A. THE PROBLEM
During the last few months Canada has fallen into an economic recession, and in the last year the stock market has decreased by about 33% across the board. This has changed substantially the environment in which operating charities do fundraising and charitable foundations do charitable giving.
B. SHOULD CHARITIES EAT INTO CAPITAL?
With December 31, 2008 financial statements now becoming available, many charities, associations and foundations are finding that their investment assets have decreased substantially. They now need to decide how to react. In a recent “Special Message from the President”, the University of Toronto states that it does not plan to erode its accumulated capital to make its expected payments from endowments of $62 million in April of 2009. It points out that the endowments were put in place for the long-term. Therefore using up capital would compromise the University’s ability to return rapidly to traditional levels as the investments supporting its endowments recover over the next few years. The University will have to find other sources of funding for 2009.
Alan Broadbent, a very respected leader in the charitable sector, wrote an “Opinion” on behalf of The Maytree Foundation that funders will have to decide whether to “dip into capital” during these tough economic times. He acknowledges that many endowments are created with “perpetuity” in mind and with stewardship of the assets themselves as the main function of the organization. He admits that there is a temptation to put preservation of capital ahead of preservation of the amount of funding for the community.
Alan states “I think it is clear. [A funder] must focus on the needs of the community, and keep up its level of support for funding programs even if it means dipping into capital.”
The federal and all provincial governments are acknowledging that they will run a deficit in 2009 to employ Canadians and stimulate the economy. Perhaps charities and foundations should do the same by funding some donations by selling investments?
Though tempting, charities and foundations should be careful if considering this path. From a legal perspective, charities and foundations should examine the documentation that set up their endowments. Those that took advantage of the “ten year gift rules” in order to satisfy the disbursement quota requirements should review those very carefully as well.
Many charities, including the Ottawa Community Foundation, have responded to the falling stock market, the poor economy and a decrease in donations by suspending all community grants for 2009.
All organizations should be reviewing their investment and disbursement policies very carefully before taking any action.
C. BCE DEAL FAILS AND CAPITAL GAINS RARE
Bell Canada was the stock held by “Widows and Orphans” for years. A decade ago, these same individuals saw their Bell Canada shares split into Nortel shares and BCE shares. Those who held their shares in Nortel were very wealthy at one stage. They now find that their Nortel shares are worthless. Those who held BCE shares watched the very complicated and complex, but ultimately unsuccessful, takeover of BCE shares. They saw their share value increase and then fall when the deal failed.
A great many charities were aware of the BCE situation and set up plans to assist BCE shareholders in their tax planning by encouraging them to donate their BCE shares at, or prior to, the completion of the takeover. Those plans have all failed. Shareholders did not receive the hoped for increase in value and the charities did not receive the money.
In recent years, amendments to the Income Tax Act encouraged shareholders of offering companies with large accrued gains to donate their shares to charities. In 2008, there were few people fortunate enough to have a large capital gain. As a result this type of fundraising decreased dramatically. Many charities found fundraising to be difficult in 2008. For example, the United Way of Toronto raised $207,500,000 in 2008, which was $2,500,000 short of its target for the year. It will be interesting to see the numbers for 2009.
D. INVESTMENT POLICY
Charities should of course have a formal written investment policy which satisfies the “prudent investor rules”. This means that if the charity has long-term investments, such as an endowment, it should think long-term. Most experts believe that this means that they should continue investments in the stock market because, since 1950, the range for rolling three year returns on the SMP/TSX Composite Index has been between 8.6 and 12.7% and this takes into account seven or eight significant market downturns. This is several percentage points better than bonds or cash.
A great majority of experts, including economists, financial advisors and financial planners, point out that, historically, when the stock markets fall 30% to 40%, they return within the next two or three years to their previous levels. Therefore, perhaps now is the time to rebalance.
E. CHARITABLE REGISTRATION ACTIVITY
Borden Ladner Gervais LLP (“BLG”) is approached weekly by individuals and organizations that wish to establish a charity. Among other things, we point out that this is a serious step that can take six to nine months and, therefore, it should not be taken lightly. It requires a long term commitment by a strong group of individuals who have a passion for the charitable activity; the confidence that they can raise substantial amounts of money; the ability to operate an organization administratively; and a plan of how to carry out their objectives.
Many people are surprised at the statistics concerning the registration of charities. In the year ended March 31, 2008, there were 3,655 new applications for registration as a charity filed with Canada Revenue Agency (“CRA”); 606 applications for re-registration filed; and 2,345 charities registered. During the same period, 357 applications were formally denied; a great many were simply dropped; 958 organizations had their charitable status revoked upon request; 771 were revoked because they did not file their annual registered charity information return on time; and 49 were revoked for other causes such as failing to comply with the Income Tax Act. There were 790 audits of registered charities carried out as a result of public complaints, random selection, or review of the annual charity information returns.
Lawyers working in the area continue to find the delays in dealing with applications for registration and other requests from CRA to be too long. Last fall, CRA announced that reducing the delays was one of its major objectives for 2009. We will have to wait and see if any reduction in delay occurs. However, as mentioned above, charitable activity in Canada is growing and, particularly at this time, the needs of the communities are increasing. It is encouraging to know that there are so many Canadians willing to go through the steps of creating a charitable organization or foundation to try to help others.
It is important that individuals, foundations, and corporations realize that, notwithstanding the economic recession and the decrease in the value of “public” company shares, the needs of operating charities and the people they serve continues and, in many cases, increases. Those directors of organizations with endowments should look very carefully at their situation and the applicable legal requirements. They should balance the choice between decreasing payouts in order to soften the fall and decreasing the capital in order to meet the continuing needs of the traditional recipients of the funds.
The “Widows and Orphans” who own shares of Bell Canada will note that the Nortel shares are worthless, that BCE is out of play for now and BCE is paying a dividend again. Fundraisers will have to find another way to replace the often very substantial donations which were received from shareholders who had a large capital gain.
The process of registering a charity, dealing with the new T3010 charitable information return, the increasingly aggressive audit activities of CRA, and the continuing delays in responses for information from CRA will keep many people busy.
Charities and not-for-profit organizations with financial assets should re-examine their investment policy carefully during 2009 to ensure that it continues to accurately reflect a “prudent investor” approach for the organization given the timing of its activities and its funding.
It looks like 2009 will be another very interesting year for charities and foundations.