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Cross-Border Legal and Tax Issues for Ministries

Robert B. Hayhoerhayhoe@millerthomson.ca

416.595.8174

Canadian Council of Christian CharitiesSeptember 2003 Annual Conference

Mississauga, Ontario

M I L L E R T H O M S O N LLPBarristers & Solicitors, Patent & Trade-Mark Agents

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International Ministry Scenarios

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Canadian Funding of U.S. BasedMinistry

U.S.

Field Ministry Activities by U.S. Employees

Africa Asia EuropeLatin

America

Canada$

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International Ministry Scenarios

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C om bined fie ld m in istry activ ities:-U .S . em ployees-C anadian em ployees-G erm an em ployees

Africa Asia EuropeLatin

Am erica

C anada$ $

$

Multi-Lateral Integrated Ministry(possibly U.S. Centered)

U .S .

G erm any

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International Ministry Scenarios

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Multi-Lateral Partitioned Ministry

Canada

AFRICA

Sta

ff +

$U.S.

ASIAEUROPE

LATINAMERICA

Staff + $

Sta

ff +

$ Staff + $

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Canadian Background

• 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

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Qualified Donees

• Canadian Registered Charities• UN and UN agencies• Crown (Canadian federal or provincial

government)• Foreign charities with Canadian

government patronage• Prescribed foreign universities customarily

attended by Canadians

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Registered Charity

• Income Tax Act definition of “registered charity” – corporation, trust or association with

charitable purposes– must be both:

• “resident in Canada”; and• “created or established in Canada”

• Therefore non-Canadian charities cannot become registered charities

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Establishment of Registered Charity

• Create Canadian legal entity – majority Canadian board

• Canadian residence requirement

• Apply for registration with Canada Customs and Revenue Agency– T2050 form

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Grants by Registered Charities

• 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 revocation of

registration

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Consequences of Revocation of Charitable Registration

• No intermediate sanctions in Canada• 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– Canadian Magen David Adom for Israel

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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 Dallas as in Toronto

• Direct foreign activities– local or Canadian employees

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CCRA Approach to Foreign Activities

• Formerly very flexible• Now increasingly complex and stringent

– RC 4106 “Registered Charities Operating Outside Canada”

– T3010 annual return questions– T2050 application for registration

questions– significant audit attention

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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

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Joint Ministry Agreement

• Core elements:– pooling of resources for common

project– requires decision-making structure

• Canadian votes proportional to monetary contribution

– joint liability– stringent recordkeeping requirements– term and termination

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U.S. Perspective on Joint Ministry Agreements

• Some US lawyers believe that “Joint Venture” terminology suggests a separate entity under US law and may create additional tax and liability issues– agreements must be drafted carefully to

reduce this concern

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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

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Fee for Service

• Canadian charity may hire foreign charity for specific services– missionary training– evacuation facilities– supervision of short terms teams

• Need invoices• Need prior written contract unless nominal

amount (under $5,000 per year)

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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 agents

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Choice of Arrangement

• Multi-Lateral Integrated Ministry– joint ministry arrangement– may be limited to Canadian participation

• Multi-Lateral Partitioned Ministry– joint ministry arrangement possible– agency arrangement preferred

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Choice of Arrangement

• Canadian Funding of U.S. Based Ministry– joint ministry arrangement possible– agency arrangement preferred

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Anti -Terror Law in Canada

• 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

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Key General Legal Issues

• Allocation of liability risk should be carefully considered:– activities conducted as an independent

contractor– activities conducted as an agent– activities conducted “jointly”– insurance coverage– indemnification

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General Legal 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

– website integration issues• Real and personal property

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Recommended Approach

• Ministry structure should be driven by institutional values (not Canadian tax law)– Limit overhead and extraneous

processes– An ignored arrangement is an

admission of wrongdoing• Canadian legal compliance is a spiritual

obligation of Canadian ministries

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Cross-Border Legal and Tax Issues for Ministries

Robert B. Hayhoerhayhoe@millerthomson.ca

416.595.8174

Canadian Council of Christian CharitiesSeptember 2003 Annual Conference

Mississauga, Ontario

M I L L E R T H O M S O N LLPBarristers & Solicitors, Patent & Trade-Mark Agents