Utilizing Ten Year
Gifts in Charitable Fund Raising
By TERRANCE S. CARTER, B.A.,
LL.B.
CHARITY
LAW BULLETIN No. 2 - March 20th,
2001
Ten year gifts to
charities are becoming an important tool in charitable fund raising, both for
charities and donors. They assist
charities by being exempt from the 80% disbursement requirement that applies to
donations received in the previous year.
They assist donors by facilitating the giving of gifts that are to be
held for a longer term, whether it be for a minimum of ten years or for longer,
such as a perpetual endowment fund.
However, there are many legal issues involving ten year gifts that are
not well understood by charities for which the advice of lawyers should be sought. The following is a brief overview of some of
those issues.
1. DOCUMENTING TEN YEAR GIFTS
Subsection 149.1(1)
of the Income Tax Act (ITA) sets out what constitutes a ten year gift.
The relevant provisions are as follows:
...a gift subject
to a trust or direction to the effect that property given, or property
substitutes therefore, is to
be held by the foundation [charitable organizations] for a period of not less
than ten years...
The fact that a ten
year gift can include a directed gift as well as a charitable trust means that
gifts to a charity that may not meet the requirements to create a charitable
purpose trust may still constitute a ten year gift where the requirements to
document a ten year gift under the ITA have been met.
Each ten year gift
must be evidenced by a document signed by the donor. The documentation must:
oclearly identify the donee
charity, including its official name and registration number;
oindicate the amount of the
gift;
oset out the date the gift is
made;
oset out the name and address
of the donor; and
oset out the serial number of
the official receipt issued to the donor for the gift.
The documentation
should then be attached to the charity's duplicate copy of
the receipt and retained with its other books and records.
The requirement
that a ten year gift must be a trust or a direction that is executed by the
donor may be problematic when dealing with a public fund raising event, such as
a dinner or auction, where the proceeds are to be added to an endowment or
other type of ten year gift. It is not
realistic to expect that each person attending the event would be prepared to
sign a direction or declaration of trust.
A solution might be for the event's promotional materials to set out the
requirements to establish a ten year gift and to include a reply card to buy
tickets stating that the completion and signing of the card is deemed to be the
execution of a ten year gift document, or alternatively to include all of the
relevant information about the ten year gift on the back of the tickets
provided that the purchasers sign their tickets and the charity retains a
duplicate copy
2. EXPENDITURE OF INCOME BY FOUNDATIONS
Ten year gifts
remain subject to the 4.5% annual disbursement quota imposed on
foundations. Unless a foundation has
other income to meet the 4.5% disbursement quota on ten year gifts that it
holds, it is essential that the ten year document permit the income earned on
the gifts to be expended each year, and also that the annual income earned on
the gift be at least 4.5% of its original value plus any resulting capital
gains.
Sub-section
149.1(1) requires a ten year gift to remain intact for ten years. This means that a partial disbursement of capital to meet the quota is not
permitted. Therefore, before accepting
a ten year gift, a foundation must be satisfied that the gift will earn
sufficient income to meet the 4.5% disbursement quota. If not, the board cannot disburse a portion
of the capital to meet the quota.
Instead, it should not accept the ten year gift.
A related question
is whether the document creating a ten year gift can authorize the expenditure
of capital gains earned on the gift by defining "income" to include resulting capital gains. In this regard, CCRA has recently stated
that capital gains earned from a gift are considered to be a portion of the ”property
given, or property substituted therefore“ under ss.149.1(1) of the ITA
and that no capital gain earned on a ten year gift can be disbursed for at
least ten years.
As a result, it is
important for charities that may have ten year gift documentation permitting
the disbursement of capital gains not to exercise that option; otherwise, the
charity would be in violation of the definition of a ten year gift under
ss.149.1(1) of the ITA.
3. CONSEQUENCES OF EXPENDING CAPITAL PRIOR TO
EXPIRY OF TEN YEARS
If the capital of a
ten year gift, i.e. "property given or property substituted
therefore" under ss.149.1(1) of the ITA, including capital
gains ("Capital"), is expended within ten years of the gift being
made, certain consequences would result:
oThe expenditure would be a
breach of trust or a violation of the donor direction creating the ten year
gift.
oThe portion of the Capital
expended would be added to the disbursement quota of the charity for the year
in which the Capital was expended in accordance with the definition of the disbursement
quota under ss.149.1(1) of the ITA.
This, in effect, would mean that the amount of the Capital expended
would be added to and disbursed as part of the disbursement quota in the same
year, resulting in a neutral effect upon the disbursement quota of the charity
for that year.
oThe more difficult question is
whether the full amount of the ten year gift collapses where only a portion of
the Capital is expended in any one year.
This would not appear to be the case from the wording of ss.149.1(1), in
that the amount added to the disbursement quota is based upon the actual amount
that is expended in a particular year.
As such, if only ten percent of a ten year gift were disbursed in a
year, it would appear that only the ten percent actually expended would be
added to the disbursement quota.
oBased upon the above, some
charities have considered gradually disbursing a ten year gift over a number of
years, assuming that there would be no negative impact upon meeting its
disbursement quota each year. However,
CCRA may see a gradual disbursement as an intentional misuse of the ten year
gift, which might result in either deregistration of the charity or,
alternatively, disallowance of the ten year gift in the original year in which
it was claimed for the full amount of the gift that had been exempted.
4. EXPENDITURE OF TEN YEAR GIFTS AFTER EXPIRY
OF TEN YEARS
The ten year gift
exemption only requires that a gift be held for "not less than ten
years." Therefore, a trust or
direction could create a ten year gift that is to be held for longer than ten
years, or even in perpetuity as an endowment.
In this regard, the donor could direct how the gift is to be expended
after ten years. Silence on this issue
by the donor would give the charity liberty to use the gift as the charity
determined at the end of ten years, regardless of the donor's intentions.
Conversely, a gift
listed as a ten year gift on a charity's annual return does not necessarily
mean that the gift can be expended after ten years. The charity and its board of directors would need to carefully
review the wording creating the gift to determine if any restrictions continue
after ten years, such as the gift being held is perpetuity as an endowment.
5. MANAGING TEN YEAR GIFTS
Charities often
co-mingle restricted funds in a single account for investment purposes. Although this practice may be authorized by
pending regulations under the Charities Accounting Act of Ontario,
it is prudent for charities to maintain each ten year gift in a separate
account. Although administratively
awkward, this practise would help to ensure the following:
o
Since the Capital of a ten year gift, including any resulting capital
gains, cannot be expended for at least ten years, a charity must be able to
identify the original gift and the capital gains earned thereon.
o
There would be less chance that the capital of the gift would be
expanded during the ten years in an attempt to meet the 4.5% disbursement
quota.
o
Since each donor may impose different terms on a ten year gift, i.e.
length of time the gift must be held, or the investment powers that are to
apply, maintaining separate accounts for each ten year gift would help the
charity to keep track of and comply with the specific terms of each gift.
DISCLAIMER:
This Legal Update is provided as an information
service to our clients and is a summary of legal matters. It is not meant to be
a legal opinion. Readers are cautioned not to act on information provided
herein without seeking specific legal advice with respect to their unique
circumstances. Comments and suggestions are welcome.
BARRISTERS, SOLICITORS & TRADE-MARK AGENT
211 Broadway, P.O. Box 440
Orangeville, Ontario, L9W 5G2
Telephone: (519) 942-0001
Fax: (519) 942-0300
Terrance S. Carter practices at Carter and
Associates in Orangeville, Ontario,
And specializes in the area of charity and
not-for-profit law.
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