Date: May 8, 10:00 - 11:00am Room: Walker Presenter: Andrew Valentine

1. 1
The ABCs of Fund Agreements
and Estate Gifts
Community Foundations of Canada Conference
May 8, 2015
Andrew Valentine, Partner, Miller Thomson LLP
avalentine@millerthomson.com
416.595.2980

2. 2
Fund Agreements
• Known by many names…
– “Gift Agreement”
– “Fund Agreement”
– “Pledge Agreement”
– “Endowment Agreement”

3. 3
General
• Fund Agreements: Agreement between donor
and charity establishing the terms that apply to
gifted property:
– Establish restrictions on the specific purposes for
which gifted funds may be used
– Establish terms around holding, investment, and
disbursement of funds
– May address recognition of and accountability to
donor

4. 4
General
• Fund Agreements can be limited to a single gift,
or can set terms of a fund to which many future
gifts may be made
• May establish terms of a fund that will last very
long time
• Individuals other than the donor may contribute
to such a fund

5. 5
Source of Legal Rules
• Provincial trust law
– Governs and enforces restrictions applicable to gifted
funds
– Imposes investment standards
• Income Tax Act
– Imposes disbursement quota
– Rules re issuing official donation receipts
– Establishes limits on providing benefits to non-
qualified donees

6. 6
Gift vs Pledge
• Gift: a voluntary transfer of property from a
donor to a donee for which no consideration
flows to the donor (subject to tax rules re
advantage)
– i.e., a current transaction
• Pledge: a promise to make a future gift

7. 7
Current and Future Gifts
• Fund Agreements often document combination
of gifts and pledges
– E.g., initial donation with further instalments to be
made over time
• Fund Agreements may also establish the terms
of a fund with a current gift and provide for open-
ended possibility of future gifts

8. 8
Enforceability
• Pledges generally not enforceable
• Brantford General Hospital Foundation v.
Marquis Estate (2003)
– Donor executed gift agreement with Hospital
Foundation, pledged $1 million gift in 5 instalments
– Made first instalment, then died
– Foundation sought enforcement of remaining
installments
– Court held not enforceable

9. 9
Enforceability
• Court held that absence of consideration
prevented enforcement of pledge
– Could not rely on partial performance
– Naming, recognition rights to be provided to donor
were not essential part of agreement
– Hospital could not show detrimental reliance

10. 10
Enforceability
• How can a pledge be made enforceable
– Put agreement under seal
– Confirm naming rights are essential term
– Confirm intended reliance by foundation on gift
– Include language expressly confirming intention that
agreement is to be binding

11. 11
Establishment of Fund
• Include term confirming that a fund is to be
established with the gift of the donor
• Indicate name of fund, if desired
• Confirm that all funds held in fund are subject to
terms of agreement

12. 12
Gift Provisions
• Timing: Fund agreement should confirm when
gift is to be made, including timing for
instalments (if applicable)
– Establish specific due dates
• Confirm whether future gifts to the fund may be
made from general public
– If yes, should confirm that terms of the agreement will
apply to all such gifts

13. 13
Minimum fund balance
• Some fund agreements provide for minimum
fund balance before any grants will be made
from fund
• Confirm threshold amount
• Agreement can specify that if fund remains
below threshold for set period of time, may be
converted into unrestricted funds or granted to
pre-determined grantee

14. 14
Gift Conditions
• Confirm whether any conditions apply to the gift
– Condition precedent – pre-requisite that must be met
before gift will be made (e.g., securing approval for
naming rights, raising of matching funds)
– Condition subsequent – event that undoes the gift
after it has been made (e.g., building project
cancelled)

15. 15
Conditional Gifts
• Ensure receipts issued properly for conditional
gifts
– Condition precedent – no receipt until condition
fulfilled
– Condition subsequent – receipt can be issued for
initial gift, but charity likely required to inform CRA if
condition subsequent occurs and property is returned
• Donor may be reassessed for any credits claimed

16. 16
Purpose
• If gift is to be restricted to specific purpose, this should
be specified in fund agreement, for example:
– Scholarship fund
– Field of interest (e.g., to support research in field of …)
– Designated recipient (specific charity to be supported)
• Ensure that purposes are acceptable to foundation and
workable in practice
• If unrestricted, confirm that fund will support the
charitable purposes and activities of foundation

17. 17
Donor Advised Fund
• If fund structured as DAF, confirm terms of donor advice
• Agreement should identify who is authorized to make
recommendations
• Agreement should confirm that donor advice are
recommendations only – board of foundation has final
decision
• Should specify default granting provisions if
recommendations not receive by specified deadline

18. 18
Restrictions on Holding/Spending
• Agreement may include terms imposing limits on
how and when the foundation must hold and
spend funds
– E.g., Hold capital in perpetuity, with income only
available for spending/granting
– Hold capital for specified period, with income only
available for granting
– Total return – spend percentage of fund each year,
with no differentiation between income and capital

19. 19
Restrictions on Holding/Spending
• Take care when drafting restrictions on holding
and spending out fund
– If subject to requirement to hold “capital”, define:
• What is meant by capital? (initial gift only, capital growth
included, inflation adjusted?)
• What is meant by income? (interest, dividends, capital
gains?)
– Can the charity encroach on capital under any
circumstances?
• Recommend permitting encroachment on capital to extent
necessary to meet disbursement quota

20. 20
Restrictions on Holding/Spending
• Consider whether perpetual hold is necessary
– Often recommended by charities, not requested by
donors
• Consider total return rather than capital hold
• Ideally, provide that holding and disbursement
from fund will be subject to relevant policies of
the foundation, as amended from time to time

21. 21
Investment of Fund
• Provincial Trustee Acts provide for investment standard
• “Prudent investor standard” applies in many jurisdictions
– In investing trust property, a trustee must exercise the care, skill,
diligence and judgment that a prudent investor would exercise in
making investments (Ontario Trustee Act, s. 27(1))
– A trustee must invest trust funds with a view to obtaining a
reasonable return while avoiding undue risk, having regard to
the circumstances of the trust (Alberta Trustee Act, s. 3(2))

22. 22
Investment of Fund
• Prudent investor standard focuses on financial
return on investment at portfolio level
• Trustee legislation sets out factors to be
considered when investing trust property
– Generally, refer to financial considerations
– May permit consideration of special relationship
between trust property and trust purposes
• Diversification requirement

23. 23
Investment of Fund
• Foundation must also consider Income Tax Act
issues
• Cannot make grants to non-qualified donees
• Investments on below-market terms (having
regard to risk and expected ROI) may constitute
gift to non-qualified donee

24. 24
Investment of Fund
• Mission related investing
– invest assets in ways that will fulfill mission, especially
direct investments in communities or in businesses
with a social purpose.
– Not just money in stocks and bonds for financial
return alone
• May still be consistent with prudent investor
standard within overall portfolio

25. 25
Investment of Fund
• Program-related investments (PRI)
– A PRI is an investment (not a grant) that directly
furthers the investor charity’s charitable purposes
– Usually at below-market terms
– Common types or forms of PRIs include:
• loans;
• loan guarantees;
• share purchases; or
• leases of land or buildings.

26. 26
Investment of Fund
• PRIs – CRA has issued guidance in CG-014
– If made to a qualified donee – requirements are
minimal
– If made to a non-qualified donee, the investor charity
must prove that the arrangement meets the “own
activities” requirement of the ITA by:
• maintaining direction and control over the program; and
• showing that any private benefit is incidental
• Exit mechanism if investee ceases to use funds for charitable
purpose

27. 27
Investment Power
• Recommendation
– Fund Agreement should reference Foundation
policies regarding investment, as amended from time
to time
– Gives maximum flexibility

28. 28
Donor recognition
• Fund agreement may provide for naming rights
or other recognition to donor
• Naming rights should be set out with sufficient
specificity to ensure clarity as to foundation’s
obligations
• Fund agreement should confirm when naming
rights are effective – what happens if donor does
not complete full pledged gift?

29. 29
Donor Recognition
• Foundation should consider developing policy
around donor recognition
– Threshold gift amounts for different recognition levels
– Procedures for approval of proposed/requested
recognition at different levels (e.g., Board approval,
ED, fundraising officers?)
– Protocols around donor communication
– Risk management issues

30. 30
Donor recognition
• Fund agreement should address contingencies
and issues around naming:
– Donor input on/approval of signage?
– Future changes to named buildings
• To extent possible, fund agreement should
reference policies around donor recognition and
naming rights

31. 31
Receipting
• Fund agreement should confirm that receipts will
be issued for eligible amount of the gift in
accordance with Income Tax Act
• Avoid committing to provide receipts without
qualifier that the receipt must comply with the
Act
• Among other things, receipt must take account
of any advantage in respect of the gift

32. 32
Receipting – advantage
• Income Tax Act requires that receipts must be
issued for the “eligible amount of gift”
• “Eligible amount” = fair market value of gifted
property less amount of advantage to the donor
• Advantage = all property, services,
compensation, or other benefits that a person is
entitled to receive in relation to the gift, now or in
future

33. 33
Receipting – advantage
• Common issue in fund agreements: when do naming
rights constitute an advantage?
• In general, CRA takes position that individual naming
rights do not constitute an advantage that must be
subtracted from FMV of gift
• Corporate naming rights generally do constitute
advantage because economic benefit to corporation
– Propose that corporation deduct gift as marketing expense
rather than taking official donation receipt

34. 34
Variance Clause
• Important to include variance clause in fund
agreement
• Variance clause confirms that in the event the
foundation determines that it cannot comply with
the terms of the fund because it has become
impractical, illegal or inadvisable, foundation
may vary terms of fund as necessary, having
regard to donor’s original intention

35. 35
Variation of Fund Agreement
• If no variance clause, cannot amend terms of
fund without court authorization
• Donor agreement alone is insufficient
• Cy pres – where donor has general charitable
intent and terms of gift have become impossible
or impractical to fulfill, can apply to court to vary
terms of charitable trust – expensive and
uncertain

36. 36
Administrative Fees
• Agreement should confirm whether
administrative fees will be retained by foundation
• Ideally, confirm that administrative fees set in
accordance with policies of foundation, as
amended from time to time

37. 37
Will Gifts
• Current rules in ITA distinguish “gifts by Will”
from gifts by estate
• Gift by Will
– Deemed to be made by testator immediately before
death
– Credits can be used in last two tax returns of testator
• i.e. in year of death and one year prior
• Gift from Estate
– Credits can only be used against estate income

38. 38
Gifts of Designated Proceeds
• Similar rules apply to direct designation of
proceeds on death from an RRSP, RRIF, TFSA
or life insurance policy
• When qualified donee is designated, and the
donation occurs within 36 months of death, gift
is deemed to have been made by the individual
immediately before death

39. 39
Will Gifts (cont’d)
• New rules applicable from January 1, 2016
– Gifts by Will and direct designation gifts, will be
deemed to have been made by estate
– Gift deemed to be made when the property is
transferred to the qualified donee
– But, for “Graduated Rate Estates”
• executors will have flexibility to allocate credits against
current or prior estate return, and against last two years’ tax
returns for the donor

40. 40
Graduated Rate Estate
• Applicable for a maximum of 36 months after
death
• For deaths occurring on or after January 1,
2016, estate can enjoy benefits for full 36
months
• For death occurring before January 1, 2016,
more limited

41. 41
Graduated Rate Estate (con’d)
• Why the distinction?
• Prior to proposed changes, testamentary trusts
enjoyed graduated income tax rates (like
individuals)
• After January 1, 2016, unless an estate qualifies
as a Graduated Rate Estate, will be taxed at
highest marginal rate (like current rules
applicable to inter vivos trusts)

42. 42
Graduated Rate Estate (cont’d)
• Implications
– To maximize benefits, will want to ensure gift will be
made while estate is a Graduated Rate Estate:
• can use credit on deceased’s return in year of death or
previous year
• can use credit on estate return in year of gift
• carryback to previous estate return

43. 43
Valuation
• Implications
– Valuation date changes from date of death to date of
transfer
– How to value gift for inclusion on terminal return?
• potential need to predict future value
– Increased need for filing adjustments?
• deduction carryback rules may apply
• limitations
• no interest paid on refunds for interim period

44. 44
Gifts of Publicly-Listed Securities
• No capital gain recognized on gift of shares
• Now: gift must be made by a GRE

45. 45
Conclusion
•
• Questions??

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