have poor governance.
There has been some suspicion of private foundations that emanates from the US and some problems there with private foundations. As well, although not always true, some private foundations are essentially dominated by one or two related persons and there is a concern that they may be using the private foundation more for personal benefit than philanthropic good. Some of that concern comes from one particular author’s article dealing with establishing private foundations that briefly discusses the philanthropic component and then in detail discusses other uses of a private foundation that such as employing relatives to split income, banking of land to avoid property tax, and non-arms length loans. Any charity that does not have sufficiently large board, diversity of opinions, breadth of skills, and appropriate professional advisors, may result in the organization undertaking activities that the board members may consider appropriate but any regular board would know is completely inapropriate.
An advanced search of the CRA Charities Listing at http://www.cra-arc.gc.ca/ebci/haip/srch/advancedsearch-eng.action indicates that only 20 out of the 289 charities, or about 7% that lost their status due to cause were private foundations. Out of the 85,520 registered charities about 4970 are private foundations or approximately 6%. Therefore there is not a great difference between the proportionate amount of private foundations, compared to charities as a whole losing their status for cause.
It is possible that there will be greater scrutiny of this growing part of the charitable sector in the coming years.
It is very important for private foundations to both be aware of their legal obligations and ALSO ethical considerations when operating a private foundation. It is not a private bank account or piggy bank and it is not a subsidiary of a business. Be careful of advice that is too dominated by the provisions of the Income Tax Act and does not seem to be too concerned with fiduciary responsibilities of trustees or directors of charities, or ethics or the cost of losing your reputation.
It will be interesting what comes from that CRA high net worth initiative.
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.