Most not-for-profit organizations work toward accumulating a sufficient financial cushion to provide some security against unexpected financial difficulties. There is a strong and sometimes warranted perception among members of the charitable community that even a modest surplus can have negative implications for raising funds. Charities are nervous that governments will reduce annual funding levels and that non-government donors, including the United Way and individuals, will be less likely to donate to solvent, secure organizations. Setting up a charitable foundation affiliated with your charity is one way to accumulate funds without jeopardizing donation levels.
Reasons for creating a foundation associated with a charity
A foundation makes sense where an organization wants to accumulate a financial cushion without jeopardizing funding. Donations and investment income not expected to be fully spent in the year can be generated by and, to the extent permitted by Revenue Canada regulations, kept in a foundation. Revenue expected to be fully spent in the year, such as program specific government funding, would be generated and spent by the charitable organization itself.
A foundation can be used to help remove the temptation to dip into a surplus to cover funding shortfalls. By moving the financial cushion to a foundation the operating organization is forced to balance revenues and expenses annually.
Creating a foundation allows an organization to run two distinctly different fundraising campaigns. The charitable organization could, for example, focus on short-term funding such as securing government grants and conducting direct mail campaigns. The foundation could then be charged with long-term fundraising such as the securing of endowments, the use of insurance policies naming the charity as the beneficiary, soliciting bequests and fundraising for capital projects.
A foundation is often most effective when structured to be independent of the charity associated with it. If the foundation is not to some degree independent then the two organizations will have to combine or at least disclose each other’s significant financial information on preparation of the annual audited financial statements. The desired separation of the two organizations would be diminished by joint disclosure. To achieve independence the foundation should, as a minimum, have some Board Members who are not on the Board of the affiliated organization and have latitude as to how and when it can disburse its funds. The risk to the charity is that the foundation will have too much independence and, at some time in the future, not support its affiliate in the way originally intended. The risks and benefits of independence and the degree of independence granted in the incorporating documents must, therefore, be very carefully considered at the outset.
One of the drawbacks of having a foundation is that you will need to recruit more volunteers to be on the Board of Directors of the foundation (all Ontario not-for-profit organizations must have at least three Board members). It is often possible for the foundation Board to meet only every three or four months to reduce volunteer time and make it easier to recruit additional Board members.
The Articles of Incorporation of a foundation should be general enough to permit the donation of funds by the foundation to a variety of organizations. This ability increases the perception of independence. In addition, it avoids the problems of the funds in the foundation being frozen in the event that the affiliate subsequently ceases to exist or loses its charitable registration number.
A group of like-minded organizations in a specific region could consider setting up a joint foundation to accumulate funds to be used by all the affiliated charities. This would permit the group to conduct joint direct mail and other fundraising campaigns where the benefits of economies of scale for both volunteer and non-volunteer resources can be realized. Unfortunately political philosophy is often the single biggest obstacle to setting up joint foundations.
Setting up a foundation
Creation of a foundation tied to an existing registered charity or charities need not be difficult. As stated earlier, care must be taken at the outset to ensure that the objectives of the foundation are appropriately designed to meet the needs of the sister organization(s). Following incorporation and appointment of a Board of Directors the foundation should apply for a registered charitable number from Revenue Canada. Once the charitable number has been obtained the foundation can start to raise and accumulate funds as intended.