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Sharon’s son was diagnosed with Batten disease at age 9, and succumbed 10 years later. Batten disease is a rare disorder of the nervous system with no cure. Sharon, who also has a teenage daughter, has vowed to find that cure. She’s particularly motivated because the disease is genetic, and her daughter’s future children could develop the disease. As an event planner, she networks with wealthy clients and has organized hundreds of fundraisers. She wants to start a charitable foundation, and asks her advisor about the process.

Who do you call?

Lawyers and accountants.

What they say

Yvonne Chenier:

The first step is to decide whether to use a corporate entity or a charitable trust.

The pros of a trust: they’re easy to set up and there are no initial filings, annual filings or expenses, except the required charity filing with CRA. Generally, there is no audit requirement in most trusts. The cons: they’re not understood by many people unless they have legal training. And, depending on the province where the trust is created, trusts can be difficult to work with if any changes are required. They must also have trustees.

The pros of a corporation: they’re easy to set up in most provinces and federally. Directors have limited liability, aside from a few statutory instances (such as in the Income Tax Act). Also, directors can be protected with errors and omissions insurance. The cons: they can be expensive to set up and maintain.

Margaret Mason:

A corporation has an AGM and must make annual filings. A trust has no annual meetings and no filings except for CRA filings. Which to choose depends a lot on the jurisdiction and the age of its corporate legislation.

In B.C., for instance, transfers of land to registered charities are exempt from the property transfer tax, but the land title office refuses to allow the exemption for registered charities that are structured as trusts.

Yvonne Chenier:

It’s relatively quick to set up a corporate entity. You pick your jurisdiction and file the articles of incorporation. If you’re setting up a charitable trust, we draft a trust deed signed by the trustees.

To pick the jurisdiction, Sharon should ask, “Do we do it in the province where I live, or where most potential donors are? Or, should we [register] a Canadian not-for-profit corporation in the provinces where we’ll fundraise?”

Once Sharon decides on either trust or corporation, and the jurisdiction, she would narrow down her charitable purpose. Is the foundation going to donate to other registered charities in Canada? Or is it going to be funding and running the research for the prevention of this disease? Most clients say, “I don’t want to fund other charities.” I respond, “So, it’s best if you’re designated by CRA as a public foundation or a charitable organization, not a private foundation.” The designation depends on what the applicant puts on its T2050 Application to Register a Charity. It takes at least eight months to get documents through.

Sometimes when I explain this, the client’s head is spinning. [In those cases,] I would refer them to someone who’s been through this process. I say, “Go have coffee. See if it’s for you.”

An alternative? Call charities that already deal with the disease. For Sharon, there’s the Canadian Chapter of Batten’s Disease Support and Research Association.

Margaret Mason:

There are 86,000 Canadian registered charities and there’s so much duplication. [What’s more,] many families get bogged down in administration and can’t focus on raising money. [So,] I encourage [creating] a donor-advised fund [to be] used by an existing charity.

Sharon could go to a children’s hospital foundation and say, “We want to raise money for Batten research.” The foundation says, “Let’s do a donor-advised fund agreement. You fundraise; we generate receipts for donors, and [the donations are] restricted to funding Batten research.” Annually, Sharon could recommend grants to be made. She wouldn’t have autonomy, but she also wouldn’t have to deal with administration or expenses.

The fund could be created within one day. A sophisticated foundation will have [templated] documents.The foundation may levy an internal administrative charge against donated funds, but that levy would generally be less than the cost of [running] a charity.

Most family foundations don’t have an office or employees. [But] if they fundraise from a larger circle [than their family], an office and employees might be warranted. We frequently act as the corporate records office for about $400 to $500 a year. An accountant is usually required to prepare financial statements and the T3010 Registered Charity Information Return.

What you learn

Setting up a charity is much like starting a small business, demanding time, money and paperwork. Advise clients to make sure another charity isn’t already supporting their cause. If they decide to go forward, make sure they fill in paperwork properly to avoid CRA rejecting the application. Also, let them know they could establish a donor-advised fund at an existing charity.

by Allan Tong, a Toronto-based financial journalist.

Originally published in Advisor's Edge

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