It is common to find Canadian registered charities paired with "parallel" foundations. A parallel foundation is a separate, but closely connected, organization designed to amplify and complement the operating charity's mission. These parallel foundations, themselves registered charities and usually designated as public foundations, exist solely to support their partner charity by raising funds, managing investments, and holding endowments. By separating day-to-day operations from fundraising and financial stewardship, this structure can provide greater flexibility, transparency, and long-term stability. It is common to see this model in action with hospitals and their foundations, or universities and their fundraising arms, these are powerful partnerships that can help fuel essential services, research, and innovation.
Advantages to parallel foundations
There are numerous advantages to establishing a parallel foundation, and the most common reasons operating charities set up a parallel foundation include:
- a desire to separate and enhance the fundraising function from the operating "parent" charity;
- to develop a secure pool of assets upon which the long term sustainability of the operating "parent" charity can be achieved; or
- to satisfy a perceived need to insulate asset pools from liabilities arising from the operational decisions of the parent charity.
What could go wrong?
The greatest risk with parallel foundations is the possibility that the foundation may go "rogue" eg. mismanaging funds, redirecting resources, or changing its charitable objects so it no longer supports the operating charity. This risk becomes especially serious when the operating charity has transferred or entrusted some, or all, of its assets to the parallel foundation. If the relationship between the two organizations breaks down, it can jeopardize the operating charity's financial stability and ability to fulfill its mission.
How to properly set up a parallel foundation
When the relationship between an operating charity and its parallel foundation breaks down, it is often due to a weak or flawed governance structure. To avoid this, the operating charity should establish robust control mechanisms from the start, including: clear oversight, defined roles, and accountability measures, to help ensure the parallel foundation stays aligned with its intended purpose and continues to support the charity effectively.
The case of Bloorview Children's Hospital Foundation v. Bloorview MacMillan Centre offers a powerful cautionary tale. After transferring $10 million to its foundation, the hospital later asked for the funds back to help build a new facility. There was, however, a problem: the hospital had no legal control over the foundation. When the foundation refused to return the money, the Ontario Superior Court of Justice sided with the foundation. Without clear authority or strong influence over the foundation, the hospital had no way to ensure its funding priorities were respected.
There are several ways through which an operating charity can exert control over a parallel foundation. Control can be embedded into the governance structure of the parallel foundation, including by implementing one or more of the following mechanisms:
- the parallel foundation's charitable purposes are drafted to exclusively benefit the operating charity (and not other registered charities);
- membership of the parallel foundation is composed of the operating charity itself or a combination of directors of the operating charity and/or former directors of the operating charity;
- enshrining a fixed number of director seats on the board of the parallel foundation that may only be filled by the operating charity; and
- a dissolution provision ensuring that the assets of the parallel foundation will always return to the operating charity in the event of a wind-up of the foundation.
It is also possible for the parent charity and its parallel foundation to enter into a written agreement outlining how the two entities will coordinate their operations, clearly setting out the obligations and other deliverables expected of the parties.
Other considerations
Administrative burden
Not to be discounted is the added administrative burden that comes from maintaining two legally distinct entities. For instance:
- both the operating charity and the parallel foundation will each have separate filing requirements with their applicable corporate regulator (i.e. British Columbia Registrar of Companies, Corporations Canada, etc.) and the Canada Revenue Agency;
- both organizations must maintain separate accounting books and records, including financial statements and charitable receipting records; and
- both organizations must coordinate and attend to the annual corporate decision making of their respective members and directors which, despite potential overlaps in their composition, must be kept separate and distinct from one another.
Anti-avoidance rules and disbursement quota implications
There are also anti-avoidance rules which the organizations should be aware when transferring resources between each other. The Income Tax Act (Canada) provides that if a registered charity receives a gift from another registered charity that is not at arm's length, the recipient charity must spend 100% of the gift in the year of receipt or in the following year. This expenditure requirement can be avoided if the donor charity "designates" the gift to the recipient charity.
A gift becomes a designated gift if the donor charity identifies it as a designated gift in its T3010 Registered Charity Information Return for the year the gift is made.
However, a donor charity cannot use the designated gift to satisfy its own disbursement quota, which is the minimum amount a registered Canadian charity must spend annually on its charitable activities or qualifying disbursements. This may require careful financial planning between the operating charity and the parallel foundation to ensure that both entities are meeting their disbursement quota obligations.
Donor confusion
Another consideration for charities with parallel foundations is to ensure that there is no donor confusion between the operating charity and the parallel foundation. Donors must be able to understand what entity they are donating to and for what purpose, and this may require spending significant time and energy communicating with donors and preparing fundraising materials.
Conclusion
Should you have any questions about this article or are considering setting up a parallel foundation, please contact a member of our Charities and Not-For-Profit Group.
Originally published by Public.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
