January 29, 1996

Introduction
Corporate directors are obliged to act in the best interests of the corporation. It is also generally accepted that directors should consider their corporation’s responsibility to others, including the corporation’s employees.

This paper will review the liability of directors of non-share capital (not-for-profit) corporations pertaining to employment matters. First, it will note obligations under the Day Nurseries Act. A summary of key requirements under the Employment Standards Act will be followed by review of liabilities that arise under the Income Tax Act.

Directors should always exercise prudence. The first step in reducing the risk of liability is to be aware of a corporate employer’s basic statutory and contractual obligations. Next, directors should be aware of the current state of the corporation’s fiscal affairs. With this information, directors may reasonably ensure that the corporation is in compliance with its current obligations, thereby restricting any practical personal exposure to liability.

Day Nurseries Act
Section 16 of the Day Nurseries Act empowers program advisors to enter and inspect day care centres. The program advisor may also review books of account, enrolment records and other records. This would include payroll information. It is an offence under the Act to obstruct a program advisor in the exercise of his or her duties. A person shall not supply false information or refuse to supply information which the Act empowers the program advisor to inspect.

Under section 21 of the Act, directors, officers and employees who “knowingly concur” in a contravention of section 16 by the corporation is guilty of a provincial offence and is liable to a fine of up to $5,000 or imprisonment of up to 2 years.

In the current environment, to the extent that program advisors are reviewing payrolls to make sure that there is money on hand to pay accrued liabilities, it would be prudent for the directors to satisfy themselves that money has been put aside in accordance with true information furnished to a program advisor.

Employment Standards Act
Record Keeping
Directors should ensure that the corporation keeps employment payroll records in accordance with the Employment Standards Act (ESA).
Under the ESA, an employer is required to keep for each employee:

• employee’s name and address,*
• employee start/anniversary date,*
• date of birth if employee is less than 18 years old,
• number of hours worked each day and week,
• wage rate and gross earnings for each pay period,
• vacations with pay or vacation pay,*
• amount of each deduction and purpose for each deduction, and
• net amount paid to each employee.

The above records marked with an “*” must be kept for 5 years after work is last performed by the employee. The other records must be kept for each employee for 2 years from the date the employee last worked for the employer.

Vacation pay accrues for employees as it is earned, not when it is paid. The payroll system should show, at any given time, how much vacation pay has accrued for each employee.

By ensuring that the proper records are kept, a director should, at the same time, be able to satisfy himself/herself that there are financial controls in place to account for payments to employees and remittances to Revenue Canada (discussed below). They will also be able to ensure that the employer has sufficient funds to meet the current payroll and accrued vacation pay.

Statutory Notice/Termination Pay under the Employment Standards Act
The Employment Standards Act requires the employer to give the following minimum written notice of termination/termination pay:

Different notice procedures and longer statutory notice periods apply to a “group” or “mass” termination of 50 or more within a four-week period. If the corporation does not have more than 49 employees, then even a closure of operations would not activate the special rules.

Statutory Severance Pay under the Employment Standards Act
The ESA also says that an employer must provide statutory severance pay if:

• the employer has an annual payroll of $2.5 million or terminates the employment of 50 or more employees within a six-month period, and
• the employee has 5 or more years of service.

Statutory severance pay is calculated based on a formula: 1 week of pay for each complete year of service plus 1/12 of a week of pay for each completed month in the last partial year, up to a maximum of 26 weeks’ pay.

Statutory severance pay is distinct from statutory termination pay. It cannot be converted into working notice.

In planning the affairs of the corporation, the directors should be aware of the above obligations in respect of termination pay and (if it applies) statutory severance pay. However, as will be explained in the next section, directors are not personally liable for termination pay and severance pay under the Employment Standards Act. Nor are they liable for pay in lieu of notice to which a former employee may be entitled under common law.

Directors of Non-Share Capital Corporations under ESA
The provisions covering the liability of directors under the Employment Standards Act do not apply to:

• corporations without share capital, formed under the Corporations Act;
• co-operatives, under the Co-operative Corporations Act; and
• corporations not carried on for gain or corporations similar to corporations without share capital and co-operative corporations.

Non-profit day care centres would probably fall into one of the above categories. Accordingly, the liability of directors of such corporations is covered by the Corporations Act. Accordingly, a director of a non-share capital corporation cannot be personally ordered to pay under the director’s liability provisions of the Employment Standards Act.

Under the Corporations Act, a director is liable for amounts the corporation owes to employees:

• for services the employees performed,
• while the director was on the board of the corporation,
• up to 6 months’ wages, and,
• up to 12 months’ accrued vacation pay.

Directors are liable only if the corporation has been sued for the debt within 6 months and the judgment has not been satisfied (or, within that period, has gone into liquidation or has been ordered wound up) and the director is sued within 6 months after he or she ceased to be a director. Liability extends only to the part of the obligation that the corporation cannot pay.

Directors of non-share capital corporations are not liable under the Corporations Act for termination pay and severance pay which the corporation may owe a former employee, because these payments do not relate to services performed. Similarly, common law damages for pay in lieu of notice are not considered payments for services performed. For this reason, a director would not be liable for any common law pay in lieu of notice that the corporation may owe a former employee who did not receive notice of the termination of employment in accordance with his/her contract of employment.

Withholding/Remitting Taxes and Premiums for CPP and EI
The Income Tax Act says that directors are liable for taxes the corporation failed to withhold and remit during period in which they were directors. The same provisions apply to Canada Pension Plan and Employment Insurance premiums. Directors are also liable for interest or penalties relating to such taxes or premiums.

In addition to a number of procedural hurdles limiting a director’s liability, a director is not liable under the Income Tax Act for the corporate failure to withhold and remit where the director “exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.”

If the appropriate financial controls are in place, a director may reasonably and regularly verify that the corporation has deducted at source and remitted the required amounts to Revenue Canada.

The frequency of monitoring should increase where the corporation is in a tenuous financial position. Revenue Canada has produced information circulars (IC 98-2 Directors’ Liability) which a board of directors should review with professional advice and compare against its own practices.

Conclusion
While directors of non-profit corporations are exposed to potential personal liability, if they pay attention to the affairs of the corporation, the likelihood of being called upon to pay a debt of the corporation is remote.

In planning the affairs of the corporation, the directors should consider their statutory and common law obligations to their employees. At monthly directors’ meetings, the agenda should include a review of current and accrued financial obligations to employees and related obligations to Revenue Canada. If prudent management is followed, then the directors will know, well in advance, if the corporation is in danger of failing to meet its payroll.

In the unlikely event that the prudently managed non-share capital corporation ceases operations without notice, directors will not be liable for statutory termination pay, statutory severance pay or common law pay in lieu of notice which the corporation owes its employees.

Market research by the accounting profession reveals that most people have only a vague idea of the scope and objectives of an audit. Fewer people have any idea of the limitations of the process. As a result, the public is often understandably surprised and disillusioned when learning of corporate failures such as Livent Inc., YBM and Philips Services. The question “Where were the auditors?” is often asked.

With this article we hope to shed some light on the audit process. We will examine some of the factors that affect the nature and extent of audit testing and we will look at what communication you might reasonably expect from your auditor.

The Concept and Process of Auditing
What is the concept and process of auditing? During the 1960’s and 1970’s, audit professionals in many countries independently developed theories of auditing that could be applied to examination of many different areas, including financial statements. While practitioners may have differences of opinion as to the application of certain of the underlying concepts, the basic framework is generally accepted by auditors and the public. This framework has been codified in many countries around the world and is often called Generally Accepted Auditing Standards (“GAAS”).

The fundamental responsibility of an auditor of a not-for-profit organization is to obtain evidence to determine the degree to which assertions in the financial statement under audit compare to established generally accepted accounting criteria. The four concepts in the above statement that require an explanation are:

1. financial statement assertions
2. established generally accepted accounting criteria
3. obtaining evidence
4. comparison of financial statement assertions with established accounting criteria.

To comprehend the audit process it is important to understand each of these concepts and the relationship between them.

Financial statement assertions
A set of financial statements is created by management to communicate information to a variety of readers about a series of financial transactions occurring in a prior period, most often a year. The information in the financial statements contains certain assertions made by management. Assertions include:

• existence – that an asset or a liability of the organization exists at a given date
• occurrence – that a recorded transaction took place involving the organization
• completeness – that there are no unrecorded assets, liabilities or transactions
• ownership – that an asset is owned or a liability is owed by the organization at a given date
• valuation – that an asset or liability is recorded at an appropriate value
• measurement – that a revenue or expense transaction is recorded in the proper amount and in the appropriate period
• statement presentation – that an item is disclosed in accordance with generally accepted accounting principles (“GAAP”).

To help clarify the concept of an assertion, take as an example the caption “cash” in a statement of financial position. As cash is classified as an asset, the reader is entitled to assume that the cash both exists and is owned by the organization. Existence and ownership are key accounting assertions relating to the asset category of cash. As another example, the assertions for “accounts payable” and “accrued liabilities” would be those of completeness, that all the liabilities that should be recorded have been recorded, and valuation, that the liabilities recorded are valued correctly (i.e. they are not over or under stated). The assertions for a revenue item such as membership fees would include: occurrence, that the revenue was earned by the organization; ownership, that the fees did not belong to another organization; and completeness, that all the revenue that was earned was recorded.

The assertions contained in financial statements come from the accounting process. Accounting paints a picture of past financial transactions and communicates this to the reader. The auditing process, on the other hand, uses generally accepted criteria to provide an objective opinion as to whether the financial statements accurately reflect the accounting assertions.

Established Generally Accepted Accounting Criteria
The criteria used to generate financial statements have been developed through a quasi-legislative process over the last forty years in a number of countries including Canada, the UK , the USA and Australia. The criteria are called GAAP – Generally Accepted Accounting Principles. GAAP in Canada at the present time includes:

• standards promoted by the Canadian Institute of Chartered Accountants’ (“CICA”) Accounting Standards Board
• common principles and practices that have gained general acceptance in the spirit of existing standards for those areas where the CICA’s Accounting Standards Board is silent.

Obtaining evidence
The auditor’s job, in short, is to provide a professional opinion on the relationship between the assertions in the financial statements and those embodied by generally accepted accounting principles. The auditor must obtain evidence to support his or her opinion on these financial statement assertions. Evidence can come in many forms including:

An auditor does not obtain all of these types of evidence for every financial statement assertion. For example, when attempting to verify an amount receivable the auditor may rely on direct confirmation from the debtor and evidence of payment made after the year end to provide assurance that the receivable both existed and was collectable. The auditor might decide that additional evidence would not be required to prove the assertions.

Comparison of financial statement assertions with established accounting criteria
The auditor obtains evidence and subsequently evaluates whether that evidence is sufficient and appropriate. The evidence gathered must be sufficient and appropriate to permit the auditor to express an opinion on the financial statement assertions. Techniques used to gather evidence include:

The auditor will not necessarily employ all these verification techniques to establish whether financial statement assertions agree with generally accepted accounting principles for every assertion. The degree to which an auditor collects evidence and applies verification techniques is based on the auditors professional judgment. The auditor must use judgment to minimize the risk of arriving at an incorrect conclusion. This brings us to the concept of audit risk.

The Audit Risk Model
Audit risk can be thought of as the risk that the auditor will fail to express a reservation in his or her opinion on financial statements that are materially misstated. A misstated financial statement is one where the accounting assertions are not in accordance with those prescribed by generally accepted accounting principles. Take, as an example, a statement of financial position with a caption for term deposits with a value of $100,000 where the organization did not have any term deposits. The assertion regarding the existence of these assets implied by the statements would be false. If this is not brought to the reader’s attention in the auditor’s report as a result of the auditor’s negligence then an audit failure would have occurred.

An auditor’s goal is to reduce the risk of audit failure to an appropriately low level. Auditors must use professional judgment in selecting appropriate verification techniques to reach their goal all within an acceptable level of risk. Auditing procedures are designed to minimize three types of risk:

1. Inherent risk
Inherent risk relates to the nature of the transactions, assets and liabilities being audited. Some financial statement items are inherently more susceptible to error or fraud. For example, cash is more susceptible to theft than prepaid expenses or goodwill. Inherent risk is generally identified during the planning process by obtaining or updating knowledge of the organization’s business and industry and significant events and transactions occurring during the year under audit.

2. Control risk
Control risk relates to the effectiveness of the organization’s internal controls and financial reporting. The organization has the responsibility for establishing sufficient internal control to prevent or detect, on a timely basis, errors resulting from problems in the processing of transactions and the maintenance of accounting records. If the auditor identifies effective internal controls and performs tests to provide evidence of the effectiveness of those controls then he or she can reduce the amount of verification on detailed balances and transactions. The auditor will typically only test internal controls where doing so would reduce the cost of performing the audit or where testing of detailed transactions and balances is not feasible.

3. Detection risk
Detection risk is the risk that the auditor will not identify misstatements in the financial statements. An auditor only reviews a sample of transactions and balances as to test all would be both impractical and prohibitively expensive. Therefore, it is possible for an auditor to fail to identify misstatements despite having performed audit testing. Inadequate verification (i.e. drawing the wrong conclusion from evidence obtained or failure to obtain evidence identified as necessary in the planning process) can also cause a failure to detect misstatements.

The impact of fraud
One of the underlying axioms of auditing in Canada is that the auditor can assume, in the absence of evidence to the contrary, that management will act in good faith (i.e. management will not deliberately act to defraud the organization). Consequently, auditors in Canada do not carry out audit procedures designed specifically to uncover the existence of fraud as part of every audit engagement. However, if the auditor, in the course of an audit, does uncover evidence of fraud or evidence indicating that a fraud might exist then the auditor would expand his/her verification procedures to determine whether a fraud has occurred and has created a misstatement in the financial statements.

Materiality
Financial statements are prepared by management using many judgmental evaluations. As a result it is not possible or economically feasible for an organization to produce financial statements that are absolutely precise. As an example, management estimates the collectability of accounts receivable and provides an allowance for doubtful accounts based, not on absolute certainty, but on management’s best estimate of the likelihood of collecting the accounts. Similar judgments are made when determining amounts of revenue unearned at a period end and in calculating over what period to amortize capital assets.

How precise should financial statements be? The concept of materiality is recognized in accounting literature. A misstatement in financial statements would be considered material if a person with a reasonable knowledge of the business and its economic activities would have reached a different opinion about the organization had he or she received a set of financial statements correcting for the material misstatement.

Auditors must recognize the concept of materiality in planning their audit. If an audit were designed to identify every possible misstatement in the financial statements, it would quickly become prohibitively expensive. Therefore, audits are generally designed to identify only material misstatements in the financial statements.

Setting materiality is a judgment call by the auditor. The auditor must consider both quantitative and qualitative measures in a arriving at a number. An appropriate level of audit materiality depends, in part, on the sensitivity of the readers to the accuracy of the financial statements. For many not-for-profit organizations a misstatement of 2% or more of gross revenue would be considered material. However, in many circumstances materiality is determined by qualitative rather than quantitative measures. For example, an organization having to return every dollar of unspent funding might consider an error of $1,000 material, even if their gross revenue is $650,000, if that error results in a dollar-for-dollar refund to the funding body.

Objectivity
Objectivity is critical to the audit process. Generally accepted auditing standards state that an audit must be performed by an auditor with an objective state of mind. An objective state of mind means that the auditor expressing an opinion must hold himself or herself free of any influence or relationship with the organization or any related party that might impair the auditor’s professional judgment or objectivity. A consequence of the objectivity standard is that audits generally may not be carried out by individuals who are directly involved with the not-for-profit organization in any capacity other than that of auditor. For example, a treasurer of a church congregation who is also a qualified auditor would not be permitted under professional regulations to perform the church’s audit. This is because a reasonable observer might view the treasurer-as-auditor’s judgment and objectivity as being impaired.

Reporting to users
Once the auditor has gathered sufficient and appropriate evidence, he or she will then conclude whether the assertions in the financial statements being audited are in accordance with GAAP. If the auditor concludes they are then he or she will issue an opinion without reservation . If, in the auditors opinion, the assertions are not in accordance with GAAP then the auditors report will state this, indicate what the differences are and, if possible, quantify the financial impact on the statements.

You will note that an auditor does not report on whether or not the organization is in good financial health. If an organization is in financial difficulty then the financial statements should reflect that; the auditor does not point it out separately. Except in the most serious circumstances an auditor’s job is not to comment directly on whether an organization is in financial difficulty. Rather, he or she will report whether the statements “tell it like it is” in accordance with GAAP.

During audits, issues are sometimes identified that may be of interest to management and Boards of Directors in discharging their responsibilities. At the conclusion of an audit the auditor may prepare a management letter to report on issues, including improvements in the safeguarding of assets, the improving of controls and increasing the efficiency and effectiveness of an organization’s financial systems. It is important to understand that preparation of the management letter is a by-product of the audit and is not an obligation of the auditor. An audit would not usually identify all matters that may be of interest to management in discharging their responsibilities. In other words, just because an auditor has not brought any recommendations to the attention of management does not mean that there is no room for improvement or that additional requirements are not needed for the safeguarding of assets. Organizations wanting a separate opinion as to the adequacy of internal control and procedures to safeguard assets would have to engage an auditor to expressly provide an opinion on that aspect of the organization.

In a formal management letter auditors will typically only comment on items they consider significant. An auditor will often communicate matters of lesser significance directly to persons responsible for financial systems (e.g. bookkeepers and accounting personnel) either orally or in writing during the audit. These items of a lesser nature are generally not communicated directly to an organization’s Board of Directors.

Summary
In summary, an audit is a cumulative process that starts with planning and moves to gathering and evaluating of evidence. In determining the amount of evidence to be obtained in the verification procedures, the auditor must specifically assess the risk that a material misstatement in the financial statements will not be identified during the audit process. Once the auditor has obtained sufficient evidence and performed sufficient verification then he or she will draw a conclusion as to whether the financial statements are, in all material respects, fairly presented in accordance with generally accepted accounting principles. This opinion will be presented to readers in the auditor’s report.

Bibliography
The following sources were essential for the preparation of this article:

• Auditing: An Integrated Approach, W.M. Lemon, A.J. Arens & J.K. Loebbecke – 1997
• The CICA Handbook
• The IAASB Handbook http://web.ifac.org/publications
• CICA Report of the Commission to Study the Public’s Expectations of Audits – 1988
• The External Audit, R.J. Anderson – 1977
• The Philosophy of Auditing, R.K. Mautz & H.A. Sharaf – 1961

What constitutes allowable political activities for charitable organizations has been a contentious issue for the past twenty years. A recent court case has clouded the issue even more. Engaging in prohibited political activities can result in a charity being de-registered. Knowing where to draw the line on political activity is critical as de-registration will result in the confiscation of all of your charity’s assets.

In this article we will briefly discuss historical changes to what constitutes allowable political activity and review current Revenue Canada regulations and the recent court case.

A Historical Review
For many charities some degree of political activity is essential for meeting their objectives. In 1978 Revenue Canada issued Information Circular 78-3 in an attempt to define “political activities” for Revenue Canada’s purposes. There was tremendous opposition from the charitable community at the time. As a result, Circular 78-3 was withdrawn by Revenue Canada, albeit very reluctantly. It is interesting to note that the then-Prime Minister indicated that, regardless of the Information Circular being withdrawn, the position laid out in the Circular still represented both the law and Revenue Canada’s administrative policy.

The issue came to a head in 1985 when the Federal Court of Appeal upheld Revenue Canada’s refusal to register a legal services organization as a charity. Revenue Canada initially refused the registration because the organization had picketed the provincial legislature. In addition, the would-be-charity indicated that it would do so again given the same situation. The court concluded that the activities, while worthwhile and in line with the organization’s objectives, were political in nature and, therefore, not charitable.

In 1986 the Income Tax Act was amended retroactively to 1985 to allow registered charitable organizations to devote at least part of their resources and energy to “allowable” political activities. These amendments stand today. The Income Tax Act allows a registered charitable organization or foundation to devote no more than 10% of its resources to political activities so long as the activities are “ancillary and incidental” to the organization’s charitable purposes or activities. In addition, the political activities may not involve the direct or indirect support of or opposition to any political party or any candidate for office.

In 1988 the Federal Court of Appeal added some clarification to what constitute acceptable political activity. Three general points were made:

• “educating” the public is not of itself an acceptable political activity for a registered charity
• registered charities that “educate” the public must disseminate all points of view and not just those in line with the charity’s objectives
• an organization with a political objective in its corporate objects of incorporation is not eligible for charitable status.

Revenue Canada’s Current Position
In February 1987 Revenue Canada issued Information Circular 87-1 outlining allowable political activities for registered charitable organizations and foundations. The Circular divides charitable activities into three categories:

• charitable activities not subject to any limitation
• prohibited activities
• political activities that, when ancillary and incidental to a charities established purposes, are permitted within expenditure limits (i.e. under 10% of an organization’s resources).

The Information Circular does not define what constitutes “charitable activities not subject to any limitation”. Revenue Canada has left the area open to interpretation by stating that “a particular activity is fundamentally charitable or fundamentally political depending on the facts of a particular situation”. Political activities are viewed as those aimed at bringing about changes in law and policy. Revenue Canada generally accepts as charitable any work aimed at the relief of poverty, the advancement of religion, the advancement of education or the advancement of other purposes beneficial to the community. If you have a question about any of your organization’s activities and whether they are subject to limitation contact Revenue Canada’s Charities Division at 1-800-267-2384.

Revenue Canada is more helpful in defining what constitutes partisan politics and other prohibited activities. “A charity may not oppose or endorse a named candidate, party or politician. The charity’s resources may not be devoted directly to such activities, or devoted indirectly through provision of resources to a third party engaged in partisan political parties” [IC 87-1, para. 10].

Allowable political activities are defined in the Circular as “activities that cannot themselves be considered charitable activities but are subordinate to bona fide charitable purposes and which may be considered political” [IC87-1, para. 12]. Examples given include:

• publications, conferences, workshops and other forms of communication which are produced primarily in order to sway public opinion on political issues and matters of public policy
• advertisements designed to attract interest in or gain support for a charity’s position on political issues and matters of public policy
• public meetings or lawful demonstrations to publicize and gain support for a charity’s point of view on matters of public policy and political issues
• mail campaigns whereby a charity requests its members or the public to forward letters to the media and government expressing support for a charity’s view on a political issue or a matter of public policy.

Approved political activities are only permitted within specific expenditure limits. All registered charities must spend at least 80% of their receipted donation revenue on charitable activities in order to satisfy the disbursement quota. As many registered charities receive significant unreceipted funds (i.e. by way of government grants and investment income) meeting the disbursement quota is often a non-issue. Political activities are considered non-charitable and, therefore, the related costs must be classified as non-charitable expenditures.

In addition to the disbursement quota, all or substantially all of a registered charity’s resources must be used for charitable activities. The phrase “all or substantially all” in the Income Tax Act is understood to mean at least 90%. As a result, no more than 10% of the resources of the organization are allowed to be used for ancillary and incidental political activities. Note that the word “resources” refers to all the financial and physical assets of the charity as well as the services of its human resources.
Registered charitable organizations and foundations are expected to self-assess annually to determine whether their political activities are within the limits described above. The annual T-3010 Registered Charity Information Return must be filed but no special report of political activities is required. Charities are expected to keep sufficient financial and other records on hand to verify that all or substantially all of its resources have been used in charitable activities. These records must be kept back to 1986.

Note: Revenue Canada encourages use of the “all or substantially all” rule for allocating resources. If 90% or more of an expense is for charitable activities then the entire expense can be allocated as charitable. Conversely, if substantially all of an expense relates to political activities then the whole expense should be considered political.

Recent Developments
A recent decision of the Federal Court of Appeal has the potential for further restricting the definition of allowable political activities. In this case, Human Life International (“HLI”), a pro-life organization, had an extensive information program designed to convince the public of the merits of its pro-life position. HLI had neither lobbied for nor against legislation nor did it lobby or attack specific political candidates.

The Federal Court of Appeal held that “activities designed to sway public opinion on controversial social issues are not charitable activities”. The court did note that there are no previous legal cases to support this position. Most importantly, the term “controversial social issue” was not defined. It is not clear, for instance, whether advocacy for increasing public resources for licensed childcare would be taken as an activity designed to sway public opinion on a controversial social issue and therefore grounds for de-registration of a charity.

The court left the onus on the organization to prove that a specific activity is acceptable under the Income Tax Act. Consequently, if Revenue Canada revokes registration based on something it defines as a “controversial social issue” then it is up to the organization to defend its actions and prove that its activities were acceptable political activities and were carried on within resource limitations. This seems to give Revenue Canada significant power to interpret political activities as it sees fit.

We understand that the case will be appealed to the Supreme Court of Canada. In the interim, registered charitable organizations and foundations should review their political activities to ensure that they are within the guidelines issued by Revenue Canada Information Circular 87-1.

Reasons for creating a foundation associated with a charity
Wealth accumulation
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.

Fiscal prudence
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.

Focused fundraising
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.

Does your centre qualify for charitable status?
Childcare centres incorporated without share capital under the Ontario Corporations Act are all not-for-profit organizations. Not-for-profit status does not automatically qualify centres for federally registered charitable status. Centres must apply to Revenue Canada to become a registered charity for income tax purposes. Registration involves filling out forms, meeting specific tests and criteria and is best done with the help of someone knowledgeable with the process.

Most not-for-profit childcare centres are deemed charitable organizations in Ontario. Being a charity in Ontario has nothing to do with being a registered charity for federal income tax purposes. Being a charity in Ontario only brings you under the purview of the Public Trustee of Ontario and the Charities Accounting Act.

Benefits of Registration
Being a registered charity will enable your centre to issue donation receipts for donations of money and, in some cases, gifts-in-kind. Donation receipts may not be issued for regular childcare payments by parents. Donation receipts may only be issued for voluntary donations over and above regular childcare fees.

Donations to childcare centres generally make up a very small portion of total revenue. For example, many childcare centres routinely receive $20,000 or more a month from parent fees and related subsidies. These same centres are often fortunate to receive $2,000 a year in donations (less than 1% of total revenue). The ability to issue donation receipts will often not significantly increase the amount of donation revenue received. If your Board is considering charitable registration then it should first estimate the increase in revenue expected from being able to issue donation receipts for non-fee donations. This estimate will give you an idea whether or not registration is worthwhile.

Registered charities are automatically eligible for a refund of approximately 70% of HST paid. If your centre is currently not eligible (i.e. a not-for-profit organziation that is not a registered charity and has government funding more than 40% of gross revenue on average for the past two years) and if the recovery would be significant then you might consider registration.

If your organization is interested in using gambling or gaming for fundraising then you may find it advantageous to obtain registered charitable status in order to be given access to Bingo, Nevada ticket, and other revenue sources. Non-charitable organizations will find it difficult to become registered charities solely to obtain resources from gambling.

Some municipalities offer property tax rebates to registered charities that either own or rent property used to deliver their charitable services. This is generally a municipally run program. Please contact your municipal offices for information in your area. Registered charities operating in the City of Toronto can go to http://www.toronto.ca/taxes/property_tax/tax_rebates.htm for information on the program in Toronto.

Costs of Registration
Obtaining registered charitable status can be costly. The process generally takes at least six months and can take up to several years. Some legal costs may be incurred during the process and there is no guarantee that Revenue Canada’s approval will be obtained. For more information on registration please go tohttp://www.cra-arc.gc.ca/tx/chrts/

Once you are registered you must annually complete a Charitable Organization Information Return (T3010) and file it with Revenue Canada. Some of the information you supply in the Information Return is then available to the public. Failure to complete and file this form within six months of your fiscal year end can lead to deregistration.
The costs to community based not-for-profit childcare centres of obtaining registered charitable status generally exceed the benefits. If your centre already has charitable status then you should ensure that annual reporting requirements are met to prevent deregistration.

Ontario Ministry of Government Services
Commencing in 2000, for-profit corporations operating in Ontario are required to complete a filing with the Ontario Ministry of government Services with each Ontario income tax return. Commencing 2009, all not-for-profit organizations in Ontario file this form as part of their federal corporate T2 income tax return. As registered charities do not have to prepare a T2 return, the Ontario Ministry of Government services is mailing out forms to them directly. These forms should be completed and returned within 60 days of the year end. There is currently no penalty for failure to file.

Canada Revenue Agency
T2 Corporate Income Tax Returns
Canada Revenue Agency (CRA) requires all not-for-profit organizations that are not registered charities to file a T2 Corporate income tax return annually. The return must be filed within six months of the organization’s fiscal year end. There are no penalties for late filing.

Non-Profit Organization Information Returns (T1044s)
All not-for-profit organizations that are not registered charities, incorporated or otherwise, must file a T1044 information return if either of the following conditions applies:

a) The organization has interest, dividend and other investment income in excess of $10,000 in the year; or
b) The organization has total assets in excess of $200,000 in the prior year.

The T1044 return is due within six months of the year-end and must be filed with a copy of the annual financial statements. This form must be filed in addition to a T2 Corporate income tax return. Unlike the T2 Corporate income tax return, there are significant financial penalties for late filing. Specifically, a late filer will be charged a late filing penalty of $25 per day up to a maximum of $2,500. CRA is giving first-time filers a penalty holiday to encourage filing. Once an entity files a T1044 they must file a T1044 annually regardless of whether or not they continue to meet the above criteria for first-time filers.

If you do need to file a T1044 it is critical that you have your financial statements prepared in advance of the six month filing deadline. If you do not have financial statements ready within six months of the year end we recommend that that you submit a draft of your financial statements together with a completed T1044 return to avoid a late filing penalty.

Note that all organizations required to file a T3010 do not have to file a T1044.

Registered Charity Information Returns (T3010s)
Every registered charity must file a T3010 Registered Charity Information Return within six months of the organization’s year-end. Failure to file this return on time may result in de-registration of the charity. CRA has evidently accelerated the de-registration period.

In the past, organizations not filing a T3010 were not de-registered until at least 12 months after their filing deadline had passed. Recent dealings with CRA lead us to believe that this period has been shortened to six months.

In our experience de-registration occurs most often when organizations have moved, do not forward their change of address to the Agency and then forget to file their T3010 on time. CRA’s subsequent warnings and reminders, usually sent through registered mail, are then not received and de-registration occurs.

De-registered organizations can re-register by completing form T2050, paying $150, getting a certificate of good standing from the Ontario Ministry of Consumer and Commercial Relations and filing certain letters. The charity is not allowed to issue donation receipts while it is de-registered.

HST registration and refunds
Requirement to Register
Most not-for-profit organizations need only register for HST purposes and charge HST if they meet both of the following criteria:

a) Taxable sales for HST purposes exceed $50,000 during the fiscal year; and
b) The organization has in excess of $250,000 in revenue from all sources.

In some cases fees charged by not-for-profit organizations are not considered taxable sales (they are instead a recovery of costs) and therefore the organization should not register even though annual revenue from these sources may exceed $50,000. In other cases, not-for-profit organizations provide an exempt service (e.g. provision of childcare) where HST cannot be charged. If you have concerns or questions whether or not you should register for HST purposes you should consult CRA at 1-800-267-2384.

Refunds
Not-for-profit organizations that are not registered charities are eligible for a 50% refund of HST provided they receive at least 40% of their funding from government sources in the current year or 40% on average over the past three years. It is important to note that not-for-profit organizations must exclude services purchased by governments from the definition of government funding. An example of a purchased service is childcare or hostel services purchased by municipal agencies on a per diem basis.

Most registered charities are automatically eligible for a refund of one half of HST paid on expenses. The refund can be applied for on a monthly or annual basis. We recommend that you file an annual HST refund form at the completion of your annual audit unless the HST refund is significant to the organization. Note that CRA has sanctioned the simplified method whereby the HST refund may be calculated based on an estimate of HST paid during the year. You can alternatively base the refund on actual amounts of HST paid if that information is collected within your accounting system.

Organizations can apply for refunds for up to three proceeding years.

Rules for issuing donation receipts
The Income Tax Act states that registered charities can issue official donation receipts for property gifted by a donor to a registered charity. Note that as “services” are not property they are not eligible for receipts. For a transfer of property to be a gift the transfer must be voluntary (i.e. not subject to a contract or other formal obligation on the part of the donor), and the property must be transferred without expectation of return. “Without expectation of return” means that nothing of value or benefit should be collected by the donor or anyone designated by the donor in return for the gift.

Receipts for gifts-in-kind may be issued for the fair market value of the gift at the date of donation. Gifts over $1,000 must be independently appraised. The donation receipt issued must include a brief description of the property donated and the name and address of the appraiser.

Donation receipts may not be issued for:

• services such as computer consulting and design work
• old clothes, furniture, home baking, hobby crafts etc. Exceptions can be made for articles of unusually high value.
• sale of raffle, lottery and other games-of-chance tickets

These are the basic rules dictating when donation receipts may and may not be issued. See the following CRA guidelines for specifics (http://www.cra-arc.gc.ca/E/pub/tp/it297r2/). Following are guidelines for applying the rules to specific situations:

Games of chance
You may not issue donation receipts for sale of lottery or raffle tickets as people buying these tickets have an expectation of return. It is clear that charities running the ubiquitous hundred dollar sweepstake lotteries cannot give donors receipts for purchasing tickets for these events. It becomes less clear when you think of issuing receipts for charitable functions which include a door prize in the event. Generally Revenue Canada overlooks benefits to donors such as door prizes where they are only a minor part of the event.

Donation of Services
A charity may not issue a donation receipt for a contribution of services. This follows from the rule that donation receipts may only be issued for a transfer of “property”: Services are not property. To issue a receipt for a donation of services the transaction must be divided into two parts: one being a sale and the second a cash donation.

• Firstly, the “donor” of the services would invoice the charity for the value of the services provided. The charity should then pay for the services in cash.
• Secondly, the service provider would donate the cash (i.e. the “property”) to the charity. The charity may then issue a donation receipt to the donor.

There are two separate transactions in this exchange. Firstly, the service is provided and paid for. The income generated must be included in the taxable income of the service provider and, in addition, HST and PST, if applicable, must be charged and remitted as in a normal sale. The second transaction is the donation and involves the gifting of money from the donor to the charity and issuance of the charitable receipt in return.

Charities and donors often shortcut the process by merely swapping a donation receipt for services provided. HST is often missed in the swap transaction and the donor may not be aware that the value of services provided must be included in taxable income on their income tax return. At the very worst, a charity can lose its charitable registration for issuing a donation receipt for contribution of services.

Sponsorships
Donation receipts may not be issued for sponsorships where the sponsor receives a benefit such as advertising or promotion in return for the donation. Revenue Canada’s position is that the donor must deduct these sponsorship expenditures as business expenses and, therefore, a donation receipt should not be given. As an example, companies and individuals often sponsor golf holes or dining tables at charitable events. The name of the donor is included in the event publicity. In this way the sponsor receives public recognition. As businesses can deduct advertising and promotion from taxable income, the tax deductibility of the payment will not be lost.

Gala fundraising events
Donors attending gala fundraising events pay for and receive a benefit, such as a meal or tickets to a performance, for their contribution. One of the cardinal rules of receipting is that a donor receiving a benefit of more than a nominal value (e.g. a package of golf balls, flowers, a page of address labels) is not entitled to a donation receipt.

An exception to the nominal value rule occurs where a donor purchases a ticket to attend a charitable event such as a play or banquet and the donor pays more than the value of the event. The charity is allowed to issue a receipt for the difference between retail value of the cost of the event and the purchase price of the ticket. For example, if a charity sells a $200 ticket for an event costing the charity $110 per person, then the donor is eligible to receive a donation receipt for $90.

It is important to note that the value of the receipt is the difference between the retail value of the entertainment and the price charged by the organization for the event. If the cost of the event is partially or completely covered by another individual or organization (e.g. if a theatre contributes a block to tickets to a performance at a discount) then the donor is still only entitled to receive a donation receipt for the difference between the retail value of the cost of the event and the purchase price of the ticket. If, using the above $200 ticket example, the charity receives a donation of food for the dinner to bring the cost per person down to $75 from $110, then participants are still only eligible for a $90 receipt for each $200 ticket purchased.

Art auctions
Charitable organizations are increasingly turning to art auctions as a source of donation revenue. In these situations, either artists themselves or individuals or corporations donate works of art. If an artist contributes his or her own work of art then the artist is deemed to have sold it in the normal course of business at fair market value at the time of the gift. As the work of art comes from the artist’s inventory the sales price must be included in the artist’s taxable income. As is the case with donation of services, the artist should sell the work of art to the charity and then donate the cash from the sale back to the charity. The artist should still charge HST and if applicable. The donation receipt issued by the charity to the artist can be used to offset the taxable income of either the artist or the artist’s spouse.
Some organizations are concerned that if they cross cheques with donors then the donation cheque may not be honoured (i.e. may be returned NSF). The organization would then be stuck with a piece of art which they may have trouble selling for full market value. Consequently cheques are often not crossed and the art is incorrectly swapped directly for a donation receipt.

In the case of art donations from non-artist individuals or corporations, the donor would still receive a tax receipt based on the value of the donation. Revenue Canada has an administrative policy of not requiring formal valuations for works of art with a retail value of under $1,000. However, for donated works valued at over $1,000 an independent appraisal is required. A donation receipt may then be issued to the donor for the appraised value.

Typically, proceeds realized by charities on auction of artwork are significantly less than appraised values. Revenue Canada could come back and challenge the appraised fair market value of the donation up to four years after the fact. Revenue Canada would presumably base its challenge of the receipted amount in part on the gap between the amount of the donation receipt issued and the auction price. To avoid embarrassment and future financial difficulty for donors, charities are advised to obtain the most reputable appraisals possible.

The purchasers of art at an auction are, of course, not eligible for receipts as they are buying art and are not making a donation.

One further wrinkle to the art auction: Charities are required to spend at least 80% of the value of receipts issued on charitable activities (the disbursement quota). If, as an example, receipts are issued to donors for $100,000 and only $40,000 is raised at the auction then the charity must still spend 80% of the receipts issued (i.e. $80,000) on charitable activities in the next fiscal year. If the art auction is the only source of revenue then the organization may have difficulty spending $80,000 as it only raised $40,000 in cash. For organizations with significant sources of non-receipted revenue such as government funding, meeting the quota is generally not an issue. However, if that is not the case then care must be taken to ensure you have sufficient funds to meet the 80% disbursement test.

Benefits to donors of gifting
Donors can receive donation receipts for donations of property made to the following types of organizations:

• charitable organizations, public foundations and private foundations
• Canadian amateur athletic associations
• housing corporations that provide low-cost housing and are exempt under the Income Tax Act
• gifts to a municipality within Canada
• gifts to the United Nations or one of its agencies
• gifts to universities outside Canada and charitable organizations outside Canada, in certain circumstances. These donation receipts are typically only deductible against taxable income earned in the jurisdiction of the organization. For example, donations to a certain public US television station can only be deducted against US source income.
• gifts to the Crown.

Donors are eligible for a credit against tax payable of approximately 27% for the first $200 of donations and approximately 50% for donations in excess of $200. The benefits are significant. Either spouse may claim the credit for charitable gifts regardless of who actually made the donation.

In the case of corporations, charitable donations can generally be deducted up to 20% of taxable income in the year. In many situations, however, sponsorship payments should be classified as advertising and promotion expenses. In these cases, donation receipts should not be issued as the expenditures may be deducted directly against business income.

Summary
The Income Tax Act permits donors to claim a significantly higher deduction in the year of the donation than was formerly available. In many situations donors will now find it more beneficial to donate gifts of property, on which they have accrued capital gains, than to dispose of the property and contribute the cash. Again, the organization should work through individual situations with donors as they arise.

Employer Provided Childcare
Interestingly enough, there is no taxable benefit in the hands of the employee in cases where:

• the employer establishes an in-house childcare facility or leases space to provide a childcare facility off premises,
• the employer pays for all operating expenses of that facility and
• the facility is available to all employees either free of charge or for a minimal fee.

The childcare facility must be available to all employees and not just to a group such as management and, furthermore, all parents using the centre must be charged the same discounted fees.

Workplace childcare centres often result in significant costs to employers. Even though these costs are deductible from business income the employer costs are often perceived to exceed the benefits of providing subsidized workplace childcare. Consequently, employer subsidized workplace childcare centres tend to be few and far between and the generous tax provisions available to employees are rarely taken advantage of.

Employer Subsidized Childcare
Amounts paid by employers directly to an employee to defray childcare costs incurred by the employee will result in a taxable benefit to him or her. For example, if an employee receives $10/day from an employer to help defray the $30/day cost of toddler care then the $10/day will be taxed in the hands of the employee. The full cost of care paid for by the employee of $30/day is, however, eligible for the childcare expense deduction noted in the article “Deducting Childcare Expenses”.

It is important to note that from a cash standpoint employees are always better off having employers defray childcare expenses to whatever extent possible. For example, an employee receiving a $10/day taxable benefit could have their childcare cash outlay reduced by $6/day ($10 received from the employer less additional tax payable of $4). This assumes the allowance does not result in a reduction in their base pay. Employees not receiving the taxable allowance will have to come up with an additional $6/day out of their own pocket.

From the employer’s standpoint the full amount of any childcare allowance should be deductible as an employment expense against business income for tax purposes.

Childcare provided to centre staff
Some centres provide either free or discounted childcare to centre staff who have children. There are a number of compelling psychological advantages to staff for having their children looked after at their place of work.

However, the childcare centre must factor a staff discount policy into its fee assumptions when preparing its monthly cash flow forecast. Several staff might take advantage of this policy at once thereby significantly reducing fee revenue.

Discounts and/or free childcare will result in a taxable benefit to the employee equal to the difference between normal fees charged by the centre and amounts actually paid by the staff. Cash flow advantages are similar to those noted above.

Deductibility of employer subsidized fees
Please note that childcare expenses are only eligible for the childcare expense deduction to the extent that they have been paid by the taxpayer. If an employer pays a subsidy directly to a centre then the employee may only deduct the amount of the fees they actually pay to the centre. For example, if stated pre-schooler fees are $25/day and because of an employer subsidy an employee only has to pay $15/day then only the $15/day is eligible to be deducted as a childcare expense by the employee. On the other hand, if an employee were to pay the full $25/day to the childcare centre and then be reimbursed $10/day by the employer then the employee would be able to deduct the full $25/day as a childcare expense up to the maximum allowed. Note that in both cases the employee will have to include the $10/day subsidy in taxable income.

Summary
In summary, employees are almost always better off having their employer either fully pay or partly defray the costs of their childcare. A tax deduction to the employee is only available for amounts paid in the year to the childcare provider. Consequently, employees should arrange to be reimbursed personally by the employer for any cost defrayment.

• Registered Charities must file a Charity Information Return (T3010) within six months of their year end. Failure to file a return could result in deregistration. Registered charities do not have to file a corporate tax return.
• Not-for-profit organizations that are not registered charities must file a corporate income tax return (T2) within six months of their year end. There is no late filing fee.
• More importantly, not-for-profit organizations with more than $10,000 in investment income in a year or more than $200,000 in total assets (at the end of the immediately preceding fiscal period) must file a Non-Profit Organization Information Return (T1044(e)). The return must be filed within six months of the year end. Note that failure to file the information return on time will result in a penalty of $25/day to a maximum of $2,500 for each year of failure to file. Given the size of the penalty you should review your financial statements annually to determine whether you are required to file this return.

Annual Provincial Corporate Filing
Currently all incorporated organizations in Ontario, including childcare centres, are required to file an Annual Return and Special Notice to confirm/update their corporate records with the Ontario Ministry of Government Services. For non-for-profit coprporations that are not registered charities, this form is included with your annual T2 corporate inocme tax return. All registered charities will be mailed a form septarately that must be completed and mailed to the Ontario Ministry of Government Services.

For more information visit the the Ontario Ministry of Government Services website at http://www.rev.gov.on.ca/en/bulletins/ct/pdf/4012.pdf.

The letter should include:

• state that you provide childcare services, that the organization is run by a volunteer Board of Directors not remunerated for their time and effort, and that resources are scarce in this time of fiscal restraint.
• request for a waiver of any penalties. Include a copy of the Notice of Assessment from Revenue Canada setting out the amount owing.
• note why the remittance/forms were filed late (generally oversight resulting from over-work).
• explain that large late filing penalties will have a serious negative financial impact on your operation.

You should hear from Revenue Canada within three months and hopefully your appeal will be accepted.

We have attached for your information a summary of the information required on donation receipts and a list of some of the infractions that will give rise to financial penalties. A CRA reference has been provided for each item in case you would like more information.

Canada Revenue Agency Donation Receipt Requirements (effective March 2004)
Cash donations
The following information must be included on every receipt issued for a cash donation:

Gift-in-kind donations
The following information, in addition to that noted above for cash donations, must be included on every receipt issued for a gift-in-kind donation:

Notes on issuing charitable donation receipts:

• Receipts can only be issued for gifts of property. A donation receipt cannot be issued for a gift of services as services are not property. Guideline RC4108
• The fair market value of all non-cash gifts must be determined (IT 297 R2 Para 6). We recommend that a charity obtain an independent appraisal for all gift?in?kind donations in excess of $1,000.
• Charities must retain a paper copy of every receipt issued, or be able to print a copy of the receipt without inputting any new data required on the receipt. Guideline RC4108
• Copies of lost donation receipts must be marked “Cancelled”. All copies of a spoiled donation receipt must be retained by the charity and marked “Cancelled”. Guideline RC4108
• The annual information return (T3010A) must be filed within six months of the year end.

Fines and penalties included in the March 2004 budget and effective January 1, 2005 are as follows:

In the summer of 1997 Revenue Canada clarified their position around issuing donation receipts for events which include an auction. The topic reappeared this summer in the Registered Charities Newsletter (No. 7). As Revenue Canada appears to be focusing more attention on the charitable sector we thought it would be a good time to discuss the rules surrounding fundraising auctions.

Revenue Canada’s rules
Receipts may only be issued for events that Revenue Canada classifies as a “like event”. To the best of our knowledge Revenue Canada has not issued a written definition of a “like event”. Over the phone a Revenue Canada representative informed us that a “like event”:
must happen at a particular moment in time;
must be ticketed; and
usually involves a consumable item such as dinner.
An auction does not qualify as a “like event”. Instead, an auction falls under the same category as a chance to win a prize or draw. As such, registered charities cannot issue donation receipts for admission to auction events.

The problem
Revenue Canada considers a “like event” combined with an auction to no longer be a “like event”. Since all events other than like events are non-receiptable no donation receipt may be issued for any part of the admission charge to the combined event. This presents a problem for organizations staging gala events as many galas combine a dinner with an auction (silent and/or live). The auction often provides a substantial portion of the net fundraising proceeds of the event and is generally essential to the success of the combined event.

To illustrate the problem: consider a formal fundraising dinner for patrons at a hotel ballroom followed by a live auction in the same room. Tickets are $500 per person with an expected donation receipt of $400 per ticket. If the auction portion of the event removes the ability of patrons to receive the $400 donation receipt then selling the tickets will be considerably more difficult.

When does having an auction associated with an event pose a problem?
We understand from Revenue Canada that an auction will jeopardize an organization’s ability to issue a donation receipt only if attendance at the auction is limited to or gives the appearance of being limited to event ticket holders. If your organization issues separate tickets for both the auction and non-auction portions of your event then a donation receipt could be issued for the difference between the ticketed price and the fair market value of the non-auction portion. No receipt may be issued for the auction ticket.

Organizations generally do not separately ticket the auction and non-auction portion of events for good reasons. Patrons are less likely to purchase a separate auction ticket and auctions are often structured as the evening’s entertainment. Continuing with the example used above, a Revenue Canada representative informed us that they would consider attendance at the auction as being available only to dinner ticket holders. In Revenue Canada’s eyes the requirement of formal dress at the event, in addition to the absence of general seating for non-dinner patrons implicitly limits auction attendance to the dinner attendees. Being unable to issue donation receipts at such an event would, at best, be highly embarrassing for the host organization and could, at worst, be financially disastrous.

Linking a silent auction to an event can pose similar problems if only event patrons are able to see and bid on auction items. Revenue Canada advised us that none of an event ticket price would be eligible for a donation receipt if attendance at the silent auction is implicitly limited to event patrons.

Strategies to reduce problems
Auctions are often very lucrative and efficient fundraising events. Provided your organization follows Revenue Canada’s guidelines you can continue to raise funds through auctions without jeopardising the charitable status of your organization. Here are several suggestions:

• Have an auction that is not combined with any other event and do not issue receipts to the participants for admission tickets. This approach is often used for stand-alone art auctions.
• Hold an auction and a “like event”, such as a gala dinner, as separate events with separate tickets issued for each event. A patron could then choose to buy tickets to both events or to either one. A receipt would be issued for part of the purchase price of the dinner tickets even if the auction and dinner were hosted on the same evening and in the same place. You could sell tickets to the auction separately for a nominal sum (e.g. $2). The dinner ticket price would naturally be higher and a receipt could be issued for the appropriate amount (see Vol. II, Issue 6, p.26).
• If you plan to combine a “like event” with a free auction under one ticket then:
  • make it clear that the two are separate events. Consider posting a public sign at the entrance to the event announcing the auction;
  • make it clear that those who paid to attend the dinner will be given no preference at the auction (e.g. in terms of seating);
  • have additional seating for non-dinner guests available at the auction;
  • have separate entrances to the auction and the dinner areas. Make sure security is adequate, as entrance to the event is now effectively open to the non-paying public. Security could be a major concern at a silent auction where the items are often on display for a significant period of time.
  • do not make the auction the primary focus of the event.

If you have any questions about fundraising auctions we strongly urge you to call the Charities Division of Revenue Canada at 1-800-267-2384 or visit them online at http://www.cra-arc.gc.ca/charities.

In this article we will outline how you can determine what your financial cushion is, what is an appropriate level of financial cushion for the organization and, finally, examine some strategies for building, maintaining and, where necessary, reducing your financial cushion.

Determining your financial cushion
For purposes of this article, when we talk about a financial cushion we refer to assets of an organization that are likely to turn into cash within one year, less liabilities of the organization that will have to be paid within one year. This net amount represents the financial cushion that is actually available to the Board of Directors if funds are required for a financial emergency. The concept of financial cushion is often referred to as Net Assets, Accumulated Surplus or Fund Balance in a statement of financial position.

Net assets in the following example are $50,000. This is the amount that assets exceed liabilities. That is not to say that the organization has $50,000 to spend in the event of a financial emergency. You will notice that $40,000 of net assets is made up of capital assets.

These assets could be furniture and equipment, leasehold improvements, or a playground. They are not usually easily convertible into cash in the event of a financial crisis.

In this example, the truly useable financial cushion is the excess of current assets over current liabilities, in this case, $10,000.

An additional wrinkle must be added. Certain assets may have restrictions placed on them by private donors or government funders. Examples are donations given for specific projects such as research and an endowment fund to be held in perpetuity. In this case the true financial cushion available for day-to-day use in an emergency may well be less than the total of current assets over current liabilities. You should review your organization’s financial statements to determine the actual amount of net assets that are unrestricted and available to your organization.

Appropriate levels for a financial cushion
There is a common misconception in the not-for-profit sector that organizations are not allowed to have a financial cushion as they are “not-for-profit”. In this context it is useful to remember that not-for-profit organizations are also “not-for-loss” organizations. An organization cannot sustain losses over the long term without ceasing to operate or going bankrupt. Likewise, it is very challenging to run an organization with next to no financial cushion. Managing funds in this environment becomes very time-consuming and is bound to distract from the organization’s objective of providing service to its community. If you run your car with a close to empty gas tank all the time, you are likely to run out of gas at some point in the year. The same is true if you have too small a financial cushion. At some point you are bound to run out of money.

Having established that a financial cushion is essential, the question becomes, how much should it be? The unwritten guideline in the not-for-profit community in Ontario seems to be that a financial cushion of between one and three month’s expenses is an acceptable range. Organizations in a stable financial environment with secure funding can often function well with a cushion toward the lower end of the range. Organizations operating in an unstable financial environment would be better off operating with a financial cushion toward the upper end or even above that range.

It is important to note that there are relatively few statutory constraints on the level of financial cushion that an organization can maintain. The following is a brief survey of the requirements in legislation applicable to many not-for-profit organizations in Canada:

a) The Ontario Corporations Act and Canada Corporations Act do not specify lower or upper limits of financial cushion that must or can be held by not-for-profit organizations. The level of cushion is left up to the Board of Directors.
b) Canada Revenue Agency (CRA) requires that all registered charities obtain permission from CRA to “accumulate funds”. There is no definition in the Tax Act as to what constitutes an “accumulation” of funds. Past experience would indicate that a cushion of up to six months expenses would probably not contravene CRA’s guidelines. If your organization is a registered charity accumulating significant funds for a major expenditure such as the purchase of a building, you should obtain CRA’s permission to accumulate the funds prior to undertaking the fundraising project.
c) In the child care field, Toronto Children’s Services has an administrative policy whereby accumulation of net assets (this would appear to include capital assets and restricted funds) in excess of three months of operating expenses may result in a reduction in subsidy per diem rates. In our experience, Toronto Children’s Services bends over backwards to avoid reducing per diem rates and always discusses such a situation with a childcare centre before taking action.
d) Provincial funders such as the Ministry of Health and the Ministry of Housing often have policies whereby any excess of approved revenues over expenditures must be returned to the Ministry on completion of either a funding year or a specific project. In this situation, no accumulation of financial cushion for a Ministry-sponsored project is allowed. Financial cushions must be built from other sources of revenue.

Managing the level of your financial cushion
Managing the level of the financial cushion of your organization is an important part of the financial management process. Prior to managing the cushion, the Finance Committee or its equivalent should first determine what the current level of the financial cushion is and then specify what the ideal level of cushion for the organization should be. Determining the ideal level will require you to take into account the current financial environment as it now exists and future expectations. Once the current level of the cushion is known and the desired level estimated, you can then proceed to achieve the desired objective.

Increasing Your Financial Cushion
Planning to increase a financial cushion is not a complicated concept. You have to focus on generating an excess of revenue over expenses over a given period. In theory that’s easy. As many Boards of not-for-profit organizations know, generating a surplus is usually easier said than done.

Generating an excess of revenue over expenses entails increasing revenue and/or decreasing expenses. Grant revenue is often fixed or increases in grant revenue must be matched by identical increases in expenditures. Consequently, many organizations must turn to fundraising for increasing revenue. For many service-based organizations salaries account for the lion’s share of expenses. Expense reduction most commonly translates into reducing staff costs by either increasing program efficiency (i.e. increasing revenue without a concurrent increase in staff costs) or reducing staff compliment.

Finance Committees should be careful not to try to accumulate too large a surplus all at once. The process should be spread out over a number of years to minimize stress on personnel and ensure that the quality of service provided does not decline significantly during the process.

Reducing Your Financial Cushion
Periodically not-for-profit organizations find themselves in the enviable position of having too large a financial cushion. In our experience planned reduction of a financial cushion can be much more divisive to an organization than increasing the cushion. Reducing a cushion involves spending more that your organization takes in over a period of time. People often have strong and differing views on how this should be done, if at all. To reduce internal conflict we recommend that you discuss and approve at the Board level the ideal amount of financial cushion and the time frame over which the organization will operate at an annual excess of expenses over revenues until this target is reached. Many Boards of Directors are highly reluctant to operate an organization at a deficit even though it is a “planned” deficit. Consequently, agreement must be reached at the Board level to avoid misunderstandings when management operates the organization at a loss. In our experience there is no easy way to reduce a financial cushion in the absence of clear, honest and frequent discussions between management and the Board of Directors.

Summary
In summary, not-for-profit organizations should have, as a guideline, a financial cushion of between one and three months of expenses. This cushion should exclude capital assets, related long-term liabilities and funds restricted as to use by donors. It is important for an organization to determine the level of its current financial cushion and set a desirable target. Once the target has been met the organization should plan a course to increase, maintain or decrease the financial cushion as appropriate.

Defining Risk
The Canadian Institute of Chartered Accountants’ publication Learning About Risk: Choices, Connections, and Competencies defines risk as “the possibility that one or more individuals or organizations will experience adverse consequences from an event or circumstance”. This definition is flexible enough to be useful in commercial and not-for-profit organizations alike.

The Board of Directors of a not-for-profit organization is responsible for establishing the objectives for the organization and then making sure that these objectives are met by management. Risk, then, is the possibility that an event or circumstance will cause an organization not to meet the objectives established by the Board of Directors.

The greater the probability that an event or circumstance will result in an organization’s objectives not being met, the greater the risk of the situation. Note that high risk does not relate to the magnitude of the consequence but rather to the probability that the event or circumstance will occur.

Risk suggests a negative or adverse consequence. The opposite of risk is opportunity. Opportunity is the possibility that an organization will benefit from an event or circumstance. Inability to identify and exploit opportunities would be considered a risk where that inability could prevent the organization from reaching its objectives.

The risks an organization must deal with can be internal or external. It is often easier for an organization to manage the internal risks. For example, an organization might identify as a risk the possibility of losing government funding. If poor internal policies such as inefficient program delivery or poor monitoring of results could result in the loss of funding then strengthening internal processes could mitigate this risk. However, an organization may be helpless when faced with a loss of government funding caused by a shift in political thought.

Managing Risk
For most not-for-profit organizations it is the Board’s responsibility to ensure that a framework is in place to manage risk. The four processes involved are:

1. Identifying conditions that must exist for an organization to achieve its objectives
2. Identifying factors that could interfere with these conditions
3. Assessing the probability of these factors occurring (i.e. determining risk)
4. Taking action by either accepting the risks (and perhaps putting in place systems for damage control should the adverse consequences occur) or reducing risk to an appropriate level.

A. Identification of Conditions Needed to Meet Objectives
The first step in the process of risk management is identifying the conditions that must exist for an organization to meet its objectives. We assume for purposes of this article that an organization has already clearly stated its objectives through a strategic planning or other similar process. The conditions that must exist in order for an organization to meet its objectives could include:

• provision of a quality of service to clients consistent with standards established by the Board of Directors
• provision of services that continue to be relevant to clients (i.e. adapting services to meet the changing needs of the organization’s clients)
• continued access to sufficient funding to provide the necessary resources, financial, personnel and otherwise, to meet established objectives
• management of resources including volunteers, cash, other financial assets and networking resources

B. Factors That Could Interfere With Meeting Objectives
Once your organization has determined the conditions that are critical to meeting its objectives, you need to determine the events or circumstances (“factors”) that could interfere with these conditions. Using the four conditions in the previous section, the following factors might be identified.

Factors that could result in failure to provide high quality services:

• Inadequate financial resources, which could limit the organization’s ability to recruit sufficiently experienced and capable staff
• Insufficient monitoring of the quality of service provided (e.g., failure to keep track of outcomes, measure complaints and/or undertake periodic internal evaluations.

Factors that could result in failure to offer services relevant to clients:

• No system in place to regularly monitor clients’ needs
• No system in place to regularly monitor the needs of principal or potential funders

Factors that could result in inadequate sources of funding:

• Lack of attention to the political climate and how it might affect government funding and/or private donations
• Inadequate management and/or volunteer skills with respect to grant writing
• Insufficient attention to the organization’s image and reputation within its fundraising community

Factors that could result in the organization’s failure to manage resources:

• Failure to set efficiency benchmarks (e.g., number of cases handled per caseworker, cost of meals per day per child) and to monitor actual results
• Failure to set annual/monthly budgets and regularly follow-up with a comparison of actual to budgeted results
• Failure to assess the degree of satisfaction experienced by volunteers as a result of their role in the organization
• Ability to obtain resources external to the organization through networking (i.e., ability to get resources at a nominal cost).

C. Assessing the Probability that Adverse Factors Will Occur
So far you have identified your organization’s objectives, the conditions that must exist in order for your organization to achieve its objectives and the factors that could interfere with these conditions. The next step is to assess the likelihood that these factors will occur.

Take as an example the ability of an organization to receive sufficient funds where the majority of funding comes from government sources, which in turn is contingent on the organization’s ability to write grant proposals. If the organization relies on one key staff person with the ability to write grant proposals it would be critical to assess the likelihood of that person leaving. Similarly, if your organization is dependent on a single source for the majority of its funding (e.g. receiving money from the Ministry of Health for provision of a mental health program) then what is the likelihood that the political climate will change and your organization will be faced with cutbacks in funding?

Assign a risk factor of, for example, 0 to 10, to each of the critical factors that could interfere with achievement of an objective (0 representing the least likely factors and 10 the most likely factors). This will help you to determine which risks are most critical to your organization and will prepare you for the fourth step.

D. Taking Action to Mitigate Risks
At this point adverse factors that could prevent an organization from meeting its objectives have been identified and the likelihood that each of these events will occur has been estimated. It is now up to the Board of Directors to determine if it is able to live with the risks or if it must take action to decrease the likelihood of the factors occurring. The decision of whether or not to take action will depend on the cost associated with the action weighed against the likelihood of the adverse factor occurring coupled with the severity of the consequences.

For example, if one of the risks identified is that of an insecure political environment resulting in possible cancellation of an entire grant program, the organization needs to determine whether it wants to spend the resources required to influence the political environment or, instead, to try to diversify its funding sources. In all likelihood an organization would attempt to do the latter as the length of time required to affect a political solution to a funding problem is often too great and the outcome too uncertain.

As another example, if the consequences associated with failing to provide high quality service are considered critical, then the organization may want to develop benchmark performance measures against which quality of service can be compared. Reporting of results to management/the Board of Directors on a regular basis would hopefully flag whether the quality of service offered meets the established criteria or falls short. In this case the cost of developing benchmark performance measures must be weighed against the cost of losing clients and/or related funding from the poor quality of services.

Summary
Risk management by not-for-profit organizations is a part of continuing to be able to provide service to clients over the long term. Establishing a framework whereby your organization clearly:

• articulates its objectives
• identifies the conditions that must exist to achieve those objectives
• identifies adverse factors that could prevent your organization from meeting its objectives
• assesses the likelihood of these adverse factors occurring
• takes action to either accept the risks or implement standards to mitigate the adverse consequences

will go a long way to enabling your organization to efficiently and effectively carry out its mandate.

Safeguarding your cash resources is vital. This is especially important as banking becomes less personal and access to ATMs and Internet transactions increases.

Your organization should implement at least the following policies to safeguard your financial resources:

• keep all blank cheques in a secure and preferably locked place
• never have pre-signed cheques in the office and, if you are a signing officer, never agree to pre-sign a cheque
• keep the signed cancelled cheques that are returned from the bank locked away in a safe place to minimize the opportunity for forging of signatures
• make bank deposits regularly to avoid having significant amounts of cash and cheques in the office
• consider having a deposit only debit card to make ATM deposits easy to do frequently
• keep petty cash safely locked up. If theft of petty cash is a problem consider purchasing a small safe from your local hardware store for about $200.
• maintain petty cash and petty cash receipts on hand at a constant amount (the “imprest basis”). Replenish the petty cash float only on submission of an itemized expense report with all receipts attached. For more on petty cash see December, 1996 [Volume I, Issue 11, p. 55].
• deposit all loose cash received directly in the bank and not in the petty cash box.
• Implement the same controls over authorization of Internet payements as you have over payment by cheque (i.e. have the same signing officers sign approve each Internet transfer prior to payment).

Implementing the above procedures will help minimize the opportunity for theft and the attendant aggravation and upset that goes with it.

Types of Revenue
Revenue in the not-for-profit sector can be divided into two major categories. The first is revenue earned by an organization through the provision of services and the sale of goods. The second is revenue received from contributions for which no direct provision of services or goods is expected.

Earned revenue
Revenue in both the for-profit and not-for-profit sectors is recognized when goods have been delivered or services rendered and when payment for the good or service can be reasonably assumed. Earned revenue can come from sources such as the sale of goods, the provision of services or the use by others of an organization’s resources yielding rent, interest, or royalties.

A membership organization charging its members fees for services rendered would recognize the fee revenue as earned over the membership period. An organization with a June 30 year end charging membership fees on a calendar basis would determine what portion of the services had been rendered by June 30. If payment for a full calendar year of services had been received before June 30 then the portion of fees to be earned between July and December would be deferred to the following year.

Contributions
Contribution revenue is unique to the not-for-profit sector. Contributions are transfers of money and other assets to a not-for-profit organization with no expectation of service being provided directly to the person making the contribution. Contributions can be government grants, donations of cash and other assets, or cancellation of liabilities. It is the timing of recognition of contribution revenue that typically creates confusion.

Methods of contribution revenue recognition
In Canada not-for-profit organizations may use the following two methods to recognize revenue from contributions:

• Deferral method: Under the deferral method, revenue is recognized when expenses directly related to the revenue are incurred.
• Restricted fund method: The restricted fund method is a specialized type of fund accounting whereby funds are segregated by type of donor restriction, typically into restricted, endowment and unrestricted funds. Note that the restricted fund method is not the same as an organization reporting on a program-by-program basis. Rather, the grouping is based on the type of restriction the contributor places on the resources. Under the restricted fund method contribution revenue is generally recognized in the period contributions are received.

Types of contributions
There are three main types of contributions: restricted, endowment and unrestricted. Following is a description of each type of contribution restriction and the difference between for accounting purposes reporting with the deferral and restricted fund methods. The proper classification of donor restrictions is critical to determining how contributions are accounted for. Most restrictions will be explicitly stated by the contributor at the time of giving.

Restricted contributions
A restricted contribution is a contribution that comes with a specific condition or restriction imposed by the donor. The organization must use a restricted contribution for the purpose specified by the donor. For example, a donor may give a contribution specifically for purchase of a capital asset or for use in a specific type of program. Failure to do so would typically result in the funds being refunded to the donor.

Deferral method
Restricted contributions, under the deferral method, are recognized as revenue in the period in which the related expenses are incurred. Contributions for expenses not yet incurred are, therefore, deferred to a later date. For example, donations for capital assets such as computer equipment or a building must be recognized over the same period that the assets are charged to expenses. Consider the case of a contribution to an organization for the purchase of a computer. For accounting purposes computers are often assumed to have a life of three years. The organization would both write-off the computer over a three year period and recognize the contribution as revenue over the same three year period. Similarly, purchase of a building with an expected life of forty years would result in contributions for the purchase of the building being deferred in the year of donation and then recognized over a forty year period.

There is another significant rule under the deferral method. Donations of land and other assets that will not be amortized at any time are never recorded as revenue. They are instead recorded as a direct increase in net assets, similar to an endowment contribution.

Restricted fund method
Restricted contributions are recognized as revenue in the year received. As an example, a donation of a million dollars to a building fund would be recorded as revenue of the building fund in the year received.

Restricted contributions received for which there is no designated fund should be recognized in the general fund under the deferral method. As a result, revenue may be recognized under both the restricted fund and deferral methods in a single set of financial statements. It is crucial that you read the notes to the financial statements to ensure that you fully understand which methods are being used.

Endowment contributions
An endowment is a special type of restricted contribution. Typically, an endowment contribution specifies that resources contributed be maintained permanently by the not-for-profit organization. Interest earned by endowment contributions may usually be used by the organization either for a purpose specified by the donor or for general purposes. A contribution to a scholarship fund is an example of an endowment contribution. Original donations are usually kept in perpetuity and interest earned on donated assets is used to fund the scholarships.

Deferral method
Under the deferral method endowment contributions are reported as direct increases in net assets. As with donations of land, endowment contributions are not recorded as revenue at all under the deferral method. For example, an organization receiving a million dollars for a scholarship endowment would record the million dollars as a direct increase in the net assets (e.g. accumulated surplus) in the year the donation is received.

Restricted fund method
Endowment contributions are recognized as revenue of the endowment fund in the year received. If an individual donates $500,000 to a scholarship endowment fund then, under the restricted fund method, this amount would be recognized as revenue in the year of the donation. This treatment is significantly different than that under the deferral method where the endowment contribution is never recognized as revenue.

Unrestricted contributions
Unrestricted contributions are donations that fit in neither the restricted nor the endowment categories. A typical example of an unrestricted contribution is that of a cash donation made by an individual to an organization for general use.

Deferral method
Under the deferral method unrestricted contributions are recognized as income in the period they are received. An organization with a December 31 year end receiving an unrestricted contribution in December would recognize it as revenue in the year of receipt regardless of whether or not the amount was actually spent by the year end.

Restricted fund method
Unrestricted contributions are recognized as revenue of the general fund in the year received. This is similar treatment to that under the deferral method.

Summary
Revenue from the provision of services and the sale of goods is accounted for by not-for-profit organizations in the same way that it is in the for-profit sector. Contributions made, for which the donor does not expect to directly receive anything in return, may be accounted for under either the deferral or the restricted fund methods by not-for-profit organizations. The timing of recognition of contribution revenue depends on whether there are externally imposed restrictions placed on the contributions. For both the deferral and restricted fund methods, unrestricted contributions must be recognized as revenue in the period received.

Structure of Financial Statements
The annual financial statements of not-for-profit organizations normally include:

• a statement of financial position (sometimes called a balance sheet or a statement of net worth)
• a statement of operations (often called a statement of revenue and expenses)
• a statement of changes in net assets (the term “net assets” is often referred to as accumulated surplus or funds). For many organizations this statement is combined with the statement of operations.
• a statement of cash flows. This is often omitted if information regarding the cash flows for the year is readily obtainable from the other statements.

Audited financial statements include notes to provide additional information about the method of financial statement preparation and about the organization itself. The notes may also include supporting schedules that are cross-referenced to the statements noted above.

The financial statements of seemingly similar organizations may use different titles for the various statements. For example, one organization might have a statement of revenues and expenses while another might have a statement of operations. The purpose of these statements is the same despite the difference in names.

Content of Financial Statements
Financial statements are generally limited to quantitative financial information about transactions and events as opposed to more qualitative statements regarding financial condition and well being. For example, a statement of operations may show an excess of expenses over revenue (i.e. a loss) of $20,000 for the year. The statements will not comment on the future effect that the loss may have on the organization. It is up to the reader to interpret the information.

Financial statements are based on past rather than future transactions and events. Readers often look to historical information contained in financial statements to help predict the future cash flows of an organization. Predictions are, however, not an objective of the statements. Instead, the statements are intended to reflect what has already happened. In the example above, the existence of a loss does not provide sufficient information for a reader to determine if there is a serious cash flow problem or if the loss was an anomaly. The fact that a loss happened should, however, be reason for a reader to question whether a problem might exist in the future.

Financial statements form only a part of the financial reporting of an organization. Other important sources of financial information include annual reports, budgets and funding proposals. Readers wanting more information than that contained in the organization’s financial statements will often be able to obtain it by referring to these other sources.

Objectives of Annual Not-for-Profit Annual Financial Statements
The primary objective of annual financial statements of not-for-profit organizations is to fulfil the information needs of members, contributors (i.e., funders) and creditors regarding the organization’s financial position.

Members, creditors and contributors to not-for-profit organizations are not generally kept informed of daily operations and ongoing finances unless they are members of the board of directors. Members require some form of external communication of the not-for-profit organization’s economic information to determine whether their contributions and fees are being spent as expected. Similarly, a not-for-profit organization’s creditors and funders often need external reports.

Financial statements are used to provide information about:

• what the organization owns and what it owes;
• the changes over the period in what the organization owns and what it owes;
• whether the organization operated at a surplus or a deficit over the period.

Owned or Owing
The statement of financial position (a.k.a. balance sheet or statement of net worth) contains information at a specific date – typically the fiscal year end of the organization – about:

• what the organization owns and what is owing to it (assets);
• what the organization owes (liabilities). This includes amounts owed to others or amounts to be spent on the operations of a future period (e.g. deferred grants).
• the accumulated surplus or deficit from prior years’ operations (net assets/deficit). The difference between the assets and the liabilities is the amount of the net assets/deficit.

The statement provides a measure of the net worth or solvency of the organization. This snapshot of assets, liabilities and accumulated surplus (i.e., net worth) usually includes a comparative snapshot as at the prior year end.

Surplus or Deficit
The statement of operations (a.k.a. statement of revenue and expenses) contains information regarding:

• how much revenue was earned by the organization during the year. This will include both cash received and revenue earned but not yet collected (i.e. amounts receivable).
• the expenses the organization incurred such as those for wages, operating costs, etc.
• the difference between the revenue and expenses, which is the organization’s surplus or deficit for the year.

If the statement of financial position presents a snapshot at the beginning and end of the fiscal year, the statement of operations paints a picture of the year itself.

The statement of operations contains information concerning where revenues come from and how they were spent. The excess (or deficiency) of revenues over expenses is the number that people refer to as the “bottom-line”. This number tells readers whether the organization was able to match its expenses with revenue or if expenses outweighed revenues during the year.

Changes in What is Owned and Owed
The statement of cash flows provides information about how the organization generated and spent its cash during the year. It compliments the first two statements. The statements of financial position and operations provide a snapshot of the financial position of an organization at a specific date and a sense of its economic performance over the period but do not always clearly show why there were changes in assets, liabilities, and net assets. For example, an organization receiving a capital donation to buy a piece of land or a building would not normally reflect that donation as revenue. Instead, it would be shown as an increase in capital assets on the statement of financial position and, typically, shown as a direct increase in net assets. Another example is that of repayment of debt. If an organization pays off a bank loan, that payment is not an expense. It would result in a direct reduction of a liability. In both of these cases the transactions would be disclosed in a statement of cash flows.

Note that for many small operations, the changes in an entity’s assets, liabilities, and net assets can generally be seen from the statement of operations. As a result, many not-for-profit organizations without significant debt, capital assets and deferred grant balances often do not prepare a statement of cash flows.

What Goes into Financial Statements
As discussed above the objective of financial statements is to provide users with an idea of an entity’s financial position, its economic performance over a period and its changes in assets, liabilities, and net assets. We will now take a detailed look at the more common categories that appear in financial statements.

Assets
The first section of assets represents the current assets. Current assets comprise cash and other assets (e.g. short-term investments and accounts receivable) that would usually be converted into cash in the normal course of operations within the year.

Cash
Cash includes petty cash on hand, and cash in bank and credit union accounts. Note that the cash balance is adjusted for:

• cheques written before the year end that are not cashed until after the year end
• cash deposited in the bank after the year end that was received by the organization before the year end.

These two adjustments ensure that the cash balance represents the actual cash on hand and available to the organization at the reporting date.

Short-term investments
Short-term investments include items such as term deposits, guaranteed investment certificates, mutual fund money market holdings, and, in some cases stocks and bonds. It is important to note that, as with all other assets, these investments are recorded at their original cost to the organization. Subsequent gains are not recorded in the accounts. The notes to the statements often disclose market value of the investments. You should read the notes to see if the market value disclosed is greater than or less than the cost amount of the investments recorded in the statements.

If, in the eyes of the organization, an investment has suffered a permanent impairment in value (i.e., has declined in value below the original cost and the value is not expected to recover) then the securities will be written down in the financial statements to the now lower market value. Subsequent increases in market value will not be recognized in the statements.

Accounts receivable
Accounts receivable are amounts owing to the organization at a specific date for services rendered and goods sold. Examples of accounts receivable are amounts owed by parents for child care fees and workshop fees earned by an organization but not received until after the year end. Accounts receivable may also include other items due to the organization such as GST refunds, interest receivable on investments and grants receivable from government organizations for services rendered by the organization prior to the reporting date.

An important question to ask regarding accounts receivable is: “Will the amounts receivable actually be received by the organization?” An implicit assumption in financial statements is that the amounts included in accounts receivable will be recovered by the organization. Amounts on the organization’s books that are not expected to be recovered are often either fully written off or are offset by an allowance for uncollectible debts.

Inventory
Inventory comprises goods and supplies (assets) held by the organization for resale. An implicit assumption in financial statements is that inventory can be sold at an amount at least equal to its cost to the organization. A question to ask regarding inventory is: “Is it saleable in the foreseeable future?” If the answer is no, then the inventory should not be included as an asset in the financial statements.

Capital assets
Capital assets are assets held for a period longer than one year and comprise items such as land, buildings, furniture and other equipment. Capital assets are held for use by the organization in delivery of its services and are not intended for sale in the ordinary course of operations. The financial statements reflect capital assets at their original purchase price. The statements do not attempt to disclose fair market value or disposable value or any type of value other than cost. Consequently, while capital assets may be listed at $20,000, that is not to say that they could be sold for $20,000 or that it would cost $20,000 to replace them. The information disclosed is that the assets originally cost the organization $20,000.

Accumulated amortization
Financial statements disclose not only the cost of capital assets but also an item called accumulated amortization. Assets are usually recorded as an expense over a number of years (e.g. three years or five years). This is the accountant’s way of trying to spread the cost of an asset over its useful life. Accumulated amortization is the accounting term that explains how much of the assets have been recorded as an expense since their purchase. The excess of original cost over accumulated amortization of capital assets is termed “net book value”. The net book value of capital assets represents the remaining value of assets to be written off as an expense in future years.

Note that land is not amortized as the usefulness of land generally does not diminish with time in the same way that, for example, a computer does.
Analysis of assets
When reading a balance sheet we recommend that you focus on the following:

• collectability of accounts receivable (i.e. will amount recorded actually be received);
• the difference between the market value of securities/investments and their recorded cost;
• if inventory on hand is saleable in the foreseeable future;
• whether all significant capital assets of the organization are recorded on the balance sheet
• whether the organization plans to or needs to replace capital assets in the future .

Liabilities
Like assets, liabilities are divided into current and long-term categories. Current liabilities are those which are owed and due to be paid within one business cycle, usually a year, such as accounts payable and accrued liabilities and deferred grant revenue. All other liabilities to be paid over a period longer than a year are classified as long-term liabilities.

Accounts payable and accrued liabilities
Accounts payable and accrued liabilities are obligations that have been incurred by the organization before the year end but have not yet been paid. The following are examples of some of the more common amounts payable:

• unpaid salaries and wages at the year end where the pay date does not fall on the year end date
• vacation pay earned but not taken by employees as at the year end
• goods and services such as utilities, food and professional fees that have been purchased and/or consumed by the year end but have not yet been paid for.

Liabilities are generally recorded at the amount that the organization expects to pay to discharge them. If a potential liability exists but it cannot be valued (e.g., in the case of an outstanding item such as a lawsuit whose outcome is in doubt at the year end) then this situation will often be disclosed in the notes to the financial statements. This is yet another example of why you should always refer to the notes when looking at a set of financial statements.

Deferred grant revenue
Deferred grant revenue represents grants received by an organization before the year end where the related expenses have not yet been incurred. As an example consider an organization that receives a salary grant in advance of the year end for salaries to be incurred the following year. The unspent portion of the grant at the year end would be recorded as deferred grant revenue in the liabilities section of the financial statements.

Loans, mortgages and other debt
This caption represents the amount of debt, such as mortgages and multi-year bank loans, owed by the organization to third parities. Again, reading the notes is very important for understanding the impact the debt will have on the future cash flows of the organization. The notes will generally disclose the loan payment terms, interest rates, and, very importantly, the security pledged by the organization. For example, if an organization pledged its accounts receivable and inventory as collateral for a bank loan then this will be disclosed in the notes to the financial statements.

Analysis of liabilities

• Compare current liabilities with current assets. The organization should have sufficient current assets (the sum of cash, inventory, accounts receivable, etc.) to cover its current liabilities. If it does not then you should question how the organization will pay the amounts owing in the upcoming year.
• Review the terms and conditions of loans and other debt to determine whether any large payments are due in the near future.
• Read the notes to the financial statements to determine whether there are any potential liabilities that could not be quantified as at the year end.

Net Assets
The next major caption in a balance sheet is that of net assets. This caption often appears as accumulated surplus (deficit), net worth, or funds. Regardless of the name, in all cases it represents the excess of the book value of what an organization owns (assets) less the book value of what the organization owes (liabilities).

Net assets are often subdivided based on the nature of the restrictions placed on the net assets by an organization’s donors and funders. There are four common subdivisions of net assets: restricted, designated, invested in capital assets and unrestricted.

Restricted
This caption reflects assets given to the organization on which the funder or donor has placed explicit restrictions. The organization has a duty to use these funds in accordance with the specified purposes or the funds could have to be returned to the contributor. An example would be where donations have been given specifically to fund the purchase of a building. The organization must use the money to buy a building; it could not turn around and spend the money to cover operating or other non-building expenses.

Designated amounts
Designated amounts usually represent amounts the organization has set aside to fulfill a specific function. Designated amounts come to the organization without restrictions on their use but are subsequently designated for a specified use by the Board of Directors. A common example would be where an organization notionally or physically sets aside an amount to purchase a new asset such as a building or to repair or renovate an existing asset such as a playground. Designated amounts could also be set aside for possible costs in the event of wind up of an organization or to provide a cushion in the event of unexpected financial requirements.

It is important to note that, unlike funds with externally imposed restrictions, the requirements to spend designated amounts can be changed by the organization without the funds having to be returned to anyone.

Invested in capital assets
This amount represents the net book value of capital assets in the financial statements less the value of liabilities related to those assets. For example, if an organization had a building with a net book value of $1,000,000 against which there was a $250,000 mortgage then the amount reflected as “invested in capital assets” would be $750,000.

Unrestricted funds
What is left over after restricted, designated and funds invested in capital assets are so called “unrestricted” funds. These are funds that can be used for the general operating purposes of the organization. Note that even though use of the funds is classified as unrestricted they must still be used in accordance with the legal mandate of the organization as set out in its incorporating statutes or similar documents.

The amount of unrestricted funds provides an indication of the solvency of an organization; solvency being the ability of an organization both to fulfil its current obligations and fund its future operations for the foreseeable future. For many not-for-profit organizations the combination of the unrestricted and designated net asset items should typically be within the range of one to three months of operating expenses. This is only a very general guideline. There are circumstances that would warrant a level of unrestricted and designated net assets outside of that range. Circumstances include extreme financial uncertainty (which could justify a level of net assets in excess of the range) or, on the other hand, excellent financial stability (which could justify a smaller than average level of net assets).

Analysis of net assets

• Compare restricted net assets with the level of current assets less current liabilities. Does the organization appear to have sufficient resources to cover these specified spending requirements?
• Review the total of unrestricted and designated surplus amounts. Compare this total with total operating expenses. If the combined surplus is less than a month’s worth of operating expenses or more than three months’ worth of operating expenses then you might question whether the surplus is appropriate.

Revenues
Revenues represent the earnings of an organization during the reporting period. For example, an organization entitled to receive $1,000 in a year for providing services to its community would report the $1,000 as revenue. It is important to note that the revenue would be recorded whether or not the organization actually received the cash. Note that any revenue earned by not received at the reporting date would be included in accounts receivable under current assets in the balance sheet.

Donation revenue
Donation revenue usually comprises donations actually received in the year. Donors do not enter into a contract with the organization when making a donation. The revenue is, therefore, generally only recognized in the reporting period in which the donations are actually received.

Pledges to donate that have not yet been honoured by the donor at the year end are generally not set up in the financial statements. Because the pledge agreement is not a legally enforceable contract the organization has no legal way to enforce collection. You should read the notes to the financial statements to see if the organization has a policy of recognizing as revenue donations pledged but not yet received at the year end.

Grant revenue
Grants, unlike donations, are generally characterized by a legally binding contract between the funder and the organization. Grant revenue comprises funds earned by virtue of the organization carrying out programs specified by the funder in a grant contract. Revenue earned does not necessarily equal cash received from funders during the year. For example, an organization receiving $1,000,000 in cash before the year end for a program that was only three quarters over by the year end would typically record grant revenue of $750,000 in the statement of operations. The remaining $250,000 would be reflected as deferred grant revenue under the liabilities section of the statement of financial position. Consequently, grant revenue, unlike donation revenue, reflects grants “earned” by an organization and not just cash received.

Analysis of revenues

• Review changes in revenue from last year to this year. Management should be able to explain significant changes if the reasons for those changes are not evident from the financial statements themselves.
• Review accounts receivable in conjunction with revenue. A significant increase in accounts receivable might indicate either problems with collectability of revenue or a significant increase in activity toward the end of the fiscal year.

Expenses
Expenses during the year represent costs incurred by the organization to carry out its services. Again, as with revenue, it is important to note that expenses will include amounts for services provided or goods received that have not yet been paid for by the organization at the reporting date. Note that unpaid expenses will be reflected as part of accounts payable and accrued liabilities in the statement of financial position.

Salaries and wages
Salaries and wages are typically the single biggest expenditure item for most not-for-profit service-based organizations. Personnel related expenses should include the amount of any pay equity obligation for the year whether or not the organization has actually paid staff their pay equity entitlement. Organizations should also include the expense of unpaid vacation pay over the period if this is a significant item.

Analysis of expenses

• Compare the change in expenses from last year to this year. Review the notes to see if explanations for significant differences are noted.
• Review the notes to the financial statements to determine whether there are potential expenses that have not been recorded because the amounts were not reasonably determinable at the year end.

Statement of Cash Flows
This brings us to a review of the statement of cash flows. This statement is a very important one for organizations with a significant amount of deferred revenue, long-term debt and capital assets. The statement of cash flows categorizes and summarizes the actual cash receipts and cash disbursements for the year. Unlike the statement of operations, this statement excludes the effect of amounts receivable and amounts payable by the organization at the year end. The statement discloses, among other items, cash spent for purchase of capital assets together with cash spent to retire debt.

Cash transactions occurring in the year are typically divided into two captions:

Cash from operations
This caption includes cash received and cash spent during the year on an organization’s operations. For example, if an organization receives a $1,000,000 grant before year end but only spends $750,000 of it by the year end then the statement of cash flows will reflect the full $1,000,000 grant receivable under the caption cash received from operations. Cash used for operations will show the $750,000 in cash spent.

Financing and investing
This caption includes cash received from and cash paid out for investments in the year such as marketable securities, equipment and land and buildings. These items would not appear in the statement of operations as they result from an exchange of one asset for another (i.e. cash for an investment) and are, therefore, not expenses. The statement also includes cash received from or paid to reduce debt. For example, if an organization paid $250,000 to purchase a building, then the full amount of the $250,000 would appear in the statement of cash flows as a building purchase.

Analysis of statement of cash flows

• Take net cash actually received or spent on operations from the statement of cash flows and compare it with the surplus or deficit for the year as recorded in the statement of operations. The two amounts should be similar unless liabilities or receivables have changed significantly over the year. If the two amounts do not closely correlate then ask why. Understanding a discrepancy is especially important when an organization with a healthy excess of revenue over expenses has received significantly less cash from operations. The discrepancy might indicate cash flow problems that could lead to financial difficulties.

Conclusion
The above is a brief overview of the information portrayed by financial statements with a few tips for questions you might want to ask management. We would be happy to hear if you have ideas and suggestions regarding the review and analysis of financial statements of not-for-profit organizations. We will share ideas and suggestions with our readers wherever possible.

This article provides both an overview of the merger process and a guide to help you merge successfully.

Does a merger make sense for your organization?
As with any major change in direction, your organization and its board of directors should first determine whether a merger is desirable and/or appropriate. Continuing to fulfil your organization’s mission and goals should be a primary consideration in any merger.

Positive outcomes of a merger

• A larger entity is able to spread volunteer hours over a broader base thereby reducing the burden on existing volunteers.
• A larger organization can often reach a broader public than a smaller entity.
• With a strategic merger your organization may be able to offer additional services with a consistent philosophy. For example, a children’s mental health organization might consider merging with a similarly sized not-for-profit childcare operation. The organization would then have regular childcare facilities to offer to clients of the mental health branch and, conversely, families needing ongoing childcare could take advantage of the mental health services. Clients receiving services in one area could expect to receive services with similar standards and philosophy in other areas.
• Merging organizations may reduce administrative costs. The bulk of these cost savings typically result from a reduction in senior personnel (e.g. the elimination of one executive director position and possibly the reduction of one or more senior mangers in non-program areas) as well as a reduction in occupancy costs. In our experience, savings in administrative areas are often significantly less than expected as most organizations have already aggressively cut these costs.
• Maintaining funding can sometimes be dependant on organizations merging. We are aware of several recent instances in Toronto where continued funding was contingent on a group of organizations merging into one. The motivation for the “forced” merger was ostensibly to reduce administrative costs.
• A well chosen merger can often revitalize a waning organization. Organizations sometimes just run out of steam. A merger can bring new creative energy along with financial stability to programs.

Possible negative effects of a merger

• Having dissimilar philosophies at the board and staff levels of prospective merger partners is the most significant barrier to a successful union. Community-based organizations are usually created to fulfill the needs of a very specific public. Finding another community with compatible needs and desires can be difficult. If two entities with incompatible philosophies are forced to merge the result could well be the death of both organizations.
• So-called mergers of entities of dissimilar size, financial wealth or social stature can be more akin to a takeover by the dominant entity. The “weaker” of the two entities may wither and die from disenfranchisement. In this situation it may be better for an entity to wind-up and let its community seek services elsewhere.
• The whole organization can suffer in situations where one arm of a merged organization is not financially viable at the outset. For a merger to be successful, each entity should be solvent in its own right for the foreseeable future.

How to structure a merger
Once organizations have decided they are compatible they need to consider how to best structure the joining. There are at least three distinctly different ways of merging. Each will result in an organization with a distinct and unique flavor. We strongly advise you to get legal advice to determine the responsibilities and liability positions of the boards of directors of each of the merging entities.

Amalgamation:
Two or more not-for-profit organizations can be legally amalgamated into one. In this process the assets, liabilities and all other attributes (both positive and negative) of each of the organizations are melded into one organization, the amalgamated entity. Legally speaking this “new” entity is not new at all. It is the sum of the parts of all the amalgamating entities. The amalgamated entity fully inherits all the pre-amalgamation entities’ duties and obligations in existence prior to the start of the amalgamation. As an example, liabilities for severance pay, in the event that employees are terminated, are not extinguished by an amalgamation. The pay equity obligations of all entities are also fully passed on to the amalgamated entity.

A legal amalgamation is most appropriate when organizations with similar abilities, attributes and risk profiles want to join together. Significant due diligence should be carried out by boards and senior staff of both organizations prior to amalgamation. This process will help the boards of each of the organizations ensure they are not inheriting a closet full of legal liability skeletons.

Transfer of assets:
An alternative to amalgamation is the scenario where one organization is chosen as the successor organization and the other organization(s) sell or transfer all assets to the successor. The other organizations are then formally wound up. Only the assets are generally transferred to the new entity. Major funders should be contacted well in advance to determine whether services and related funding can be transferred from one entity to the other without undue effort.

This form of merger works best in situations where one or more of the entities has significant liabilities and/or future obligations that the merged organization does not want to assume. Make sure you get legal advice as to how best to deal with the liabilities left behind.

Note that a transfer of assets only works where the successor organization is registered as a charity as articles of incorporation clauses often state that not-for-profit organizations can only transfer assets to a registered charity.

A friendly takeover:
A third option is the friendly takeover where the board of directors of the successor organization replaces the board(s) of the other organization(s). All legal entities continue to exist and operate although they would be managed by one board of directors. The associated organizations may be able to share space and combine certain non-program staff costs in order to save money.

This setup is often of biggest advantage in situations where it is either not possible or extremely inconvenient to have program funding contracts transferred from one organization to another. Discussions with funders are, again, critical well in advance of committing your organization to such a “merger”.

Executing the merger
Following is a practical guide to aid in the merger process. The guide must be tailored to your specific situation and, again, getting good legal advice is essential.

Are the organizations compatible?
Organizations planning to merge should first determine the primary objectives for merging. Are the objectives diversification of services, becoming financial solvent, broadening the membership base of the organization etc.? If merging will better accomplish reaching these goals then consider setting up a committee to seek out an acceptable partner and initiate the process.

To facilitate a smooth merger process we recommend that formal joint strategic planning sessions be initiated at both the board and staff levels of all entities to be merged. Consider then holding a joint session at the completion of the two processes for all participants. These meetings will help determine whether a merger will meet the needs and objectives of both entities. We strongly recommend that an individual independent of both organizations facilitate this process to bring to it some objectivity and clarity.

In successful mergers that we have been associated with, these discussions have occurred over a significant period of time, often up to a year or more prior to the joining. The discussions can be intense and serve to test the ability of the entities to get along. It is always better to call off a questionable merger before the deal has been signed than to suffer through a poor partnership, which may lead to a deterioration of services provided by both of the entities. If you can’t get through the betrothal period you will probably face difficulties after the marriage.

Will the new entity be financially viable?
You must determine whether the entity to be created by the merger will be financially viable. You can, however, only evaluate the financial viability after you have determined what services will be offered. As a result, the financial implications of a merger should follow the often more difficult determination of the strategic objectives of the new entity. Regretfully, many organizations often jump to analyzing the finances first.

To analyze the financial implications of a merger we recommend that all of the involved organizations prepare budgets for the upcoming three year period under their existing service models. Using existing models as a base, adjustments can be made to reflect changes in the service model. Typically, staff costs amount to in excess of 70% of budgets for not-for-profit service organizations. Consequently, much of the financial exercise will be to determine the optimal staff complement and estimate salary levels.

To prepare the budgets we suggest you break operations down on a service program by service program basis. Administration and fundraising can be handled as separate program-like departments. For each of the departments estimate direct revenue from known sources (e.g. grants, membership fees, and fundraising campaigns where outcomes can be reasonably estimated). Costs should then be estimated based on the organization’s future service plans. You will end up with an estimated excess (deficiency) of revenue over expenses for each of the departments. Hopefully the combined budget for the amalgamated entity will have a positive cash flow. The following chart illustrates what a completed budget might look like. For illustrative purposes only one service program has been included. Your budget will undoubtedly have many more.

Note that to minimize arbitrary allocations among departments, costs should be directly allocated to departments wherever possible. For example, even though the executive director works on services, albeit indirectly, the whole salary could be allocated to administration for purposes of the internal budget. This will generally result in a less complex and more easily understood internal budget and should make it easier to spot costs that could be shared by organizations planning to merge.

This form of budget will generally not be appropriate for presentation to external funders as it is often both critical and appropriate to include a share of administration in program costs when reporting to outsiders.

Once the individual budgets of all the departments have been prepared, they can then be combined and analyzed to determine whether the combined entities will be solvent and whether savings can be realized.

Administrative steps to execute a merger
Following is a list of steps that should be performed in the execution of a merger. Again, the list must be customized for your specific situation.

Setting up “Lights-Out” Committees
We suggest that for each merger entity you consider setting up a small committee to manage the orderly closing down of operations. After the merger date, each of these committees would be responsible for paying pre-amalgamation bills, collecting receivables and dealing with the administrative tasks and inevitable headaches associated with the closing of any operation. Each of these committees would ideally include the executive director of the pre-amalgamation entity together with its chair and possibly its treasurer.

Cash
All petty cash on hand should be deposited in the bank accounts of the respective entities just prior to the date of the merger. New petty cash funds can be started where needed and these should be funded out of the bank account of the merged entity.
All bank accounts should be reconciled as at the date of the merger. All unusual reconciling items should be identified and followed up as soon as possible.

An estimate should be made of the amount of cash needed for finalization of the pre-merger affairs of each merging organization. This cash, managed by the lights-out committee, should be kept in a bank account specifically for the purpose of settling those obligations. The remaining contents of pre-merger bank accounts should be transferred to the main operating account of the merged entity on the effective date of the merger.

Consider leaving the name of the pre-merger entity on the wind-up account and leaving this account open for a while to make it easier to deposit cheques made out in the “old” name. Late deposits such as GST refunds and other items in the name of the pre-merger entity can more easily be deposited in an account bearing that name.

Investments
Compile a list of all term deposits and other investments held by each of the organizations as at the merger date. Prepare written notification of any name change for the financial institution(s) holding the investments. In cases of amalgamation, Articles of Amalgamation may have to be submitted to each of the institutions together with a revised list of signing officers.

Accounts receivable
Identify all amounts owing to each of the pre-merger organizations just prior to the date of merger. Determine when each amount is expected to be collected and identify those for which collection is doubtful.

File for a GST refund, where applicable, as at the date of amalgamation for each for the pre-merger entities.

Insurance and capital assets
Write to all insurers requesting cancellation of insurance effective as of the merger date. Prepare a list of all capital assets of the new amalgamated entity and forward this to the insurer of the merged entity.

Lease obligations
Prepare a list of all equipment under lease (telephones, photocopiers, vehicles, etc.) for each of the individual entities. The planning committee should review lease terms of all equipment under lease and determine what options for use and/or disposal are available to the organization.

Obtain copies of all premises’ leases. Review your options, preferably with a real estate lawyer.

Accounts payable
On or before the merger date pay all invoices relating to the period up to the date of the merger. Prepare a list for the new entity’s administrator of amounts to be paid for which invoices will not be received by the date of merger. All other amounts should be referred back to the lights-out committee.

A list of all amounts payable as at the date of amalgamation that are in dispute or in the process of being negotiated/settled should also be prepared. This list should be reviewed periodically by the board of the new entity.

Payroll related items for pre-merger entities
There are a number of often difficult merger tasks specifically related to personnel and payroll. Seniority, pay equity and collective bargaining agreements are just a few of the issues that need to be dealt with early on in the process. We strongly advise that all organizations attempting a merger seek the counsel of a lawyer experienced in labour law generally and in the nuances of the not-for-profit sector specifically.

a. General

• Prepare notices of name change of the employer and/or termination for all employees of the pre-merger entities.
• Arrange for all staff and the Receiver General to be paid up to the date of merger. The staff should be paid by their respective pre-merger entities.
• Cancel all but one of the payroll services used effective the date of the merger.
• Transfer all personnel files to the new location.

b. Non-statutory benefits

• Advise all benefit plans of termination of existing coverage effective the date of the merger
• Advise all employees of their change in benefits plan coverage and procedures on or before the merger date.

c. Revenue Canada

• Prepare T4 and T4A supplementaries and summaries for all employees and merging entities from January 1 to the date of merger.
• Prepare the last payroll remittance to Revenue Canada and arrange for it to be received at the appropriate date (e.g. by the 10th or 15th of the month following the last payroll date).
• Cancel the Revenue Canada payroll number for all pre-merger entities but one, effective the date of the merger. Written notification on the back of the payroll remittance form is usually sufficient for Revenue Canada.

d. Ministry of Finance of Ontario

• Prepare the EHT return(s) effective the date of the merger.
• Cancel all EHT number(s) but one effective the date of the merger.

e. Workplace Safety and Insurance Board

• Determine which entities are covered. Arrange for coverage to be transferred to the new entity.
• If coverage is to be cancelled, contact the WSIB in advance to determine the amount of the cancellation penalty.

Post merger payroll tasks
a. General

• Prepare employment contracts for all full and part-time staff effective the date of the merger.
• Establish the pay period (e.g. bi-weekly, semi-monthly etc.).
• Have all employees complete and sign TD(1) forms establishing the amount of tax to be withheld.
• Set up direct deposit accounts for employees, if applicable.
• Set up personnel files.
• Set up all new employees on the payroll service (internal or external).
• If a semi-weekly payroll period is adopted, set the second Friday of January as the first bi-weekly pay day of every year.

b. Non-statutory benefits

• Contract with an insurance carrier to provide benefit coverage effective the date of the merger.

c. Government requirements

• Obtain a business number from Revenue Canada for the merged entity. With an amalgamation Revenue Canada will generally allow the continuation of one of the business numbers provided a copy of the articles of amalgamation are filed with them.
• There is also generally no need to obtain a new Ministry of Finance of Ontario EHT account number. Again, the Ministry will generally allow the continuation of one of the EHT numbers provided a copy of the articles of amalgamation are submitted.
• Set a year end for the amalgamated entity that makes sense for business purposes. Factors to consider include when you would like to hold your annual board of directors elections (i.e. the AGM) and the year end of the organization’s major funders.
• Appoint an auditor for the year end audit.

A cautionary note: Books and records should only be destroyed after you have carefully reviewed the statutory requirements covering your organization. If you have any doubts you should contact the applicable government departments. Please note that the Corporations Act (Ontario) does not specifically address the issue of record retention. In most cases compliance with Revenue Canada’s requirements should suffice.

Revenue Canada requirements
The most comprehensive documentation regarding requirements to keep books and records is maintained by Revenue Canada. These requirements are clearly spelled out in Revenue Canada Taxation Information Circular 78-10R4. A copy of this circular can be obtained from any Revenue Canada office or read on line at http://www.cra-arc.gc.ca/E/pub/tp/ic78-10r4/ic78-10r4-e.html. We urge you to obtain a copy and review it.

Organizations covered by Revenue Canada regulations
The Revenue Canada regulations cover all organizations required to pay or collect taxes, registered charities and registered Canadian amateur athletic associations. Not-for-profit organizations that are not charities, collect no GST and are not employers are also covered as they must maintain records to substantiate their tax exempt status. In short, all not-for-profit organizations are covered.

What records should be kept
Revenue Canada Taxation does not specify precisely what records should be kept. However, the guidelines suggest that at least the following records must be maintained:

• all deposit books together with documentation supporting who the funds were received from and to what they relate
• a record of all cash disbursements, proof of payment such as cancelled cheques and documentation, such as invoices, to substantiate disbursements
• payroll records in sufficient detail to substantiate calculations of amounts withheld from employees and those amounts remitted to Revenue Canada Taxation
• sufficient documentation to substantiate receipts given to individuals and organizations donating money and gifts-in-kind to charitable organizations
• all documentation relating to ten-year-gifts received by charitable organizations and foundations.

If Revenue Canada Taxation audits your organization and determines that inadequate records have been kept then they will, as a minimum, specify what books and records they require you to keep in the future. Note also that the books and records must be kept at your organization’s place of business. It is not acceptable to Revenue Canada to have your organization’s books and records maintained off-site. In situations where a volunteer treasurer or bookkeeper maintains the books off-site, a backup copy must be maintained at the organization’s place of business.

How long records must be kept for Revenue Canada
Revenue Canada divides records into categories which must be kept for:

• the organization’s lifespan plus two years
• six years from the end of the fiscal period to which the records relate
• two years from the end of the calendar year to which the records relate

The lifespan plus two years rule
Revenue Canada specifies that certain financial records must be kept for the duration of the life of your organization plus an additional period not less than two years from the dissolution date. These records include:

• a copy of all Board minutes
• annual audited financial statements
• general ledger
• annual adjusting journal entries
• any significant contracts and agreements entered into documentation and duplicate receipts relating to ten-year-gifts to registered charities. These records must be kept for a period of two years from the earlier of the date the charitable registration is revoked or the organization is dissolved.

For many smaller not-for-profit organizations this information will fit in a cardboard storage box each year. The box should be filed somewhere dry, safe and secure.

Keep for at least six years
Most books and records not covered by the lifespan plus two years rule must be retained for a minimum of six years from the end of the fiscal period to which they relate. This category includes, among other information, bank statements, invoices and payroll records. In 1998, organizations with a December 31st year end can therefore destroy those books and records not covered by the lifespan plus two years rule for the 1991 fiscal year and before.

The rules get a bit more complicated for records supporting deferred grants. Documentation regarding a grant received in 1991 but deferred in the financial statements until 1992 must be maintained until 1999. This is because the retention requirements refer to six years “from the end of the last fiscal year to which the documents relate”. Documents relating to long-term contracts such as mortgages and multi-year funding agreements may, therefore, need to be kept for substantially longer than the traditional six year period.

Under the Employment Insurance Act and Canada Pension Plan, the retention period is defined as six years “from the end of the calendar year to which the books and records relate”. Therefore, in 1998 an organization with a March 31st year end can destroy payroll records not covered by the lifespan plus two years rule for 1991 and prior calendar years.

Keep for at least two years
Duplicate donation receipts issued by a registered Canadian amateur athletic association or a registered charity, other than those relating to ten-year-gifts, need only be held for at least two years from the end of the calendar year in which the donations were made. In 1998, registered charities can therefore destroy duplicate donation receipts from 1995 and prior calendar years.

Early destruction
Books and records can be destroyed at an earlier date with advance written permission from the Minister of Revenue. Your organization must complete a Revenue Canada Taxation form T137, “Request for Destruction of Books and Records”, in order to obtain permission. Please refer to Information Circular 78-10R2 for full details.
Note: All of the above comments on document retention assume that your organization is not about to be wound up or dissolved. Boards of Directors planning a wind-up or dissolution should refer directly to Revenue Canada Information Circular 78-10R2.

Record retention for amalgamated entities
Any organization involved in an amalgamation must ensure that all the amalgamated entities fully comply with Revenue Canada’s record retention requirements. The books and records of all the organizations prior to the amalgamation must be kept according to the appropriate regulations as well as those of the new amalgamated entity. This is because the organizations have not dissolved, they have merely been amalgamated into one legal entity.

Specific record retention requirements of Ontario statutes
We have briefly reviewed the record retention requirements of a number of Ontario statues. It would appear that in most cases adherence to the Revenue Canada Taxation requirements will result in compliance with the regulations of other statutes. Note, however, that this applies primarily for the retention of financial books and records. Retention requirements for other types of documents such as medical records are often quite different. Again, we urge you to review the requirements of the statutes governing your organization. A summary of the retention requirements of the statutes we are most familiar with follows:

Day Nurseries Act (Ontario)
Enrolment documentation and records regarding individual children enrolled in a centre are stipulated in Sections 48 and 49 of the Act. Records must be maintained for at least two years after the discharge of a child. This requirement could result in documents being maintained for longer than the six year period required for financial books and records. For example, you would have to retain enrolment and related records for nine years in the case of a child enrolled at the centre for a seven year period (seven years of enrolment plus a two year post-enrolment period). Practically speaking, we recommend that you maintain enrolment and related records for a period at least two years longer than the longest period for which a child could be enrolled in your program.

Sections 64 through 66 of the Day Nurseries Act specify that financial records are to be maintained by every operator governed by the Act for a period of “at least six years from the time of their making”. Compliance with the Revenue Canada regulations should, therefore, ensure compliance with the Day Nurseries Act requirements for financial documents.

Charitable Institutions Act and Homes for Retarded Persons Act (Ontario)
A written record and file for each resident of a charitable institution or home for retarded persons [sic] must be kept for at least twenty years after the last entry in the record with respect to the resident or, where the resident dies, for a period of at least five years after the death of the resident. [O. Reg. 814/81, S.5.]

Homes for Special Care Act and Nursing Homes Act
Any record relating to a trust account (i.e. details of deposits and withdrawals) must be kept for a period of six years from the date of the making of the record. Again, compliance with the Revenue Canada regulations should ensure compliance with the requirements of the Homes for Special Care Act and the Nursing Homes Act.

Public Hospitals Act
Patient medical records must be kept for a minimum of ten years after which time each facility can determine its own policy.

Retention of insurance policy documentation
It is important to note that insurance claims are covered by the insurance company engaged by your organization at the date the insurable event occurs, not the date at which it is reported. Maintaining a record of your insurance carrier and details of the policy in force for six years may seem sufficient however cases of alleged abuse may not surface until well after the six year period is over. As a result, we recommend that you maintain copies of all of your corporate insurance policies for your organization’s lifespan plus two years along with your minute books, general ledger, financial statements etc.

The Trade-off Between Autonomy and Control
Internal controls must be matched to your organization’s philosophy and operating structure. The first step in designing a set of internal controls is for the board of directors to decide on the degree of control that it wants to exercise over branch operations. A substantial range is possible.

At one end of the spectrum is an autonomous organizational structure where each of the branches functions independently of the main organization or head office. An autonomous structure downloads the costs of controls to the branch operations. In this situation the branches would be able to:

• appoint their own board members
• have control over their own finances including record keeping and the raising and spending of money
• issue their own charitable receipts, if applicable.

At the opposite end of the spectrum is an organizational structure where the head office has complete control over branch operations. In a more controlled structure, organization and administrative costs are transferred from branch locations to the head office. In this situation:

• local branch board appointments are approved by the head office
• all financial transactions are run through the head office
• financial and other critical systems are all administered and controlled by the head office

Reality typically lies somewhere between these two extremes. Financial and other controls in a fairly autonomous branch network tend to vary greatly as they are designed by and for the needs of the individual branches. A potential risk to the organization as a whole is that a problem in a branch resulting from inappropriately designed or maintained systems and controls could result in bad publicity. Bad publicity could seriously taint the rest of the organization.

In a more highly controlled environment, the board of the head office would exercise the degree of control they are comfortable with by setting policies for the branch locations. In addition, the head office would have greater assurance throughout the year that policies are being followed provided, of course, there is regular monitoring. The downside of the more highly controlled system is the significant amount of resources (money and volunteer and staff time) required to design, implement, maintain and report on a system of controls for operations at the various branches.

There is no one correct philosophy. We recommend that your board determine the degree of control it needs to exercise over its branch operations at a strategic planning session. Once this decision has been made then appropriate accounting controls and systems can be implemented.

Following are a number of issues we are frequently asked about by organizations with multi-branch structures.

Issuing Donation Receipts
Controls over the issuing of donation receipts are especially important in multi-branch environments. Board members of the registered entity (often only the head office) are responsible for ensuring that all donation receipts issued under its name meet the criteria set out in the Income Tax Act of Canada. Failure to adhere to these regulations could result in the deregistration of your charity. Organizations granting autonomy to branches, while at the same time offering to issue charitable donation receipts on their behalf under the umbrella name of the organization, must ensure that sufficient controls are in place at the branch level to correctly issue receipts. The following areas must be addressed when designing controls:

• receipts must only be issued for donations received and regulations for in-kind donation receipts must be properly followed
• donation receipts must not be issued for any donations where the identity of the donor is not known (i.e. loose collections)
• an accurate and up-to-date donor database should be maintained to promote efficiency of future fundraising
• all donation receipts issued must be reported to Revenue Canada on the annual Registered Charity Information Return (T3010)
• you should have the ability to track sufficient and accurate information to complete the T3010′s sections on non- charitable expenses, political activities, fundraising, etc.

Monitoring Branch Finances
The board of the head office needs to determine the level at which they will monitor the financial operations of the branches. A combination of the following procedures could be implemented depending on the degree of control that a head office wants to exercise:

• establish mandatory budgeting, accounting and reporting standards for all branches. A written policy manual is essential.
• require periodic reporting of financial results and budgets to the main branch (monthly, quarterly or annually)
• require detailed head office review of periodic branch financial submissions for accuracy, timeliness and compliance with head office policies
• establish head office policy of visits to branch operations by board and/or staff members to review head office expectations, branch results to date and to provide suggestions for changes and/or improvements.

Control Over Cash Disbursements
Head offices wanting to exercise significant control over branches will accept responsibility for and administer cash disbursements for the branches. In this situation all branch financial transactions would be conducted through the head office bank account and the head office would be responsible for authorizing all disbursements (i.e. signing the cheques). Alternatively, head offices not needing to exercise the same level of control could consider allowing branches to set up their own bank accounts and authorize their own disbursements. Doing so entails appointing branch personnel (staff or branch board members) as signing officers of the organization. The head office board should consider obtaining legal advice to determine its legal liability in this case.

Summary
Determining the degree of control to be exercised over a multi-branch operation requires a board to have a firm grasp on its strategic plan of operations. Only once this plan is known can the appropriate controls be implemented. We strongly recommend that you consult legal counsel to ensure that the liability position of your organization, head office and local branch boards is well understood.

Different rules and regulations for reporting on funds spent apply for the various levels of government. These rules range from the very detailed annual reports required by the Ministry of Community and Social Services (the Annual Program Reconciliation Reports) to no financial reporting requirements at all (many of the municipal grants). You need an internal grant monitoring system that will work for a wide variety of grants.

We recommend that for each grant program you prepare a summary including:

• The fiscal period covered by the grant.
• Expected amounts to be received and the date these payments are to be received.
• Reporting requirements at the end of the grant program and the date the reports are due.
• Situations that will result in repayment of grant monies.

The grant summaries should be reviewed periodically throughout the year. A month or so before the end of each grant program you should take necessary steps to ensure all money that should be spent has been spent. Action before the expiry date of a grant program is essential.

Allocation of administrative expenses
Organizations with a multitude of funding sources should appropriately allocate administrative (i.e. non-specific) expenses across their various grant programs. Expenses such as the Executive Director’s salary, telephone and bookkeeping are all necessary for your organization to function. Consequently, you are justified in allocating a portion of these costs to your program unless doing so is expressly prohibited by grant regulations. Remember that all allocations are arbitrary. There is no correct amount or percentage to allocate. Consequently, make an allocation that is both reasonable in the circumstances and results in the desired result in your organization’s funding reports.

Following are some planning ideas to help you manage grants received from some of the more common funding sources. We would appreciate hearing your experiences with grant programs not listed as well as additional suggestions for programs discussed below. We will share suggestions and tips with our readers.

Municipal government salary grants
Direct Operating And Wage Enhancement Grants
Salary grants for childcare workers are issued on an April to March basis. By May of each year all organizations must complete a Grant Utilization Form (“GUF”). On that form organizations must list amounts received and amounts paid out. Any unspent funds will be deducted by the Ministry commencing in the fourth quarter (i.e. January to March) of the following calendar year.

Many childcare organizations pay out less grant money than they receive as a result of temporary reductions in the size of their childcare programs. To minimize these shortfalls consider the following:

• Ensure you have at least 10% of the grant allocated to statutory benefits and administrative costs. We are aware of some cases where the Ministry allows 15% on an annual basis.
• Consider giving existing staff a one-time bonus to use undistributed amounts resulting from temporary staff reductions. Note that salary grants, exclusive of pay equity, to any one staff person cannot exceed approximately $9,000 per year.
• Starting in 1997, the Ministry is allowing centres to allocate undistributed amounts resulting from temporary staff reductions as “non-mandatory” benefits. Amounts on the non-mandatory benefit line in the GUF cannot exceed actual non-mandatory benefits paid (e.g. payments for the medical, dental and RRSP plans). Please note that claiming an amount on this line could have repercussions for preparation of your Metro Children’s Services budget.

Ontario Ministry of Children and Youth Services and Ministry of Community and Children’s Services
Grants Requiring An Annual Program Expenditure Report
Many programs funded by the Ministry of Children and Youth Services require a Transfer Payment Annual Reconciliation (“TPAR”) to be filed and in some cases audited. The report must generally be filed no later fourth months after your organization’s year end. The TPAR essentially requires listing of grant money received and related expenditures made during the funding period. The funding period generally follows an April to March fiscal year. Be careful not to factor in inadmissible expenses when calculating allowable expenses paid under Ministry grants. Inadmissible expenses include, among other things:

• Vacation pay accruals
• Accruals for retroactive collective bargaining provisions
• Amortization and other non-cash expenses

See the technical notes attached to the TPAR for details.

We strongly recommend that all organizations required to file an APER carefully review actual receipts and disbursements related to their grants in February of each year. Relevant program expenditures should then be made in March if there are unspent funds available.

The Ministry is currently requiring a refund of any surplus on a dollar-for-dollar basis. The Ministry’s request for repayment of unspent amounts is delayed until the TPARs are analysed. Currently Ministry analysis is running up ot a full year after submission of the reports. This delay in the timing can have very unfortunate repercussions, especially where organizations have fallen on lean times making repayment of past surpluses in the current year difficult or next to impossible.

Ministry of Housing
Ministry of Housing reporting requirements and forms are complex. The fiscal period is generally April to March. Amounts under spent are currently recovered by the Ministry on a dollar-for-dollar basis. In addition, if under-expenditures are thought to result from a permanent downsizing in a project then the Ministry will permanently reduce ongoing funding.

Advanced planning in February of each year is essential to ensure that actual expenditures are at least as great or greater than planned.

Ministry of Health
Program funding for non-institutional care generally requires completion of a reporting form similar to the TPAR (see above) on an annual basis. The funding year is also generally April through March. Expenditures reported must correspond with those reported in the audited financial statements except for inadmissible expenses, which include reserves for items ordered but not yet received, vacation pay accruals, amortization and other non-cash expenses. Organizations should ensure the appropriate HST percentages are included in the expense accounts as reimbursement rates vary.

For many years organizations were not permitted to move expenditures between lines. For example, overspending in salaries was not permitted to be offset by under spending in the office and administration category. Recoveries were a regular occurrence. The Ministry appears to have relaxed their requirements and is now more focused on the excess or deficiency of expenses over revenues for the entire program. Recoveries of any total excess of revenues over expenses are generally required on a dollar-for-dollar basis. Any deficit, of course, must be covered by the organization.

Toronto Children’s Services
Most childcare centres are familiar with the circumstances that will result in a reduction in per diem rates or a recovery of amounts previously received. Unlike the province, Toronto ‘s fiscal period is based on the calendar year. Following is a brief summary of events that could lead to a recovery or reduction in amounts received:

• Centres reporting expenditures less than 90% of those budgeted will automatically trigger a complete retroactive reworking of their annual budget by Toronto Children’s Services. Toronto will recalculate per diem rates using actual expenditures and, as importantly, actual enrolment levels. If the revised per diem rate based on actual expenditures and enrolment is lower than that actually paid, the excess will be clawed back.
• If your organization’s accumulated surplus exceeds three months of operating expenses then a recalculation of per diem subsidy rates will be done and could result in a recovery. In our experience Toronto bends over backwards to avoid a recovery in these circumstances. Centres are able to carry forward a surplus to the following year if a loss was subsequently incurred. In addition, in some cases recoveries can be forestalled where a centre provides Toronto with a plan for spending the excess.
• In certain circumstances a reduction in fees charged by a centre to its full-fee paying parents can result in a claw back by Toronto Children’s Services even if subsidized rates are well below the full fee rates. Be sure to review any planned fee reductions with your Toronto consultant prior to implementation.

• All information must be relevant.
• Financial information must be understandable.
• The information presented must be reliable.
• Financial information must be timely to be useful.

Reported information must be relevant
The Finance Committee and/or Board of Directors should determine what financial information they require to monitor the organization=s financial progress. Information should include a summary of results of operations (revenues received and expenses incurred), financial position (assets and liabilities) and key statistical data such as present and expected enrolment to help the Board determine the financial outlook for the future. Specifically, monthly financial reports should at a minimum include totals for:

• Revenue from fees, grants and other sources.
• Salary and benefits expenses.
• Food costs, if significant.
• Other expense information as the Board considers necessary.
• A summary of significant assets at the end of the month including cash, accounts receivable, accounts payable (outstanding invoices) and grants not yet paid out.
• For childcare centres, enrolment statistics by age-group and/or room.

The above information should give you an idea of the organization’s current financial status and progress since the last Board meeting.
A comparison of actual with budgeted results is also very useful. Actual-to-budget comparisons will enable the Board to determine whether approved financial policies are being followed (Is the centre operating at a break-even level as directed by the Board?) and whether corrective action needs to be taken. The actual-to-budget analysis is most useful when accompanied by a brief narrative explaining significant variations.

Some Boards require monthly as well as year-to-date information for actual and budgeted revenues and expenses. The amount of detail reported is, of course, up to the Board of Directors.

Following is an example of a two page monthly report to a Board:

Other financial information such as uncollected parent fees and enrolment statistics should be reported in a format agreed upon by the Board of Directors.

Reported information must be understandable
Your monthly financial reports should neither be so summarized as to be superficial nor so detailed and voluminous as to be unintelligible. The ideal amount of information reported to the Board will be a function of the culture of the Board members together with the level of their involvement. Some Boards require reams of detail while other Boards prefer a simple one page summary assuming that all of the details have been taken care of by the staff. The ideal amount of information reported usually lies somewhere between these two extremes.

One strategy to determine the appropriate amount of information is to start with a fairly summarized report (e.g. the two page variety presented here) and then add information as requested by Board members. For example, if your Board wants details of advertising and professional development expenses reported each month then expand your initial summarized version of the report to include these amounts. If your Board requests a copy of the monthly bank reconciliation then attach that to the statement of financial position presented. You might want to revisit the content of monthly financial reports with each newly appointed Board of Directors.

Reported information must be reliable
Financial reports to Boards of Directors are only useful if the information is reliable. You do not have to have a monthly audit to achieve reliability. It is generally sufficient that the bank be reconciled to the accounting records each month and that the reconciliation be reviewed periodically by the Treasurer or another member of the Finance Committee. The Finance Committee or the Treasurer might also periodically (once or twice a year) make sure that amounts reported actually agree with those in the financial records.

While a bank reconciliation will help ensure that all cash transactions are reported, it will not guarantee that all transactions have been classified properly. For example, an invoice for play supplies for $2,571 may be inadvertently misclassified as a food expense. Significant misclassification errors should, however, be detected by a comparison of actual to budgeted amounts. If, in the above example, the monthly food budget was $2,500, the misclassification would result in the monthly food expense being twice that budgeted. Hopefully the Board would question this variance at the monthly meeting.

In summary, to help ensure that data reported is reliable you should:

• On a monthly basis reconcile all bank account balances with those reported to the Board of Directors.
• Compare actual to budgeted amounts and explain variations. This procedure will help determine whether significant expense or revenue transactions have been misclassified.
• Periodically (twice a year) compare amounts reported to the Board with those in the underlying accounting records.

Reported information must be timely
Reporting the results of operations and financial position on time is essential if corrective action is to be taken by the Board. For example, if you report September activity in January it may be too late to adjust salary expenses and/or fees to avert a pending financial crisis resulting from a drop in enrolment. Timely financial reports are essential!

Reporting financial information more than two months in arrears should raise warning flags for the Finance Committee and/or Board of Directors. Steps should be taken immediately to make sure that financial information reported is no more than one month old.

In this issue we will lay out a financial management framework enabling you to use the skills you already have to adapt quickly to changing financial circumstances. For more detailed information on specific skills please refer to articles in prior issues.

Summary of the framework
Dealing effectively with change requires that your organization:

• Clearly understand its operating objectives and distinguish between core programs and discretionary programs.
• Develop both an annual budget of financial resources and a twelve month cash flow forecast that clearly maps out how the organization expects to finance its objectives.
• Set up a reporting system capable of providing your Board with relevant, understandable, and reliable information on a timely basis.
• Regularly compare actual with budgeted financial and operational results. Have volunteers and staff capable of dealing quickly.
• and effectively when change is needed.
• Establish effective internal controls to safeguard your organization’s resources and ensure resources on hand are used efficiently in delivery of service.

Set performance benchmarks
Your organization most likely already has a budgeting system, good internal reporting and a mechanism to follow-up progress throughout the year. How does uncertainty affect this process? It is critical that you are able to determine when your organization needs to take rapid financial action in response to changes. Specifically, you need to set performance benchmarks to know just when to kick into high gear and react to the changes. For example:

• A childcare centre might set its benchmarks based on various enrolment patterns. If enrolment drops below a specific number of children in a room (for example, below 14 preschoolers in a room with a capacity for 16) then that might trigger a marketing campaign to increase enrolment and/or a review of the staffing model to see if costs can be reduced to match the drop in revenue.
• A drop in occupancy rates at a women’s shelter might trigger a review to see if greater intake efficiencies could be realized.
• Cash and investments dropping below a certain predetermined amount might trigger a review of the budget for the upcoming six months to see if a serious cash problem could occur.
• Reduction of a single source of revenue might trigger a review of expenses to ensure that costs can be met for the foreseeable future.

Your Finance Committee/Board of Directors must clearly articulate a set of financial and service benchmarks that can be monitored fairly easily and on a regular basis. Failure to achieve these benchmarks should result in a review to see if corrective action is needed. This is when you can use the financial processes you already have to bring about needed change.

Revisit organization objectives
Your organization should have an agreed upon set of objectives.

A clear set of objectives or priorities will help your organization focus on what needs to be changed in order to meet key financial benchmarks. Make sure that in setting these objectives you differentiate between core and discretionary services. As an example, consider an organization that runs a full-time childcare centre, a summer camp, a nursery school and a parent drop-in centre. If the full-time childcare centre is deemed to be the essential service then it will be allocated funds first if funding sources diminish.

Setting corporate objectives is best done through a formal process. All Board members, senior staff and possibly general members and the community at large should participate in the process. The outcomes should be well documented and communicated to all members.

Develop a plan to meet the objectives
Your organization already has an annual financial budget and may also prepare a monthly cash flow forecast for the upcoming year. If financial benchmarks are not met your organization must quickly revisit its budgets.

The revised budget should focus on ensuring that core services can continue to be provided. Surplus financial resources, when available, can be allocated to non-essential programs. When preparing the budget concentrate on ensuring that:

• core programs have sufficient financial resources to function throughout the year.
• financial resources are allocated to non-essential programs only after core program resources are secured.

The revised annual budget should be approved by the Board of Directors. Use the approved annual budget to help you prepare an updated monthly cash forecast for the upcoming year. Compare the monthly forecast with actual results throughout the year. Review again the revised monthly cash forecast if the organization continues to fall short of set financial benchmarks.

Budgets should be dynamic and should be seen by the Board of Directors as one of the most critical elements of financial management used by the organization.

For specific guidance on budgeting see The Art of Budgeting. For comments on what constitutes an appropriate level of surplus/net worth see Managing Your Financial Cushion.

Monitor the results of your plan
Clearly stating your organization’s objectives and establishing and approving a revised budget will help you know where you are going and help you react to change. Your organization also needs clear information as to where it stands financially so it can determine whether it is on track or further adjustments need to be made. Monthly financial reports should continue to be prepared for your Board of Directors for this purpose. The information reported must be:

• relevant to running the organization.
• sufficiently summarized to be readily understood by Board members. Information must also be comprehensive enough to provide Board members with sufficient information to make decisions.
• accurate and correctly reported. The underlying books and records must be accurate and sufficiently well organized to permit reliable financial reporting.
• reported within reasonable time frames (e.g. within three weeks of month end).

Financial reporting to the Board should be done at least monthly if your organization is in a state of financial flux. You can get by with less frequent financial reports only if your organization is blessed with financial stability and if that stability is unlikely to change in the near future.

For a detailed review of aspects of monthly financial reporting to your Board of Directors see Monthly Financial Reporting to Your Board.

Evaluate results and revise your plan
Each month compare actual results with those estimated. Doing the comparison is easy. Acting on the information is more difficult. Your Board must have the will to adapt quickly to changes in revenue and expense patterns. Specifically, if revenue is less than expected then your organization must determine whether:

• to operate at a deficit (assuming the financial cushion is sufficient to permit this).
• additional sources of funding should be sought, and/or
• service levels must be reduced.

To deal with change quickly and efficiently your Board needs the best resources available. Specifically, you need to recruit capable and understanding Board members with the ability to make difficult decisions and implement change. We recommend that your organization set up a Finance Committee and appoint to that Committee capable Board members and outsiders if necessary (see Finance Committees).

Change staffing models with caution
In most not-for-profit service organizations staff salaries and benefits account for between 75 and 85 percent of expenses. In times of funding reductions controlling staffing costs is the most effective way to meet financial objectives.

Reducing salary and benefit costs is a complex process that must be properly handled. We strongly recommend that you either recruit a labour lawyer to your Board or, if that is not possible, consult a labour lawyer before making any significant changes to existing staffing models. Failure to do so before laying off staff or reducing their hours or salaries can result in significant unexpected monetary settlements with staff, bad staff morale and use of significant and unproductive amounts of volunteer and paid staff time.

Controlling your organization’s financial assets
It is important that your Board/Finance Committee devise a set of financial controls to ensure that the organization’s financial resources are used only as intended.
Internal financial controls should be applied in the context of the culture of your organization. The Board of Directors sets the tone of internal control at an organization. Consequently, if your organization wants to maintain a set of internal controls for effective financial management then the Board must be prepared to follow up on a regular basis to ensure that the policies and procedures are being followed. Strong support at the Board level for appropriate controls generally results in effective financial management.

For a detailed summary of internal financial controls see, click here.

Given that your incorporated not-for-profit organization must have an annual audit you might as well ensure that it is as productive a process as possible. Following are a few suggestions to help.

Have the audit completed soon after year end
The auditor is presenting an opinion as to whether the financial statements of your organization represent fairly its financial position and changes in financial position for the year. It is generally helpful to get that opinion sooner rather than later. To ensure the audit is done on a timely basis call your auditor in advance of your year end and coordinate his/her efforts with those of the person responsible for your organization’s bookkeeping. Generally there should be no problems completing an audit within three months of the year end assuming that the books and records are ready for audit within six weeks of the year end. If the books and records are not ready within six weeks it may indicate an underlying problem in the organization with respect to timely financial reporting.

Request the same people each year
Maintaining continuity of audit personnel on the audit for at least two or three years in a row will reduce the amount of time required to explain to the auditors the unique characteristics of your organization and industry. Also, having the same person for several years gives you an opportunity to develop an ongoing relationship so that you can draw on their financial expertise throughout the year as the need arises.

Find an auditor who knows your industry
It is always helpful for your auditor to be familiar with your major funders and their reporting requirements. Auditors who are thoroughly knowledgeable about the characteristics of your industry will generally be in a better position to advise you on matters relevant to your organization such as how to maximize your revenue and use your financial resources as effectively as possible.

Accumulate a list of financial questions throughout the year and discuss your concerns with your auditor during the audit. This need not take long and could provide you with some valuable financial advice. Alternatively, call periodically throughout the year to resolve financial issues prior to year end.

Have the audit done at your premises wherever possible
Performing the audit at your organization will allow you to answer the auditor’s questions as they arise. This will avoid the annoying and all too frequent games of telephone tag that can occur during the audit process. Having the audit performed on site also reduces the inevitable hassles of sending additional information to and from the auditor’s office. It eliminates the inconvenience of being without your books and records for an extended period of time and also greatly reduces the risk of losing documents.

Discuss fees in advance
Attempt to obtain a firm fee quote and ask that any additional work that could possibly result in a fee increase be approved by you in advance of the work being performed. This will give you an opportunity to control the audit fees and to deal with problems in a cost effective manner (e.g. have the additional work performed by a bookkeeper as opposed to a chartered accountant).

To help reduce audit fees consider asking your auditor for a list of information that he/she requires from you prior to the audit being conducted. If necessary, request a planning meeting to ensure you understand their requirements. The information can then be prepared by you in advance of the year end audit visit.

Expect quality service
Finally, if you are unhappy with the relationship with your auditor and feel your organization is not being serviced appropriately then speak to your auditor. If you feel your needs are still not being met consider changing auditors. Select an auditor who you believe will provide superior service, has substantial knowledge of your organization’s specific field and with whom you think you can develop a productive working relationship.

Your Board of Directors is ultimately responsible for ensuring that resources are used appropriately. The major issue is the control of cash as it can most easily be used inappropriately. Play supplies and food are generally not as much of a concern. For example, used building blocks have a limited use outside of a childcare setting. A monthly review of play supplies and food purchases will generally highlight significant changes in use patterns that can be followed up. Cash, on the other hand, can be used to buy anything and misuse is often difficult to detect.

Make Sure All Cash Received is Recorded
It is critical that at all times you know who has and who has not paid user fees. This applies equally to parent and government payments. Most fees are paid by cheque. Making sure all cheques are deposited and recorded generally is not difficult. We suggest the following:

• Cheques received by staff from parents should immediately be given to the Supervisor. The Supervisor should also open the mail.
• The Supervisor should enter cheque amounts in the deposit book noting the amount of the cheque, the parent/child’s name and the period the deposit relates to.
• Details of non-parent related deposits should also be entered in the deposit book including the period a payment applies to and the funding/subsidy program (e.g. subsidy receipts, GST refunds).
• Deposits should be made at least weekly.
• Controlling cash payments received is trickier. To help make sure that all cash received is deposited and can be traced back to the person paying we recommend:
• Parents should be directed to pay cash directly to one and only one person – generally the Supervisor. Cash payments should only be accepted by this person.
• Parents should receive a receipt for all cash payments at the time of payment. Consider having the parent initial the receipt when issued to prevent misunderstandings as to actual amounts paid and accepted.
• All cash received should be deposited directly into the bank account with the regular weekly deposit. A photocopy of parent receipts issued should be attached to the duplicate deposit book sheet. This will provide a trail from the payee to the deposit.
• No cash received should ever be put directly in the petty cash box. Cash not deposited directly into the bank account is almost impossible to trace.

We are often asked whether organizations should photocopy cheques and cash received. Generally, keeping photocopies of cheques does not help ensure that all amounts received are deposited. If questions come up you can always ask the payee for a copy of the cancelled cheque to provide proof of deposit. Photocopying cash itself is considered counterfeiting and is illegal in Canada. It also does not help you determine who paid the money.

Make sure all cash spent is for approved purposes
It is important to make sure that only approved purchases are made and that amounts paid are reasonable. Discounts should be taken whenever available. Purchases are generally made by cheque, with petty cash or by credit card. To help make sure that only approved payments are made for appropriate amounts we suggest:

Payments by cheque
You should authorize purchases before ordering the goods. If you wait until the goods are delivered it is too late as the organization is already committed to the purchase. All non-routine expenditures in excess of a set amount (e.g. $1,000) should be authorized by the Board of Directors. A Board might consider giving the Supervisor permission to authorize purchases less than the threshold amount provided the purchases are within the organization’s budget.

We strongly urge not-for-profit organizations to have all cheques signed by at least two signing officers. At least one of the signatories should be a Board member. The person preparing the cheques for signature should include an invoice approved for payment by the Supervisor. Note the cheque number, the word “paid” and the date on the invoice.

Registered charities must have two signatures on each cheque as Revenue Canada deems the ability to sign cheques with only one signature as making resources available for personal use and is grounds for de-registration.

Do not make payments from supplier statements. If you always insist on invoices for support of payments then you will greatly reduce the chance of paying amounts twice.

As a general rule cheques should never be pre-signed by a signing officer. Pre-signing effectively eliminates the need for two people to review supporting documentation. If you permit pre-signing you might as well have only one signatory. It is worth the inconvenience of having to arrange for two signatures to prevent the potentially devastating effects of misuse of a pre-signed cheque.

If a cheque must be pre-signed, generally only in situations where the amount to be paid will not be known until it is time to pay (e.g. when paying for a food purchase at the store by cheque), then consider the following:

• The cheque should be made out to a specified payee prior to it being pre-signed.
• The inscription “Not to exceed $xxx” should be written below the space for the amount of the payment.
• The cheque to be pre-signed should be accompanied by a supplier purchase order or a note from the Supervisor indicating precisely what the cheque is for and why it must be pre-signed.
• The file of unpaid invoices should be reviewed at least monthly by the Treasurer. Invoices unpaid for more than a month should be followed up to determine whether there was a problem with either authorization of the expenditure or quality of the goods and/or services received.

Payments by cash
Cash payments (i.e. petty cash expenses) are often the most difficult to control. Thankfully petty cash expenses generally do not exceed $300 a month at most organizations. To help make sure petty cash payments are only for authorized expenditures we recommend the following:

• A petty cash float should be maintained on an imprest basis. An imprest basis is one where the total of the cash on hand and receipts at any point in time equals a preset amount (e.g. $300).
• The petty cash float should only be replenished by cheque on submission of an itemized expense report with all receipts attached.
• Under no circumstances should cash received from other sources (e.g. parents paying fees with cash) be put directly in the petty cash box. If this is done then the sum of expenses and receipts will not equal the preset amount.
• The Treasurer should review the petty cash box once or twice a year to ensure the sum of invoices and cash on hand equal the preset amount. Minor differences should be corrected in the next reimbursement cheque. Major differences should be followed up immediately.
• Keep petty cash in a locked box tucked away in a safe drawer. Leaving cash in the open invites problems and inappropriate temptation.
• Where security is a problem consider buying an inexpensive safe for the petty cash. A small safe from your local hardware store costs about $200.
• Consider reimbursing unreceipted expenses only with approval from a Board member. A note should be included indicating what the purchase was for, why the receipt was lost or not obtained, and signed by the person being reimbursed.

Credit card purchases
Some organizations use credit cards for purchases. The primary problem with credit cards used by not-for-profit organizations is not payment of outstanding balances but authorization of transactions. It is important that authorization procedures remain well controlled. To help reduce unauthorized purchases we recommend:

• Have very specific policies for what can be purchased with a credit card.
• Require that all staff credit card purchases be pre-authorized by a Board member.
• Have low credit limits on all cards to prevent problems in the event a card is lost or misused ($500 or less may be appropriate).
• A copy of every credit card receipt together with the actual invoice and a note authorizing the purchase should accompany the monthly credit card statement when preparing the monthly payment.
• Cancel credit cards that are not essential.

Review of cash transactions
The above procedures all deal with individual transactions. An overall review of receipts and payments for the month is also critical as it can help you identify unusual trends and irregularities. At a minimum the following monthly review procedure should be carried out:

• All bank accounts should be reconciled monthly to the accounting records. The bank reconciliation should be reviewed periodically by someone other than the person doing the reconciliation (at least twice a year).
• As a minimum the cash balance at the most recent month end together with a statement of cash received and disbursed since the previous report should be presented at each Board meeting.

If a statement of cash receipts and disbursements is presented to the Board and the cash balance at the end of the month is correctly reconciled then misclassification in the statements is the worst that can happen. Significant misclassifications will hopefully be spotted on review of the monthly statements.

This article presents a framework for preparation of your budget, several time saving tips and a few tricks of the trade.

What to budget
Before preparing a budget you have to know your organization’s objective. Remember that your budget is meant to provide a road map of where your organization is going. Your Board provides the objective and your job is to plot a route there.

Assuming that ongoing solvency is the objective you would budget revenues and expenses for the year. Depending on the size of your financial cushion and the direction the Board wishes to take you could plan to break-even, generate a surplus or operate at a deficit. To permit your Board to monitor levels of cash in more detail throughout the year you could prepare a budget of monthly cash flow. The objectives of budgeting revenue and expenses and budgeting monthly cash flow are different. This newsletter examines techniques for preparing each of these types of budgets.

What period/cycle to use
The period covered by your budget depends on your circumstances. If you have a ten month program from September to June then it would make sense to prepare a budget for the ten month period. If, on the other hand, you have a year-round program with little change in enrolment you should consider preparing a budget from January to December.

Should you estimate revenues or expenses first? It really doesn’t matter. Estimate one then the other and if your objectives are not met then estimates for one or both will have to be adjusted.

Annual revenue and expenses budgeting
The primary objective of an annual budget of revenue and expenses is to provide your Board with the information required to operate the centre using resources as efficiently as possible. First, your Board should determine on an annual basis whether you want to:

• run at a break-even level for the year (assuming the financial cushion is adequate)
• operate at a small surplus for the year (assuming a larger financial cushion is required)
• operate at a deficit (assuming the financial cushion should be reduced).

Estimating revenue for the year
Revenue comes to your centre from several sources: parent fees, municipal fee subsidies, salary and other grants, GST rebates, fundraising and interest. In childcare, parent fees and municipal subsidies are by far the most significant component of revenue and should be the focus of your efforts.

Parent fee and Metro subsidy revenue is calculated by multiplying the expected number of children in the program by the fees to be charged. This calculation is best done on a program by program basis (e.g. infants, toddlers, etc). While the calculation itself is not hard, predicting actual revenue can be very difficult as enrolment can fluctuate substantially over the course of the year. Accuracy is difficult so simply estimate enrolment as best you can and carry on with the rest of the budget. Periodically throughout the year (i.e. at least quarterly) revise revenue estimates taking into account changes in expected enrolment.

Following are a few points to take into account when estimating fee revenue:

• Focus on total levels of enrolment. Don’t spend a lot of time differentiating between full-fee parents and those receiving subsidy unless rate differences are quite significant. Generally rate differences are not nearly as serious as enrolment fluctuations.
• If you are doing an annual budget then you normally need not take into account parent deposit policies as deposits are either used up by the end of the year or are carried over to the next year. (However, parent deposits will be a significant factor in a monthly cash flow budget.)
• Take into account fee fluctuations resulting from special rates charged for PA days and March and Christmas breaks.
• Factor staff and multiple child fee discounts into revenue estimates if applicable.
• Estimate summer revenue as best you can. In April or May you should revisit enrolment level and fee estimates once details of the summer program have been settled.
• Factor some allowance for uncollected fees into your revenue estimates. You will generally be better off using past experience at your centre instead of industry averages.

Salary grants
Direct operating, wage enhancement and pay equity salary grants funded by the Ministry of Community and Social Services flow through the centre to the staff. If you choose to include salary grant revenue in your budget then you must also include in expenses the related amounts paid to staff. You can also choose not to include both the salary grant revenue and the related salary expenses in the budget. The net effect on the excess of revenue over expenses for the year should be nil using either method.

Other income
A centre with approximately 50 children typically generates annual revenue in excess of $250,000. Revenue from fundraising, donations, interest and GST rebates is seldom greater than 1% of the total. Consequently, don’t waste time estimating income from other sources. This is not to imply that other income is not important, just that for budget purposes you should estimate it quickly and move on to the next area.

The following table outlines an estimate of annual revenue. Estimates should be updated periodically for changes as necessary.

Estimating expenses for the year
All not-for-profit organizations have a myriad of expenses including salaries and related costs, rent, play supplies, food, office supplies, insurance, etc. The task of estimating expenses can be daunting at first. To make the task more manageable focus your efforts on estimating the most important items. Areas of less financial significance such as office supplies and travel costs can be either lumped together or quickly estimated individually.

Salaries and benefits
Salaries and benefits typically comprise between 70% and 90% of the expenses of most service organizations. A mistake here will throw off the whole budget. You should spend most of your efforts estimating these expenses.

Estimating gross salaries is relatively straightforward. List all of the staff positions at the centre and estimate the gross salary for each position for the upcoming year. For staff paid an annual salary you should refer to Board approved salary levels. For staff paid on an hourly basis you will have to refer to approved rates and estimate the number of hours likely to be worked by staff in that position during the year.

Remember to include vacation pay costs including those for hourly paid positions. Some centres running a ten month operation pay staff vacation pay at the end of the school year. You must factor this annual payment into your forecast if it is applicable.

Replacement staff
Absent staff must be replaced to maintain minimum required staff to client ratios in childcare centres, youth hostels, shelters and other care giving organizations . You must factor into your budget the cost of hiring these replacement staff. A guideline we have found useful is to assume that you will require five weeks of replacement staff for each permanent position. (Typically if staff take two weeks vacation a year then they are sick for three weeks. If they take three weeks paid vacation a year they are often sick for only two weeks). As each week represents approximately 2% of the annual salary budget you could estimate an even 10% for replacement staff.

Take into account the specifics of your organization and its replacement staff experience. Some unionized centres require significantly higher levels of replacement staff and other centres require lower levels as staff are required to take vacations at times when client service levels (e.g. child enrolment) are low.

Estimating staff benefits
Statutory benefits can currently be estimated at 9.16% of salary costs.

Canada Pension Plan (CPP) and Employment Insurance (EI) are payable only on amounts up to statutory maximums. Employer’s Health Tax (EHT) is charged on a fixed percent of 1.95% of all Ontairo gross-salary compensation over $400,000 (not that the $400,000 exemption applies to most but not all organziations operating in Ontario). Worker’s Compensation rates often vary from centre to centre for reasons we have difficulty comprehending. For the sake of simplicity we recommend that you apply a straight 11% of gross salary as an estimate of all statutory benefits.

Non-statutory benefits should be estimated at twelve times the monthly premium currently being paid. In the absence of actual information you could use 4% of gross salaries as an estimate.

Salary grants
Provincially funded salary grant payments to staff should be included in an amount equal to that included in your revenue estimates.

By putting all of the pieces together you can estimate total salary and benefit costs for the year as follows:

Food costs
Food costs are typically the second highest expenditure of a childcare centre’s operation. They usually vary between 5% and 10% of total expenses. One way to estimate the cost of food is to determine what was spent in the prior year and, in the absence of program changes, estimate the same amount for the upcoming year. Costs for centres preparing their own food are typically between $1.60 and $2.00 per child per day excluding staff time. Costs for those centres using catering services are typically between $3.00 and $3.60 per child per day.

Remember that food costs are small in comparison with salaries. If you are off by 20% in your food budget it will result in a variance of about 2% of total expenses. Compare this to staff costs where an estimating error of 20% will result in an 18% variance in total costs.

Other expenses
Other expenses can be based on prior experience and current Board expectations. We frequently advise Boards to only estimate individual expense categories expected to exceed $4,000 per year (e.g. play supplies). All others categories could be lumped into an “other” category which can be estimated based on past experience. “Other” expenses can typically be estimated at approximately 8% of total annual expenditures.

Pulling it all together
Summarize the revenue and expenses budget (see table below) and determine whether the budget achieves the objectives of your organization. If your budget predicts a deficit when a surplus is required then you will either have to reduce expenses (typically this requires a reduction of salaries and benefits) or endeavour to increase revenue by either boosting enrolment or increasing parent fees.

Budgeting monthly cash flow
Preparing a budget of annual revenue and expenses is important. However, because of fluctuations in monthly revenue and expenses throughout the year you could run out of money in August even though your annual budget shows you will still be solvent by the end of December. Centres can experience significant fluctuations in outlays for salary and benefits expenditures (e.g. months with three pay periods). Also, timing of certain receipts such as Direct Operating Grants (received quarterly) may not coincide with the respective payments (salaries paid out by-weekly). Consequently, a large cash balance in the bank may not necessarily indicate financial health several months down the road.

For most childcare and shelter related organizations preparing a twelve month cash flow budget is not a difficult exercise. Start by dividing your annual estimate of revenue and expenses into twelve equal monthly amounts (ten if you don’t operate in the summer) and then adjust each of the line items for monthly fluctuations. Consider:

Monthly revenue variations

• Adjust monthly revenue for anticipated changes in enrolment and/or fees to be charged. For example, adjust March and December if additional fees are charged during school holidays and adjust July and August if you anticipate significant enrolment declines or changes in the summer fee structure.
• Be sure to take into account the timing of parent deposits. Budget for collection of deposits/last month’s fees in the month received and, equally importantly, adjust cash to be received downward in the month that these deposits will be paid back or credited to fees. This is especially important for ten month programs where the first and last month’s revenue is received in September and no cash is received in June.
• Salary grants are usually received in January, April, July and October.
• Consider leaving “other revenue” out altogether unless it is either predictable or expected to be significant.
• Allow for timing differences in collection of government fee subsidies in situations where you have less than a full year program or you experience significant monthly enrolment changes.

Monthly salary and benefit variations

• If staff are paid on a bi-weekly basis then ensure that you allocate 20 of the 26 annual pay periods to 10 of the months and 6 of the 26 to the remaining 2 months. Use a calendar to determine which months will have three pay periods. If you don’t do this you will receive a nasty surprise when, twice in the year, your monthly payroll is a full 50% higher than expected.
• If salary grants are paid out quarterly then ensure you record the timing of the payouts and related statutory benefits accordingly.
• If you run a ten month program record vacation payments in the period they will be paid out.
• Receiver General payments are larger in the month after large payrolls (e.g. three pay period months and months with lump sum salary grant payouts).

Other expense variations

• Record one-time annual expenses such as insurance, audit, large capital asset purchases and renovation expenses in the appropriate months.
• Allow for additional trip, activity and play supply expenses in December, March and the summer months if appropriate.

Once you have split annual expenses into their monthly slots make sure you tie them into the actual cash balance of the centre. An example of a monthly cash flow budget is as follows:

The above budget format readily lends itself to being produced on a computerized spreadsheet such as Excel and Lotus 1-2-3. The spreadsheet makes it easy to adjust the forecast for changes in enrolment levels and expense assumptions.

The advantage of a monthly cash flow budget is that you can anticipate serious cash problems throughout the year and act in advance to prevent a surprise dip in bank balances. Again, it is essential to update the monthly cash flow budget on a regular (quarterly) basis as a budget is only as good as the accuracy of its assumptions. It is the responsibility of the Board to review the monthly cash flow budget on a regular basis and make adjustments whenever necessary.

The financial management framework
First it is helpful to put financial management into a framework. There are four main components in the financial management cycle:

• setting overall objectives
• establishing budgets
• regular monitoring of your financial position
• comparing where you are financially with where you want to be and adjusting appropriately.

A useful analogy for the financial management of a not-for-profit organization is that of taking a voyage. The first step is to figure out where you want to go (clearly setting out your objectives). If you don’t know where you want to go you will likely spend a great deal of time going nowhere. These objectives must be established by the Board and management of your organization and are commonly created through a strategic planning process. A common objective for childcare centres is that of providing affordable high quality childcare. Articulation of objectives can be a long and complicated process. However, it is critical that the organization spend the time and go through the process periodically to ensure a common focus and direction. It is also critical that overall objectives be documented, especially if there is little continuity of Board members from year to year.

Once you have decided where you are going you must chart your preferred course as there are usually several ways to reach an objective. To use the trip analogy again, you have to determine whether you want to take the scenic route, and perhaps run out of funds, or take the most economical route possible. Your centre should prepare a budget of financial resources estimating what you will need to spend to reach your objectives and, as importantly, how you expect to obtain the resources to get there. This could take the form of both an annual budget and a monthly cash flow forecast.

The next step is to periodically monitor where you are on the voyage. In the context of the financial management of an organization, this entails having an accounting system which permits you to determine where you are financially at regular (monthly) intervals. You may also need to obtain information such as current and estimated future enrolment levels to help you determine whether your budget is still a reasonable one.

Now that you know where you are and where you want to be you have to compare the two and change course as needed to reach your destination. For your childcare centre this involves comparing your actual financial position with that previously budgeted. Changes to revenue and expense patterns can then be made to help you work towards attaining your financial objectives at the end of your reporting period.

Increasing efficiency and effectiveness
We all know that there are more and less efficient ways of achieving objectives. Good control over the financial management framework can help you achieve your objectives with as little effort as possible. Failure to tend to the financial management process can result in your getting lost (going broke) along the way. Designing sensible internal financial controls helps to make the process as efficient and effective as possible.

What is internal control?
Internal control is the term used to describe policies and procedures designed by the Board and management to help ensure that the organization’s objectives are achieved. In a childcare setting internal controls include the policies and procedures developed to ensure that high quality care is delivered at the most affordable cost possible. Two signatures on each cheque, review of monthly bank reconciliations, preparation of an annual budget and presentation of a monthly financial report at each Board meeting are examples of internal control procedures designed to help a Board know whether finances are being efficiently managed. Establishment of a finance committee and monthly reports at Board meetings to discuss areas such as child development, upcoming meal plans and finances are examples of internal controls designed to provide the Board with information required to assess the quality of care being delivered.

Internal controls go beyond accounting and financial systems. Appropriate internal controls are essential if a Board is to monitor all facets of an operation including quality-of-care issues such as personnel management, child behavior management and program development. While our newsletter will focus on the financial aspect of controls, non-financial internal controls are just as critical for a Board to efficiently achieve its objectives (delivery of services).

Internal controls should be creative and need to be applied in the context of an organization’s culture. For example, some Boards may feel more comfortable with extensive and formal documentation of all aspects of policies and procedures. A voluminous manual may suit the culture of the organization. In other organizations such a manual may be seen as unnecessary and a less formal policy and procedure document may suffice. No single set of controls can be designed and applied to every organization. It is up to your organization to determine what is appropriate for its specific needs.

The Board of Directors sets the tone of internal control at the organization. If your organization wants to maintain a set of internal controls to keep financial management effective then the Board must be prepared to follow-up on a regular basis to ensure that the policies and procedures are being followed. Strong support at the Board level for appropriate controls generally results in effective financial management.

Limitations of internal control
There are inherent limitations to internal control and its ability to ensure that corporate objectives are met:

• Good financial management and internal controls are not possible if an organization does not have a clear idea of what it is attempting to achieve. Imagine trying to design an efficient vehicle not knowing what a journey involves. You may design an all-terrain vehicle when what you really need is a school bus. Once your organization has clearly articulated its purpose and goals then you can begin to design appropriate internal controls.
• Internal controls cannot prevent an organization from making operational and/or strategic errors and mistakes. They are designed to ensure that actions taken or not taken by management are followed up and reported to the Board. Internal controls are not designed to manage the organization. People manage.
• Internal controls can help minimize errors and irregularities but cannot eliminate them. Internal controls may cease to function as a result of human error. A purchase in excess of an amount budgeted may be made and not caught by an organization’s internal controls. Also, two or more people can deliberately decide to override controls.
• An organization must take into account the costs of implementing internal controls and compare the costs with the benefits. Costs include volunteer time. As internal controls can never provide absolute assurance that policies and procedures will be followed the Board must determine what constitutes an acceptable risk and controls must be designed accordingly. Once again, this requires judgment on the part of the Board and must take into account the culture of the organization.

Control systems
Internal controls can be classified into two broad categories or systems. The first category includes controls designed to collect, record and process financial data and prepare timely reports. People often do not think of data collection, processing and reporting as part of their organization’s internal control system. However, if you do not have an effective information collection, processing and reporting process then all the controls designed to ensure accuracy won’t be worth implementing. Controls in this category include:

• Assigning responsibility for various tasks such as the centre’s bookkeeping.
• Creating reports to be understood by Board members and management. Overly complex or simplistic reports will result in poor communication of financial data.
• Designing an appropriate attendance system to make staff aware of when children arrive and when they depart.
• Designing systems to ensure that data such as supplier invoices and accounts receivable are recorded accurately and on a timely basis.

The second category of internal controls includes those designed to enhance the reliability of the data reported. These procedures and policies include:

• proper authorization of transactions (prior authorization of major expenditures)
• adequate segregation of duties
• establishment of a finance committee
• proper controls over petty cash
• designing of appropriate forms
• controls to safeguard assets (two signatures required for all cheques)
• controls to verify financial records (monthly reviews and annual audits)

We have enclosed a financial management checklist with this newsletter for your information. You might find it useful to review the items listed and determine whether you feel there are areas in which your centre could do with improved controls. The next few newsletters will go into each of the areas in more detail. Making internal controls work
We conclude our overview with a brief discussion of some of the factors that can enhance the effectiveness of internal controls in place at your centre. Again, we will be going into this area in more detail in subsequent editions.
Good control factors include:

• Establishment of a finance committee of the Board to spearhead planning and monitoring of financial activities and reporting. The finance committee would report to the Board and take primary responsibility for managing financial resources throughout the year.
• Design of an effective organizational structure (i.e. who does what, who is responsible for what and to whom). An organizational structure with clear reporting responsibilities that take into account the culture of the organization is critical for effective financial management. A poor organizational structure with unclear reporting responsibilities will invariably result in controls being missed, misapplied or misinterpreted.
• Effective assigning of responsibilities. This includes clear articulation and documentation of job descriptions. This would also include articulation and clear documentation of responsibilities of various committees of the Board and the Board itself.
• Effective management controls including methods of financial planning and budgeting, reporting of actual results to the Board and follow-up of variances between budgeted and actual amounts.

Following is a list of benefits and related employee tax consequences:

RRSP Contributions
Employer paid RRSP contributions are fully taxable in the hands of the employee and must be included in the employee’s income for the year on his or her T4. The employee will receive an RRSP receipt directly from the RRSP carrier at year end. This will result in a reduction in the employee’s taxable income for the year to the extent that he or she is eligible for the RRSP deduction.

Insurance
Group Term Life Insurance
Premiums paid by employers for employee group term life insurance are taxable benefits to employees. To avoid the administrative effort of adding small amounts to employees’ earnings every pay period, consider including a lump sum in one pay period for the annual premium.

If you pay your employees’ group term life premiums and they in turn reimburse the organization then no taxable benefit will result.

Note: the taxable benefit exemption on the first $25,000 of group term life insurance premiums was removed in 1994.

Long-term Disability Premiums
Payment of long-term disability premiums by an employer for an employee does not necessarily result in a taxable benefit to the employee. If an employer has paid the premiums on an employee’s behalf and a claim is made on the policy then the employee would have to pay tax on benefits received. The cost of paying tax on the claim payments generally significantly exceeds the benefit to the employee of having the employer pay the monthly premiums. Consideration should, therefore, be given to having the employee pay their own long-term disability premiums. In this case the employee would not be subject to tax on payments received in the event of a claim on the policy.

Private Medical and Dental Plans
Insurance premiums paid by employers for private medical and dental plans do not result in a taxable benefit to the employee. This is one of the most common tax-free benefits offered to employees.

Directors’ and Officers’ Liability Insurance
Employees and directors are not deemed to have received a taxable benefit if their employer/organization pays the premiums for directors’ and officers’ liability insurance.

Travel and Transportation
Parking
Where general parking is provided and an employee does not have exclusive access to a specific space then no taxable benefit will be assessed. However, where an employer pays for individual spaces and assigns a space specifically for the use of a particular employee then that employee may be deemed to have received a taxable benefit. The taxable benefit is equal to the market value of the parking spot.

If you do provide employees with parking and intend the parking spaces to be on a tax-free basis then you should ensure that parking spaces are not reserved exclusively for benefit of specific employees.

Traveling with a Spouse
Employer reimbursement of the costs for an employee to take his or her spouse to a conference is taxable to the employee unless the spouse is actively engaged in the conference. To avoid having a taxable benefit assessed make sure that the non-employee spouse takes an active and professional role in the conference and that the conference relates to the employee’s job.

Transportation Assistance for Daily Commuting
Providing employees with transportation passes (e.g. TTC passes) for commuting between home and the workplace results in a taxable benefit to the employee equal to the full market value of the pass. Although the employee must pay tax on the value of the pass, that will still be a fraction of the actual cost of the pass.

Employers can reimburse an employee for transportation other than from home to the fixed place of employment without creating a taxable benefit. For example, there is no tax consequence to a social worker who travels from home to a client’s house and then to work and is reimbursed by his or her employer for the full cost of the transportation. On the other hand, if the social worker goes from home to work, from work to the client’s house, back to work and then home from work at the end of the day, he or she can be reimbursed only for the midday trip without incurring a taxable benefit.

In situations where not-for-profit organizations cover a portion of an employee’s travel costs, some planning can result in a good portion of the reimbursement being non taxable. Not-for-profit organizations should, however, ensure that they have well documented and clear travel policies to avoid employees misunderstanding and incorrectly applying for reimbursement of travel costs.

Automobile Allowances
Employees are not deemed to have received a taxable benefit if they receive a “reasonable” car allowance reimbursing them for transportation costs other than just from home to the fixed place of employment and back. Revenue Canada periodically publishes maximum amounts employers are allowed to deduct as an expense on reimbursement of employee travel. CRA automobile allowance rates can be found at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/bnfts/tmbl/llwnc/rts-eng.html.

Work Environment and Staff Development
Work Environment
Improving your organization’s work environment generally does not give rise to a taxable benefit. Often a fresh coat of paint, some donated art and “new” donated office furniture can do a lot to increase morale by making a workspace look clean and new with only a modest cost to the organization.

Professional Development
Employers can pay for professional development for their employees without creating a taxable benefit provided the courses/conferences are related to the employee’s job. For example, a children’s mental health organization could send a staff member to an all-expenses-paid conference on children’s mental health. Attendance at the conference would presumably increase the employee’s effectiveness and value to the organization. The employee would receive the “perk” at no monetary cost.

Paying for employees to attend post secondary courses is more problematic.The courts have held that the value of an MBA course paid by an employer on behalf of an employee was a taxable benefit to the employee. Revenue Canada reasoned that the employee received significant personal benefit from attending the course. The ruling was challenged vigorously and we understand that Revenue Canada is currently re-evaluating its position.

Your organization should tailor its employee development spending to its budget. Payment of employee tuition can be a very expensive proposition for employers. However, attendance at conferences and workshops need not be expensive.

Company Fitness Facilities
Providing employees with a fitness facility at the place of work does not result in a taxable benefit to the employees. Unfortunately, not-for-profit organizations are generally too short of space and finances to provide such a facility.

If your organization pays an employee’s recreational club dues then payment of the dues will be non-taxable provided you can demonstrate that having your employee as a member of a club directly benefits your organization. Please note, however, that golf club memberships paid by an employer are always taxable.

Payment of Employee’s Counseling Costs
Providing an employee with counseling services for tobacco, drug or alcohol abuse, for stress management or for retirement or re-employment will not result in a taxable benefit to the employee.

Use of Employer’s Childcare Facilities
Permitting employees to use a childcare facility fully paid for by the employer will not result in a taxable benefit to the employee. Regrettably, there are very few workplace childcare centres fully funded by employers.

Some employers do provide a space for childcare, set a per diem fee and charge all parents the same fee. Any preferential fee discounts to employees are taxable.

Awards, Prizes, Gifts and Employee Discounts
Prizes for Achievement
Employees receiving cash or other prizes of significant value for achievement (e.g. an all-expenses paid trip) must have the value of those prizes included in their taxable income. Receipt of a trophy or a plaque with limited resale value will not result in a taxable benefit.

Annual Tax Free Gift
Revenue Canada allows employers to gift employees a non-cash amount of up to $300 annually as a non-taxable gift. This is a Revenue Canada administrative practice and is not specifically provided for in the Income Tax Act. The gift is permitted only if the employer does not claim the amount as a business expense. As not-for-profit organizations generally do not pay corporate tax, the $300 tax-free gift can be given to the employee with no negative tax consequences to your organization.

Employee Discounts
Providing your employees with the opportunity to obtain services from your organization at a value less than cost will result in them receiving a taxable benefit. Consider a childcare centre as an example [ref to article]. Not-for-profit childcare centres sometimes provide childcare to their employee’s families at a discount. Offering an employee a 10% discount on an $800 monthly fee would result in the employee incurring a taxable benefit of $80 per month.

The same applies to providing employees with meals at work. Childcare centres often have excess food after a meal. Consumption of leftover food would generally not result in a taxable benefit. However, having daily meals provided for employees would. Take the example of a childcare centre providing catered food at a cost of $3 per day per child. If the same food is provided to the employees then they should have included in their taxable income an amount equal to the cost of the food. This could be as much as $600 a year in taxable benefits if employees eat daily at the centre.

The following table summarizes which benefits are taxable, which are not and which could be either:

This list of taxable and non-taxable benefits is far from complete. If you have questions on these or other benefits call Revenue Canada directly.

Raise Pay Equity Target Rates Annually for Across the Board Wage Increases
Pay equity target rates must be increased annually for across-the-board wage increases given to staff each year. For example, if a centre gives staff a 2% across-the-board wage increase (not related to the annual pay equity raise) then all target rates must be increased by 2%. An ECE target rate of $25 would therefore have to be increased by 50 cents. These maintenace increases can have a significant impact on you pay equity target rates and are required to have been made since year after your centre’s plan commenced (usually 1995 and beyond).

Differentiate Pay Equity From Operating Grants
As noted above, pay equity and direct operating/wage enhancement grant funding are fundamentally different and should be treated differently from a payroll perspective. Confusion arises because pay equity and operating and wage enhancement grant payments are lumped into the same cheque by municipalities. In addition, we understand that municipalities may not receive sufficient information from the Province to differentiate between the two categories.

Childcare centres must pay direct operating and wage enhancement grants to staff as long as the funding continues. Once funding stops then your organization need not, in most circumstances, continue to pay employees an amount equal to the salary grants. You can, however, continue to make the payments if you want to and can finance them.

Pay equity obligations on the other hand result in an increase in base salary regardless of whether or not you receive funding from the government. If pay equity funding stops, your organization is still obligated to make pay equity payments required under the Pay Equity Act.

To help prevent a possible administrative nightmare we suggest you do the following:

• Distinguish between pay equity and salary grant receipts in your accounting records. For instructions on how to identify the pay equity portion of quarterly subsidy payments you should see the pay equity section of the preceding article.
• Organizations that pay direct operating grant and/or wage enhancement grant payments out in lump sum payments should distinguish in their financial records between pay equity amounts and wage grants. The pay equity portion of the quarterly cheques should not be distributed as a lump sum payment on the assumption that it has been incorporated into staff’s regular base pay. Unfortunately some organizations will undoubtedly give their staff an increase in base pay and at the same time distribute the full amount of the quarterly cheques thereby effectively doubling the pay equity payments.
• Organizations that incorporate operating and wage enhancement grant payments into regular pay should continue to clearly distinguish the cumulative annual amount of these payments in their payroll records. Pay equity should, again, be excluded from operating and wage enhancement grants in your payroll records as these payments are base salary and not salary supplements.
• It is possible that Toronto Children’s Services will reduce DOG and WEG payments effective July 1, 2000 where centres are receiving more than they are allowed under provincial guidelines. You want to ensure that quarterly grant payments to staff recorded in your records are not inflated by pay equity receipts thereby making it look like your centre is receiving more than its share of salary grants.

When To Stop Pay Equity Increases
Some organizations are confused as to when pay equity has been achieved for a given employee class. Simply put, each employee job classification has a pay equity target rate. Pay equity for the entire job class has been met when the salary for the highest paid employee in that class reaches that pay equity target rate. Note that “salary” includes an employee’s share of any government salary grants but excludes one-time lump sum payments.

As an example, take an organization with a pay equity target rate of $14.21 for its ECE job classification. There are 3 ECE’s earning $14, $13 and $12 per hour respectively as at December 31, 2008. Assume that the January 1, 2009 pay equity increase is $2.14 per hour. This raise would increase the salary of the highest paid ECE to $14.21, an amount equal to the pay equity rate for the class. Consequently, no employees in the class would be entitled to pay equity raises in 2010 and subsequent years. The 1% pay equity entitlement would still be fully distributed among the other female job classes not yet at their pay equity targets.

This requirement underlines the need to formally establish salary grids for all employee job classes. Pay equity legislation does not attempt to ensure that employees with equal job classifications are paid the same salary (i.e. equal pay for work of equal value is not an objective of pay equity legislation). Differences are allowed for seniority and competence. We recommend that you inform your staff when it is likely that their job class pay equity target will be met (i.e. when the highest paid member of the group will reach the target). This will help prevent surprises when some lower-paid members of a group find that they are ineligible for a pay equity raise.

One final note on pay equity: It is important to clearly distinguish between pay equity salary increases and other pay increases. To ensure there is no confusion you should inform employees of amounts that are pay equity raises in writing before or at the time raises are given. If an increase is not specifically identified as a pay equity increase then it is deemed to be a regular salary increase and not a pay equity increase. In this situation your organization would still be required to make an additional pay increase to cover its pay equity obligations.

Obligations and Rights
Organizations covered by the Act
The Act covers employers in both the private and public sectors in Ontario. In the private sector employers who employed an average of ten or more employees in 1987 or at any time since 1987 are covered by the Act. All organizations in the public sector in Ontario are covered by the Act. A list of entities defined to be in the public sector is included as a schedule to the Act. The list covers a wide range of independently incorporated not-for-profit organizations providing services funded by the Ontario government. The detailed list includes, among many others, all organizations operating:

• a day nursery or private home day care agency licensed under the Day Nurseries Act.
• programs providing service to day nurseries under the Ministry of Community and Social Services Act.
• elderly persons centres funded under the Elderly Persons Centres Act.
• children’s services programs funded and purchased by the Ministry of Community and Social Services under the Child and Family Services Act.

The list in the appendix is lengthy and essentially mandates that all organizations funded in part by a Ministry of the Ontario government must comply with the requirements of the Act.

Note: All organizations in the public sector that were incorporated on or after July 1, 1993 are not required to use the proxy method. The job-to-job and proportional value methods still apply to them.

Intent of the Act and implementation dates
The Act is intended to correct the historical undervaluing and lower pay of work performed by women. The intent of the Act is to specifically address gender imbalances and provide wage parity between women and men working in jobs of equal value. The intent is not to equalize wages between jobs of similar value.

The Pay Equity Act became effective January 1, 1988. The Act requires employers to compare, within the same organization, jobs done by women to those done by men. The “job-to-job comparison method” may not be adequate to achieve pay equity where there are too few male job classes against which to compare all female job classes. The Ontario government passed the Pay Equity Amendment Act on July 1, 1993 to promote pay equity in organizations not able to use the job-to-job comparison method for all female job classes. It provides a mechanism for:

• comparing female to male jobs within a specific organization used the “proportional value method”. This method allows an employer to infer a pay equity job rate for female job classes where there is no exact male job class for comparison purposes.
• employers in the “broader public sector” to compare their own female jobs to female jobs which have already been compared to male jobs in a different organization. This is called the “proxy method”.

The proxy method is only available to employers in the broader public sector. Also, the proxy method must be used for all female job classes where even one female job class cannot be compared to a male job class within the organization.

The proxy method for public sector employers is effective as of January 1, 1994. The implementation process is gradual and could take many years.

Organizations using the job-to-job and proportional value methods, on the other hand, must have achieved pay equity on or before January 1, 1998. For these organizations, pay equity should have been fully implemented by now. Compliance in future will be limited to ensuring pay equity is maintained between male and female jobs of equal value.

Background to the Proxy Method
Most organizations required to use the proxy method have already prepared and commenced implementing a pay equity plan by now. Those required to use the proxy method applied for the proxy method by first notifying the Pay Equity Commission that they tried but could not find a male comparator position for at least one of the female job classifications in their organization. This situation applied to all organizations that have no male job classes at all such as childcare centres. A review officer from the Pay Equity Commission then verified that the organization was an employer in the broader public sector and that it could not achieve pay equity by job-to-job or proportional value methods. The organization was issued an order requiring it to use the proxy method.

Once an organization received its proxy order from the Pay Equity Commission it had to use the proxy method for all job classes in the plan regardless of whether or not a male comparator existed for one or more female job classes. Organizations that did not get a plan in place previously must now go through the application process.

Preparing Pay Equity Plans
Organizations receiving an order requiring use of the proxy method then prepared a pay equity plan using the proxy comparison method. Note that organizations with unionized and non-unionized staff pools must prepare one pay equity plan for non-unionized employees and also negotiate a separate pay equity plan with the bargaining agent for each separate bargaining unit. The steps to complete a pay equity plan are:

• identify your key female job classes
• select your proxy organization and request job information
• assign values to your organization’s job classes
• receive information from your proxy employer
• determine the value of proxy job classes and job rate of proxy job classes
• develop a proxy job rate line and compare your own job classes to the job rate line
• determine required pay equity adjustments for your female job classes
• post your pay equity plan
• begin to make your pay equity adjustments

Most organizations required to have proxy comparison pay equity plans will have already performed the above steps, prepared the pay equity plan and posted it. (“Posting” a plan refers to making it available to all the employees of the organization.) If you have not prepared a pay equity plan and you believe your organization may be required to do so then you should call the Pay Equity Commission (Website http://www.payequity.gov.on.ca/peo/english/contactus.html ) and commence the process now. For an excellent description of how to complete a pay equity plan, ask the Pay Equity Commission to send you a copy of their booklet: A Guide to the Proxy Comparison Method.

Changes Subsequent to Posting a Plan
Organizations creating a new job classification (not to be confused with creating more jobs under an existing job classification) should value the job in a way similar to how existing jobs were valued. The new job classification should then be compared to the proxy job rate line and the new position should receive pay equity adjustments in the normal course of business.

Calculation of annual pay equity adjustments
Once you post your pay equity plan you must calculate and distribute pay equity adjustments. Pay equity salary adjustments (i.e. pay equity salary increases) are required effective January 1, 1994 under the Act. This implementation date is also effective for pay equity plans posted subsequent to January 1, 1994.

Calculating total salary increases
Employers are required to make annual pay equity adjustments by distributing a minimum of 1% of the organization’s previous year’s payroll. The increases must be distributed among all job classes entitled to a pay equity adjustment. Using 2004 as an example, employers should have adjusted job rates in that year by distributing a minimum of 1% of the organization’s 2003 total payroll. For each subsequent year, the organization must make pay equity adjustments again using a pool of funds equal to at least 1% of the previous year’s payroll. The annual adjustment process continues until actual job rates equal their pay equity job rates.

Calculating annual payroll
Your organization’s total annual payroll for purposes of the minimum 1% proxy method job rate adjustment is the gross employment income of employees for that year. In most situations this amount will equal gross employment earnings as noted in Box 14 of your T4 Summary prepared at the end of each calendar year. For example, if the 2006 T4 Summary shows total earnings of $278,500 then in 2007 your organization is required to increase job rates of staff by not less than $2,785.

Note that generally total payroll excludes statutory and non-statutory benefits that are not included in employees’ T4 taxable income. You should also exclude one-time bonuses paid to staff where the bonuses are not expected to occur on a regular basis.

Distribution of pay equity adjustments
The distribution of the minimum 1% annual pay equity adjustment must follow four basic rules:

1.Every job class that requires a pay equity adjustment must receive at least some increase each year.
2. Every employee in the same job class must get the same dollar value adjustment.
3. The lowest paid female job class in each pay equity plan must receive the largest dollar value pay equity adjustment.
4. No pay equity adjustment should be made to male or gender neutral job classes.

The first three rules can make distribution of pay equity adjustments among staff problematic. We recommend you adopt the following method for distribution of pay equity raises:

1. Determine the minimum required amount of the salary increase for the year (1% of your prior year’s total salaries from box 14 of theT4 Summary, less one-time bonuses).
2. Refer to your posted pay equity plan and identify all staff whose current pay is lower than their pay equity job rate.
3. Set the increase for the lowest paid female job class.
4. Allocate increases to all other positions at amounts less than the increase allocated to the lowest paid female job class.

There are several factors to take into account in the process.

• Employees covered: The Act applies to full and part-time staff only. For purposes of the Act, part-time staff are deemed to be those employees working at least one-third of the regular workweek of the organization and whose positions are ongoing. All non-full time employees whose jobs do not fit this description are not covered by the Act.
• Job rates: The term job rate needs clarification, especially where remuneration includes bonuses and salary grants. The job rate is defined in the Act as the highest rate of compensation for a particular job class. Compensation includes:
  • regular salary
  • bonuses that are a regular part of a remuneration package
  • salary grants paid to staff (e.g. DOG and WEG)
  • benefits where only some job classes and not others receive them.
• Calculation of job rates: For ease of pay equity calculations, all job rates should be expressed as a dollar per hour amount (e.g. $10.25/hour). To calculate the job rate for staff paid an annual salary, divide annual salaries, including salary grants, by the number of hours in your organization’s standard work year [e.g. $32,000/(261 days worked x 8 hours per day) = $15.33/hour].
• Correctly distributing pay equity: The lowest paid female job class must receive the largest dollar value adjustment. All other job classes can receive the same or different adjustments providing they are less than that received by the lowest paid female job class. As an example, assume the cook, earning $8.50/hour, is in the lowest paid female job class. If this class receives a 124 /hour adjustment then all other job classes must receive an adjustment of 114 /hour or less.
• Annual adjustment deadline: Pay equity adjustments must start January 1 of any given year. The September 30 deadline ceased to exist once Schedule J amending the Act was repealed in September 1997. Staff employed in the year who have left the organization before the pay equity adjustments have been made are still entitled to receive their adjustment for the period they worked.
• Informing staff of annual adjustments: Staff must be specifically informed that a raise is intended to be the annual pay equity adjustment. In some instances organizations gave staff raises in 1997 without realizing that a 1% pay equity increase was also required. Retroactive characterization of the raise as the annual pay equity adjustment is not technically permitted. The organization is supposed to make the pay equity adjustment in addition to the regular raise unless an agreement can be reached with the staff. Staff may agree to the reclassification if management can demonstrate that the organization has insufficient funds to give a raise over and above that already given. See the section on Review and Compliance Process below.

Pay Equity Funding
Many not-for-profit organizations currently receive pay equity funding from one of several branches of the Ontairo or municipal governments. There is often confusion in Boards as to whether the funding received completely offsets the recipient organization’s funding obligations.

The position of the Pay Equity Commission is that, regardless of funding arrangements made by various Ministries, organizations must always base distributions on 1% of the actual preceding year’s payroll. This calculation must be done each year.

The Ministry of Community and Social Services (“MCSS”) started funding pay equity in 1994. The amount received annually by many organizations from MCSS equals 3% of 1993 base salaries. We understand from discussion with MCSS that this funding is to cover pay equity adjustments for 1994, 1995, and 1996. This pay equity funding will only be sufficient to cover an organization’s funding obligations where payroll costs in 1994 and 1995 did not increase over those in 1993. In situations where payroll costs have increased from 1993 amounts and the pay equity funding (based on the 1993 amounts) has not been supplemented then the full amount of required pay equity adjustments may not have been made.

Where funding is received from the Ministry of Health, the 1994 pay equity adjustment of 3% is considered to be a 1% 1994 adjustment and a 2% “bonus” to help speed up the equalization process. Organizations receiving this type of pay equity funding are still required to make 1995 and 1996 pay equity adjustments. Given that funding is so scarce these days, most organizations in this position are treating the 3% 1994 adjustment as coverage for the 1994, 1995 and 1996 obligations.

The relationship between compliance and funding is made more complicated by the fact that the Pay Equity Commission has no responsibility for funding of the payments and the funding ministries have no responsibility for compliance. Staff on the Pay Equity Hotline does not provide information on Ministries’ funding plans. Therefore they are not in a position to determine whether an organization is in compliance with the Act without a full review. In our experience, staff at the various funding Ministries have limited knowledge of pay equity requirements. When trying to resolve issues with the “authorities” be very careful that all parties involved are dealing with the same set of facts and assumptions.

Review and Compliance Process
Compliance with pay equity requirements is based on self-assessment. Organizations are required to comply with pay equity legislation regardless of their financial circumstances. There are currently no annual filing requirements with the Pay Equity Commission. Consequently, a review of your pay equity practices for failure to comply with the regulations will not be initiated unless there is a formal complaint filed with the Commission.

If your organization cannot afford to make its annual pay equity adjustment in any given year then we recommend you discuss this with the employees. You may be able to negotiate a plan for pay equity increases in the event that funds become available.

In the event you cannot reach agreement with employees, a complaint may be lodged with the Pay Equity Commission. A pay equity review officer will contact your organization. The Act sets out processes for resolving disputes that may arise in establishing, implementing and maintaining pay equity. Review officers will often mediate pay equity adjustment claims between organizations and employees in an attempt to reach a compromise position that the organization, the employees and the Commission can live with.

Directors’ personal liability
Note that Directors of not-for-profit organizations are personally liable for unpaid wages and salaries of an organization under their incorporating legislation and/or the Employment Standards Act. We understand that unpaid pay equity adjustments may fall under the definition of wages and salaries in the relevant Acts. If that is the case then the directors could have personal liability for unpaid amounts. If your organization is unable to fully comply with its pay equity obligations then we recommend that you obtain legal advice.

What To Do If You Have Lost Your Pay Equity Plan
You will need your original posted pay equity plan to make the 1997 pay equity adjustment. Original plans were never filed with the Pay Equity Commission. From our talks with the Ministry of Community and Social Services we understand that that they did not retain a copy of the plans originally filed with them. Toronto area childcare centres may be able to obtain a copy their plan from Metro Children’s Services. If you can no longer locate a copy of your organization’s original pay equity plan then you unfortunately may have to re-do it and re-post it.

How to Get Help
If you have questions or require detailed assistance regarding the legislation you should contact the Pay Equity Commission in Toronto. The staff are extremely helpful and a pleasure to deal with. For questions about funding of your pay equity obligations you should contact your funding Ministry directly.
We can also be of assistance. If you would like your pay equity implementation plan reviewed please contact either Barb Scott or Phil Cowperthwaite at 416/323-3200. We will review your current pay equity implementation policies and procedures, ensure you are in compliance with the Act, help ensure your system is administered as efficiently as possible and prepare a brief report of our recommendations for your Board of Directors.

Background
Coverage under the Workplace Safety & Insurance Act (WSIA) is compulsory for many industries in Ontario. It is not, however, compulsory for childcare centres and most not-for-profit organizations. Still, many organizations have chosen to opt for voluntary coverage under Schedule 1 of the WSIA. In December, 1997 the WSIB adopted the following policy with little publicity:

“Effective immediately all eligible employers who cancel their application coverage under Schedule 1 of the Act [ed. note: voluntary coverage] will be charged a supplementary premium for the final year of coverage.

The supplementary premium will be calculated to ensure the amount realized is sufficient to meet all remaining financial obligations, including the employer’s share of the unfunded liability for the class or classes of which it is a part.”

Impact
An organization canceling voluntary coverage will have to pay out its pro-rata share of the unfunded obligations of all organizations in its class covered under the WSIB policy at the date of cancellation. Childcare centres wanting to opt out are being assessed eparture fees of in the order of $100 to $200 per child.

We suggest that all not-for-profit organizations with voluntary WSIB coverage call their WSIB representative to determine if the departure fee applies to them and, if so, how much it would be at the end of a particular year. Based on our discussions with affected organizations and the WSIB we understand that there is no process to plea for a waiver of this uncontracted-for departure fee. If you are thinking of obtaining disability coverage for your employees you should carefully consider all your options, including private and WSIB coverage. Costs to be weighed against benefits should include the future departure fee.

Overview of the Changes and Some Practical Considerations for directors of charities [1]
By: Brian Iler and Ted Hyland, Lawyers Iler, Campbell, Klippenstein

On July 1, 1999, the Ontario Government substantially revised the powers and duties of some individuals and organizations holding and investing money, or other assets, for others, or for a charitable purpose.

Who is affected?
Not everyone who holds assets for others is affected. The revisions are to a statute called the Trustee Act (the “Act”), and affects only those who hold assets in trust for others called trustees.

Because the law imposes on charities the obligations of trustees for assets held by the charity, these changes apply to all organizations which are charities and do not contain in their incorporating ? or other documents setting up the charity ? specific rules for investment of the charity’s assets. If specific rules exist, they will govern where they conflict with the Act’s new rules.

As a general rule, directors of charities are considered to be trustees of the assets of a charity, even though the charity itself is clearly trustee of those assets. Accordingly, directors of charities are bound by the obligations set out in the Act – subject, again, to any contrary rule binding on them in the charity’s own incorporating documents.

The Reasons behind the Change
Prior to the amendments, the Act contained a very precise list of investment instruments in which trustees were authorized to invest trust property. These included government bonds, some publicly?traded shares, some mortgages, and deposits with financial institutions.

Underlying the former rules was the principle that a trustee’s principal task was to get the best return on investment, but not by placing the money invested at risk. This conservative approach conflicts with current mainstream investment wisdom, which encourages a broader and riskier approach, to maximize return on investment.

What Type of Investments are Now Allowed?
The old list of permitted investments has been abolished. Now, a charity may invest trust property in any form of investment in which a prudent investor would invest. What does that mean?

The Act provides some help, but not a lot: it says that, “in investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.”

This is the conventional legal statement of the duty or responsibility of a trustee. In fact, by deleting the “legal list”, the law is placing back on to directors of charities, in relation to investments, the duty to exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments. They can no longer rely on the “legal list” to avoid the responsibility to act prudently in making investment decisions.

But what does a prudent investor do?
First, except for investments placed in mutual funds (what constitutes an acceptable mutual fund is not defined in the Act), directors may not delegate their duty to make decisions on investments to others.

Second, directors must consider, at a minimum, these seven factors set out in the Act:

• general economic conditions;
• the possible effect of inflation or deflation on the investment;
• the expected tax consequences of investment decisions or strategies;
• the role that each investment or course of action plays within the overall trust portfolio;
• the expected total return from income and the appreciation of capital;
• the needs for liquidity, regularity of income and preservation or appreciation of capital; and
• an asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

Third, if there are other factors that are relevant in the circumstances or that are required by the incorporating documents of the charity, they must be considered.

Fourth, there are factors which the law prohibits directors from considering – social or political issues generally, although where two proposed investments are equally financially beneficial to a charity, and one is politically unpalatable, the directors may choose the other.

Fifth, although directors cannot delegate their investment powers to professional investment advisors, the Act does specifically permit them to consult such advisors in relation to the investment of trust property. Moreover, there is a provision in the amendments that saves them from liability for breach of trust as a result of relying on the advice, if a prudent investor would do so under similar circumstances.

Directors’ Liability: What if the Investments Lose Money?
According to the Act, the standard that directors must adhere to is mandatory and “objective”. This means that members of boards of directors of charities, irrespective of their background and experience in investing, will be held to the same standard. Someone with little or no background will not be held to a lower standard than someone with more experience.

However, the Act states that a director will not be liable for losses from investments if the investments were made according to a plan consisting of reasonable assessments of risk and return that a prudent investor would make under similar circumstances.

In the event that a court does find a director in breach of trust as a result of loss to the charity arising from the investment of trust property, the court may take into account the overall performance of the investments in assessing the damages payable by the director. It is important to note that this provision applies only to the assessment of damages and does not shield the director from scrutiny by a court of every investment decision, and from being held personally liable for bad decisions.

What Does it All Mean?
There are a number of immediately practical implications for boards of directors of charities that flow from the changes.

First, the board of directors of a charity will be responsible for the investment decisions, and each director will be personally liable for any losses suffered by the charity as a result of investment decisions that did not demonstrate the required standard of care, diligence and judgment of prudent investor.

The focus is now on each director to show that he or she acted as a prudent investor in the circumstances.

Second, because of the requirement to diversify (as the Act states, “to the extent appropriate to the requirements of the trust and general economic conditions”), the board of directors should consider whether it is appropriate to invest in only one type of asset.

Finally, the amendments make it perfectly clear that acting as a director of a charity holding substantial assets is a serious responsibility, with consequences for failure to meet the minimum duties placed on directors. Prior to assuming such obligations, an individual should consider whether the risk is one which she/he wishes to assume, and whether directors’ liability insurance is available to address that risk.

However, to make this decision even more difficult, the Ontario Public Guardian and Trustee, an official of the Ontario government, takes the position that even spending money on premiums for directors’ liability insurance may be a breach of the duties of directors of charities in certain circumstances!

A charity that does not have a policy for investing its accumulated funds would do well to establish one. Doing so will assist the board in fulfilling its duties. The policy should contain the criteria contained in the Act, as well as any other investment criteria contained in the charity’s incorporating or other constitutional documents. Having a policy will not, alone, be sufficient, however. In order to discharge its duties, the board must assess each investment decision in light of the criteria set out in the Act and must ensure that it develops a plan or strategy for investing the charity’s property.

[1] This article is intended to convey legal information to a general readership, and has not been prepared with a view to providing legal advice with respect to any of the issues discussed or to creating a solicitor?client relationship. Anyone contemplating making a decision with respect to the matters dealt with in this article should first personally consult a lawyer.

Employee versus independent contractor
There are two main types of relationship between not-for-profit organizations and the individuals performing work for them:

• an employer/employee relationship
• an organization/independent contractor relationship.

As an example of the difference consider a not-for-profit organization hiring two people. One person is hired to provide counseling to a group of clients specified by the organization for five days a week, eight hours a day. The person is given an office onsite and is expected to work in accordance with organization policies. This person has all of the attributes of an employee. The same organization engages a computer consultant to keep the organization’s computer network up and running. If the individual, or another person designated by that individual, is expected to perform work only on a sporadic basis as and when problems arise then this person may be considered an independent contractor. Needless to say, there are many instances where the defining criteria are not nearly so clear cut.

The determination of whether a not-for-profit organization has an employer/employee relationship with an individual or has hired them as an independent contractor is a question of law. Whenever you are unsure you should consult a labour lawyer. Some of the principal criteria used by the courts in making the determination follow.

Traits of an employer/employee relationship

• the individual is effectively precluded from working for other organizations while employed
• hours of work are regulated by the organization
• the individual must perform the services (i.e. they cannot delegate the work to another individual).
• the individual is entitled to benefits by virtue of working for the organization (Canada Pension Plan, Employment Insurance, vacation and sick pay, other non-statutory benefits)
• the individual has work space and equipment provided for them (e.g. computers)
• the individual is guaranteed a fixed amount of revenue (e.g. a fixed sum paid every two weeks)
• the individual does not retain ownership of client engagements on which he/she works.

Traits of an organization/contractor relationship

• acceptance of the contract does not preclude the individual from simultaneously working for other organizations
• hours of work are not specified by the organization
• the individual may delegate tasks to other individuals (e.g. employees of the contracted individual)
• the individual receives no benefits from the not-for-profit organization in addition to contracted payments
• the individual must provide his/her own workspace and/or equipment
• the contracted individual is not guaranteed payment in the event that services are not provided and/or performance is not achieved
• the individual retains ownership of client engagements.

Correctly determining whether an individual is an employee or an independent contractor is important as the organization’s obligations vary significantly depending on the classification. Specifically, if an organization is an employer then it must comply with statutory regulations including the requirement to deduct from remuneration and remit to Revenue Canada Employment Insurance and Canada Pension Plan premiums and income tax. In addition, the organization must meet the statutory requirements for vacation and sick pay and may incur additional liabilities if the employment contract is terminated.

The costs associated with employment can amount to 20% of gross employment income. If an individual is hired for $20,000/year then the additional costs of employment to the employer could amount to $4,000/year. It is often an advantage to an individual to be classified as an employee as opposed to an independent contractor as the organization pays the cost of benefits.

There can be costs associated with having work performed by independent contractors. Typically, the organization contracting the work has less say in and control over the way services are performed. In addition, the independent contractor will often have to charge the organization GST of 7% in addition to the contracted price. The not-for-profit organization may or may not be eligible for a refund of up to half of GST charged [Volume II, Issue 4, p.19]. Note that in the Maritimes contractors may have to bill the not-for-profit organization Harmonized Sales Tax (HST) of 15%.

Determining whether an individual is an employee or a contractor is often more difficult where the individual performs services for an organization on a sporadic basis. Sporadic work should not be confused with a part-time position where an individual works less than a full week but works on a regular basis. If you have questions as to whether you should be treating an individual as an employee or a contractor we urge you to seek legal advice. A labour lawyer will be able to help you reach the best possible arrangement for both the organization and the person to be hired.

Following is an overview of the principal statutory obligations that follow from a not-for-profit organization entering into an employment contract with an individual.

Canada Pension Plan (“CPP”)
Who must contribute
Both the employer and the employee must contribute to the CPP provided the employee:

• is older than 18 and younger than 70
• has collected pensionable earnings during the year
• does not receive a CPP or QPP retirement or disability pension during the year

What CPP premiums are based on
Premiums must be paid on all pensionable earnings. In general terms, pensionable earnings includes all salaries, wages and taxable benefits earned in the year by an employee. This would include lump-sum bonus payments, pay equity adjustments and wage and salary grant payments received.

Certain types of employment and payments are not subject to CPP contributions. A detailed list of these is contained in the Employer’s Guide to Payroll Deductions published by Revenue Canada. A significant exemption from pensionable earnings is any lump-sum payment made by an organization to an employee as a retiring allowance or severance payment. CPP should not be deducted on these amounts.

How much must be deducted
The maximum amount of CPP deductions can be obtained from the Ontario Payroll Deduction Tables published by Revenue Canada Taxation. The general rate of deduction and maximum contribution limits vary so please consult the CRA web site. Employers must match employee contributions (i.e. for every dollar of employee deduction employers must also pay a dollar).

Benefits of the plan to employees
Employees are eligible for CPP benefits once they reach the age of 65. Benefit recipients may continue to be employed. In addition, employees may continue to work and elect to contribute to the CPP until they reach age 70. They will increase their CPP credits by deferring receipt of benefits up to the age of 70.

Finally, employees may apply for reduced CPP benefits once they reach 60 provided they can verify that they have substantially ceased to be engaged in paid employment prior to the pension commencing.

Employees who have contributed to the CPP are eligible for disability benefits “only if they are determined in a prescribed manner to have a severe and prolonged mental or physical disability”. In addition, the employees must meet specified criteria defined by the CPP legislation. Employees must apply in writing to the Client Service Centre – Health and Welfare Canada – to qualify for disability payments.

Finally, separated or divorced individuals may qualify to share their former spouse’s pension earnings. Individuals who believe they might be eligible for pension sharing should contact the Client Service Centre – Health and Welfare Canada, nearest them.

Employment Insurance (“EI”)
Who must contribute
Employers must deduct EI from all individuals classified as employees. There is no upper or lower age limit for deducting EI premiums. Employment outside Canada can also, under certain circumstances, be insurable (see Employer’s Guide to Payroll Deductions).

What EI premiums are based on
EI premiums must be deducted on every dollar of “insurable earnings”. Insurable earnings include basic salaries and wages, taxable benefits and other bonus payments received. In almost all cases insurable earnings received will equal total taxable earnings of the employee up to the maximum limits.

Note that, as is the case for CPP premiums, no EI should be deducted from lump-sum payments made to employees for retiring allowances or severance payments.

How much must be deducted
The general rate of deduction and maximum contribution limits vary so please consult the CRA web site. Employers must more than match employee contributions (i.e. for every dollar of employee deduction employers must pay $1.40).

There is no minimum insurable earnings level. As a result, the employment of many part-time and casual/temporary employees is now covered by the EI system. Employers are responsible for deducting EI premiums from the salaries/wages of these employees. This situation makes the determination of whether casual staff are employees or contractors especially important. If a not-for-profit organization’s decision not to withhold EI on even small amounts of income is questioned by Revenue Canada then the organization could end up paying significant penalties and interest.
Benefits of the plan to employees
The new rules and regulations surrounding eligibility for EI are complex. Employees with questions should be referred to their local Employment Insurance Centre.

Individuals are eligible for Regular EI benefits if they have become unemployed and are seeking but cannot find work. To be eligible an individual must have:

• paid EI premiums, typically through payroll deductions
• had an interruption of earnings from employment for at least seven consecutive days
• collected insurable earnings for a specified number of hours during the qualifying period.

It gets more complicated. New entrants to the labour force must have a minimum of 910 hours (essentially half of a full-time work year) in order to qualify for EI benefits. In addition, no regular benefits are paid to those who quit a job without just cause or are fired for misconduct. Just cause for quitting a job for EI purposes includes a variety or situations including:

• sexual or other harassment
• discrimination as defined in the Canadian Human Rights Act working conditions that constitute a danger to health or safety
• obligation to care for a dependent child or other immediate family member
• significant modification of terms and conditions respecting wages or salary
• significant changes in work duties
• excessive overtime work or refusal of an employer to pay for significant overtime
• antagonistic relations between an employee and a superior where it can be demonstrated that the employee is not primarily responsible
• reasonable assurance of other employment in the immediate future.

There are three types of Special EI benefits:

• maternity benefits which are available to the natural mother of a child for up to 15 weeks (note that the 17 week period usually claimed includes 2 weeks of unpaid absence);
• parental benefits which are available to both natural and adoptive parents caring for a new-born or newly adopted child up to a maximum of ten weeks. These can be received by one parent or split between two and are payable for absences from work at any time during the twelve month period after the child arrives home;
• sickness benefits which are available for up to fifteen weeks of sickness on providing a medical certificate from a doctor.

Employer Health Tax (“EHT”)
All employers with an annual gross Ontario payroll in excess of $400,000 and with permanent establishments in Ontario must pay EHT. Certain agencies “relatd” to the government of Ontario are not eligible for the exemption.

What EHT premiums are based on
EHT premiums are calculated by multiplying total Ontario gross calendar year payroll (box 14 on the T4 Summary) by the tax rate applicable to that amount. For gross employment over $400,000/year the EHT tax rate is 1.95%. As with CPP and EI, gross annual payroll does not include lump-sum payments made by an employer to an employee as retiring allowances or as severance or termination payments.

Note that related organizations are required to pool employment earnings for EHT purposes. As an example, an organization running a children’s mental health centre under one employer number and a childcare centre under a separate employer number must combine the two gross payrolls for purposes of calculating the EHT premium.

An annual EHT return must be filed by March 15th of each year pertaining to the previous year’s payroll.

Benefits to the employee
The eligibility of Ontario residents for coverage under the Ontario Hospital Insurance Plan (“OHIP”) is independent of the requirement of employers to make EHT payments. Employees with OHIP questions should be directed to their local OHIP office.

Income Tax
All employers are responsible for deducting income tax from remuneration paid to employees. All organizations should request that employees complete a form TD1, Personal Tax Credits Return, to determine the amount of tax to be withheld at the source. Employees can request for more than the minimum legally required tax to be deducted by specifying this on the TD1 form.

What taxes must be deducted from
Incomes tax must be withheld on salary, wages and other taxable remuneration including bonuses and vacation pay. Unlike CPP and EI premiums, income tax must be deducted on severance payments and retiring allowances. The minimum amount to be deducted on lump-sum severance and retiring payments is:

Vacation Pay
Who earns it
All employees in Ontario earn a minimum of two weeks of vacation with pay after each twelve months of employment. This works out to 4% of salary (2/52 weeks). Entitlement to vacation time and vacation pay benefits applies to all full-time, part-time and temporary employees. Employees who have worked less than one year are not entitled to vacation time. They are, however, entitled to vacation pay of 4% of remuneration earned in their first year.

The Ontario Employment Standards Act requires that an employee must be provided with two weeks of vacation time upon completion of twelve months of employment. Any agreement to provide pay in lieu of this minimum vacation time entitlement requires the approval of the Director, Employment Standards of the Ontario Ministry of Labour. If an employee is entitled to receive more than two weeks vacation a year, the employee may accept pay in lieu of vacation for that portion of the vacation entitlement in excess of the basic two week minimum. This policy of insisting on at least two weeks of time off emphasizes the basic principle of providing employees with an opportunity to rest, relax and rejuvenate.

Employers typically state vacation entitlement in terms of number of weeks permitted per year. Where significant unpaid absences from work are anticipated, employers should quote the vacation entitlement as a percentage of salary earned. For example, if an employee would normally have entitlement to three weeks of vacation, the employer should consider quoting the vacation entitlement in the employment contract as 6% of remuneration earned. Using this method an unpaid leave of absence would accrue no paid vacation time.

How much vacation time is required
Typical paid vacation allowances are:

Note that an employer can stipulate when employees may take vacations. Weeks given need not be consecutive. Note, however, that two weeks of vacation must be given within ten months after the end of the twelve month period for which the vacation was earned. Terminated employees are entitled to receive vacation pay earned but not taken. An employee entitled to three weeks vacation pay a year is entitled to one-and-a-half weeks’ pay in lieu of vacation if they are terminated in the middle of the year.

Legislated public holidays
The rules for employee entitlement to legislated holidays in Ontario are surprisingly complex. Currently there are nine legislated paid holidays in Ontario. They are:

• New Year’s Day
• Family day
• Labour Day
• Good Friday
• Thanksgiving Day
• Victoria Day
• Christmas Day
• Canada Day
• Boxing Day

Customarily Ontario employers provide at least ten paid holidays each year. The two additional days are often Simcoe Day in Ontario (the first Monday in August) and a floater holiday (e.g. Easter Monday). Employees may request a holiday to observe religious holidays that are not recognized by legislation. To support such a request organizations should consider:

• granting an unpaid leave of absence for the employee for the day
• allowing the employee to observe the holiday as a day of vacation
• allowing the employee to take a paid floating holiday for the day requested.

Loss of holiday pay entitlement
Under certain circumstances an employee may lose their entitlement to receive holiday pay. In these situations legislated public holidays taken need not be paid for by the employer. These situations are where the employee:

• has been employed for less than three months
• fails to report for work on a scheduled work day either before or after a holiday without giving notice
• has agreed to work on a public holiday and fails to report for work
• has not earned wages on at least twelve days during the four weeks immediately preceding a holiday.

This last point is important in situations where employers hire staff on an irregular basis. Full or part-time staff who earn wages on at least twelve days during the four weeks immediately preceding the holiday are entitled to pay for the relevant legislated public holiday. If you have significant part-time staff that are not receiving pay for legislated holidays you should check the regulations under the Employment Standards Act.

Statutory leaves of absence
Statutory provisions for pregnancy and parental leaves of absence are detailed in the Employment Standards Act. In summary, an employee is entitled to 17 weeks of unpaid leave of absence for pregnancy only if they have been employed for at least thirteen weeks preceding the estimated date of delivery. During the leave of absence the employer must continue to provide and make contributions to non-statutory benefits such as pension plans, health and dental plans unless the employee declines coverage in writing.

It is critical to note that on returning to work the employee must be reinstated to the same position he/she left and at the same rate of pay. The Ontario courts have been extremely unforgiving in cases where employers have terminated employees while they were on maternity or paternity leave. If you are considering such a course of action it is imperative that you consult a labour lawyer first.

Note also that vacation continues to accrue during pregnancy leave. If, as was suggested before, you quote vacation pay entitlement in terms of a percentage of salaries earned then, while the employee may earn an extra week or two of vacation time during the pregnancy leave, the employer need not pay the employee for the time away. If, on the other hand, employees are guaranteed a specified number of paid weeks per year then the employer may not only be required to give the employee vacation time earned during the unpaid maternity leave but they may also be required to pay the employee for the time off.

Enter 1997. The proxy method was reinstated and organizations in the broader public sector were informed they must act as though it had never been repealed. These organizations were required to make retroactive pay equity adjustments for 1995, 1996, 1997 and the current adjustment for 1998. Each adjustment was equal to 1% of the prior years’ payroll and should have been distributed according to the rules outlined in our pay equity legislation. If your payroll is approximately $500,000 and pay equity has not yet been achieved for all female job classes then your organization could have to come up with in excess of $30,000 in total to meet its retroactive pay equity obligations up to and including 1997.

In late 1997 the Minister of Finance for Ontario announced that $140 million will be available for pay equity funding for organizations in the broader public sector. The Minister apparently arrived at this amount by estimating the salaries of broader public sector organizations and the resultant pay equity funding deficiency from 1995 to 1997. The announced funding was supposed to be sufficient to cover the shortfall to date.

MCSS informs us that correspondence will be sent out shortly to all organizations in the broader public sector to advise them of the situation. A survey will be sent to these organizations sometime in 1998 to determine existing unfunded pay equity requirements. Funding was forthcoming for the period 1995 through 1998 in 2000 and continues today.

Changes to the WCB
On January 1, 1998 the Workplace Safety and Insurance Board (“WSIB”) replaced Ontario’s 83 year old Workers’ Compensation Board. Bill 99 made the following adjustments:

• Benefit levels for injured workers were reduced to 85% of net salaries.
• Inflation protection was be reduced for permanently disabled benefit recipients.
• There is no longer compensation for chronic stress.
• Chronic pain benefits are limited.
• New rules were introduced to accelerate the return to work of injured employees. In addition, injured workers are required to consent to the release of medical information by their doctors to employers and/or the WSIB.

As participation in the WSIB plan is optional for childcare centres and the majority of other not-for-profit organizations you should review participation by your organization.

Ask your private benefit plan consultant to prepare for your Board of Directors a comparison of your existing short and long-term benefits with those to be provided by the WSIB. In many cases there is already significant overlap of private plan and WCB coverage. Employees, however, are generally not permitted to claim double benefits even though premiums may have been paid for both plans.

Some private plans are more comprehensive than current WSIB coverage. For example, employees are only covered by WSIB for injuries sustained while on the job during working hours. Typically most private plans cover employees for injuries sustained twenty-four hours a day. On the other hand, some private benefit plans have a limited payment period for long-term disability claims. The WSIB will typically pay claims for the duration of the injury to age 65. In addition, WSIB participation provides some coverage for Directors of Boards as employees claiming coverage must waive rights to claim damages from their employers as a condition of applying for WSIB coverage.

Cancellation of participation in the WSIB plan is often difficult and the exit fee is often significant. Cancellation normally must be done before January 1 of a year. It is next to impossible to terminate coverage in mid-year. Now, therefore, is the time to review your long-term insurance plans.

Taxation of disability benefits
The rules for taxation of disability benefits are as follows:

• If an employer pays any part of the disability insurance premiums on behalf of an employee then disability payments will be taxable to that employee in the year received. The insurance company typically issues a T4(A) each year to employees receiving benefits where employers have paid the premiums.
• If an employee pays his/her own disability insurance benefit premiums then disability benefits received under the plan will not be taxable to the employee.

From the employer’s perspective it is less expensive to have the employees pay for their own long-term disability premiums. This approach can often be sold to employees on the grounds that their disability benefits will be tax-free in the event that they are disabled and unable to work. On the other hand, employees often prefer the short-term benefit of having their employer pay the monthly disability premiums. The personnel committee of your organization should consider the advantages and disadvantages of premium payment options when reviewing disability coverage.

What expenses are deductible?
Deductible childcare expenses include:

• all costs of day nursery care and babysitting
• for camps and boarding schools an amount is allowable. Visit http://www.cra-arc.gc.ca/E/pbg/tf/t778/t778-09e.pdf for the amounts deductible
• generally, childcare payments made to any person who is a deemed resident in Canada except:
  • the father or mother of the child
  • a person under the age of 18 who is related to a parent of the child (for example, a sibling)
  • a supporting person who either claims a dependant deduction for the child or deducts the child care expenses of the child

When may expenses be deducted?
Childcare expenses may only be deducted in the year in which they have been paid. If you pay for December care in January or later then you are not able to deduct that care in the December year; you must wait until the following year. Consequently, it is important for supporting persons to ensure that childcare payments are up-to-date each year in order to be eligible for the maximum deduction.

Expenses must be supported by receipts even though the receipts need not be filed with the taxpayer’s personal tax return. The receipts should include:

• the name of the organization or person providing care (if it is an individual then their Social Insurance Number must also be included)
• the names of the supporting person and child
• the amount paid for childcare in the year
• the date of the payments
• the signature of the person who provided the childcare services or a signature on behalf of the day nursery.

Not receiving a receipt does not mean that you are denied the deduction for childcare. It does, however, mean that you will have a more difficult time supporting your claim should Canada Customs and Revenue Agency ask for proof of payment.

How much may be deducted?
The maximum annual deduction available to parents is the lesser of:

• See http://www.cra-arc.gc.ca/E/pbg/tf/t778/t778-09e.pdf for the amounts deductible this year.
• Two-thirds of the earned income of the person claiming the deduction. Earned income as defined in the Income Tax Act includes:
  • wages, salaries and related taxable benefits
  • profit sharing received from employment earnings
  • certain disability payments payable under the Canada Pension Plan
  • certain training allowances
  • taxable amounts of research grants, bursaries and fellowships

Who may claim the deduction?
The supporting person (not to be confused with the “parent”) with the lowest net income before the childcare deduction is the only person that may claim the expenses. Note that claiming childcare may be beneficial even if one of the members of a couple has no tax to pay. Claiming the deduction could increase the spousal/common law deduction available where one of the tax paying partners earns between approximately less than the maximum threshold per year even though the low income earner has no tax to pay.

An exception to the low income earner being the only one eligible to claim the expense occurs in two partner families where one of the partners is a full-time student while the other is in the work force. In this case, the working partner may claim the deduction while the other is at school. Full-time attendance at school is defined as enrolment in an educational program that lasts at least three weeks and requires that the individual spend at least ten hours a week on courses or work in the program.

Effective July 1, 1999 responsibility for funding and distribution of salary grants has been downloaded to local area service providers. This, in most cases, is the municipality involved (e.g. City of Toronto, Region of York). We have been informed by representatives of the City of Toronto that, for the present, there will be no changes in rules governing distribution of wage subsidies to childcare staff.

For your information, we are quoting verbatim Sections III through V of the Ministry of Community and Social Services Guidelines and Procedures for Childcare Wage Subsidy. These sections specify (or leave vague as the case may be) rules for distribution of wage subsidies. We recommend that you compare your centre’s method of distribution with these rules and regulations and ensure that your centre is in compliance with the current municipal wage subsidy guidelines.

Sections III through V of the Ministry of Community and Social Services Guidelines and Procedures for Childcare Wage Subsidy

III. PERSONS ELIGIBLE
Wage subsidy is intended to improve the salary and benefit levels of employees working in a child care program and amounts paid to home child care providers. With respect to persons working in an eligible child care program, the people who should benefit are those who fill permanent positions (full or part-time).

The following list notes some of the types of permanent positions that are typically found in a child care program:

• Trained and untrained teachers
• Supervisors/Administrators
• Home Visitors
• Resource Teachers
• Clerical Staff
• Cooks
• Housekeeping and Janitorial Staff
• Bus Drivers

A permanent position (full or part-time) is one which is part of a program’s regular staffing component or under contract as a home child care provider. For example, a child care program offers a music program for six months of every year and employs an individual to conduct the six month program every year. This position is a permanent position. If however, a program offers a music program on a one time basis only, the position would not be considered permanent. That individual would be working on a short term project for the child care program. The full-time equivalent is required for full and part-time positions. (e.g. 17.5 hours/week = .5 FTE when 35 hours/weeks is the regular work week). The FTE is based on the agency’s standard work week. Because this payment is intended for employees in permanent positions (full or part-time) or persons under contract as home child care providers, the following staff should not be included:

• Persons working on a short term project. For example, an individual under contract with an agency to develop a parent contract.
• Students and staff whose salaries are covered by employment programs such as “Futures”, “Social Services Employment Program” (SSEP) etc.
• Persons paid on a fee-for service or contract basis. For example, someone who provides accounting services, janitorial services.

IV. FUNDING CONDITIONS
The Service Provider will use Wage Subsidy funds to increase the salary and benefits of staff employed in licensed child care services, funded child care resource services, and funded support for children with special needs.

The Service Provider will only use Wage Subsidy funds to increase salary and benefits of staff filling eligible positions unless non-salary related use is specifically approved by the Ministry. Where a collective agreement precludes increasing payments to staff, or other such exceptional circumstance exists, non-salary use of wage subsidy funds may be approved by the Ministry.

The Service Provider will ensure that each employee receives a reasonable portion of Wage Subsidy, and that such distributions are consistent with achievement of the service provider’s pay equity plan.

Distribution of Wage Subsidy to employees will not exceed $9,030 per FTE position in a non-profit organization and will not exceed $3,230 per FTE position in commercially operated child care program (unless resulting from transfer/sale of a child care centre previously operated by a non-profit organization).

The Service Provider will ensure that all payments to employees, including Wage Subsidy, are reflected in the job rates used by the Service Provider in pay equity calculations.

The Service Provider is entitled to use a portion of Wage Subsidy funding to cover mandatory employer contributions resulting from increased salary and benefit costs which are related to implementation of Wage Subsidy funded salary and benefit increases.

Service Providers that down-size a child care program may not redistribute Wage Subsidy funding to remaining positions. Wage Subsidy funds distributed to previously employed positions are to be declared surplus on the Child Care Wage Subsidy Utilization Statement provided to the Ministry at the end of funding year.

The Service Provider will immediately report to the Ministry any significant child care program down sizing which is expected to be ongoing, and acknowledges that such program and/or staffing changes will result in recalculation of the amount of Wage Subsidy the Service Provider is eligible to receive.

Previously approved Direct Operating Grant funding for non-salary use may continue to be used for such purposes, subject to Ministry approval each year, but must be at the 1993/94 level or lower.

Service Providers that operate a licensed home child care program shall distribute a portion of Wage Subsidy to enhance payments to home child care providers, as well as to employees of the home child care agency such as home visitors. Unless the program has down sized, the amount distributed to home child care shall be consistent with the total combined amounts of the former Direct Operating Grant and Provider Enhancement Grant previously distributed to home child care providers.

The Service Provider shall determine and administer distribution of Wage Subsidy funds in accordance with the funding conditions herein and Ministry policies, procedures, and guidelines governing Wage Subsidy and Pay Equity in effect at the time of such distribution.

The Service Provider is required to communicate to staff and home child care providers how subsidy funding is distributed, as well as any changes that may occur in distribution.

Wage subsidy funds not utilized in accordance with the conditions outlined above and current Ministry policies, procedures, and guidelines governing Wage Subsidy and Pay Equity shall be returned to the Ministry.

Failure to comply with any of the funding conditions herein may result in a claim for recovery of Wage Subsidy funding provided by the Ministry and ineligibility to receive future funding under the Wage Subsidy program.

The Service Provider will submit a Child Care Wage Subsidy Utilization Statement to the Ministry within thirty days of the end of the funding year.

V. GUIDELINES FOR WAGE SUBSIDY DISTRIBUTION

1. The purpose of Wage Subsidy funding is to enhance the salaries and benefits of eligible staff.
2. The Ministry strongly encourages that Service Providers include Wage Subsidy funding in their ongoing salary and wage payments to staff rather than distributing the funding as periodic payments during the year.
3. Salary related wage subsidy refers to the combined amount of the former Direct Operating Grant, Wage Enhancement Grant, and provider Enhancement Grant. Only expansion that is part of the MCSS area child care management plan will receive additional Wage Subsidy funding. Where expansion is not part of the management plan, the service provider is responsible for funding for 100% of the additional salaries, benefits and home child care provider payments.
4.The Direct Operating Grant portion of the Wage Subsidy may be approved in year [SIC] by the area office for non salary use, i.e. affordability or staff training. Existing approvals may not exceed the 1993/94 level. This amount will be identified separately in the approval.

Service Providers may use a portion of the Wage Subsidy grant to fund the increase in the employers’ share of benefits to the enhanced salaries.

The most effective fee collection strategies are preventative. It is important to act before unpaid fees become overwhelming for parents and families are unable to catch up. Following are a few preventative measures that may help to reduce your receivables:

Document your policies and rules
Does everybody involved in the collection process know the centre’s policies and rules regarding debt monitoring and collection? Parents, the supervisor and the board of directors all play key roles in fee collection and it is important that these roles are documented and well understood. The basic collection policies for parents should be specified in the parent handbook. These policies include:

• the frequency of payments (weekly, monthly)
• interest and other penalties, if any, to be levied on late payments
• the method of payment (postdated cheques, cash, certified cheques in the event of NSF’s)
• conditions resulting in withdrawal from care

Parents should be made aware of the policies during the initial enrolment interview. Policies must be clearly outlined and documented to ensure neither the board nor the supervisor are put in the position of having to make up rules as they go along. Consequences resulting from non-payment should be clearly communicated to be fair to parents and staff/board members. We are not suggesting that policies and rules always be rigidly enforced. Rather, we believe that clear written policies help make difficult situations more manageable and help reduce nasty surprises. Policies should also be set for the roles of the supervisor and the board. Policies should cover:

• responsibility for billing parents
• communication of fee increases
• maintenance of the receivables ledger
• information to be reported to the board
• action to be taken when fees outstanding are 30, 60, or 90+ days overdue
• special steps to be taken if the receivables are due from board members or staff

Again, we are not suggesting slavish adherence to these written policies. Deviations from the policies should be discussed at the board level on a situation-by-situation basis and documented in the board minutes.

We have a few suggestions that you might consider including while formulating your collection policies.
Regular review of outstanding amounts
First and foremost the supervisor should review accounts receivable on a monthly basis. Many collection problems stem from not acting soon enough to collect overdue debts. A summary of amounts owing should be presented at each monthly board meeting. Names should not be disclosed for reasons of confidentiality. The summary should indicate amounts overdue by month (i.e. one, two, three and over); amounts greater than 30 days past due are a potential collection problem. The supervisor should report on action taken to collect these amounts and the board should respond and assist accordingly.

Responsibility for collection of amounts past due
Generally the supervisor is responsible for collecting and depositing fees. Giving the supervisor responsibility for collection of past due amounts may interfere with care given to the children if staff/parent relations become strained. Unpaid fees are not the child’s problem. We recommend that collection of seriously past due fees be undertaken by a board member and not the supervisor. This will allow staff to focus on providing care to the child.

Speak to parents directly
Person to person contact is essential to collection of overdue amounts. It may be easy to write a letter but it is often ineffective for collecting fees. When talking to parents consider stressing that while the care of their child comes first the financial stability of the centre is also critical. Collection of fees is a key element in that stability. Your objective should be to develop a payment plan that will meet both the needs of the centre and the financial capabilities of the family.

Any repayment plan should start by ensuring that payments for current child care remain up-to-date. For example, if payment for March and April has not yet been received by May then first make sure that the fees for May are paid. This will maintain needed monthly cash flow at the centre even if past due amounts remain outstanding. For some families a weekly payment schedule for current fees may be more manageable than larger monthly payments.

Once parents return to making regular monthly payments you can negotiate a payment plan for the arrears. We recommend that you agree on a regular payment stream over a manageable number of months. If the plan puts the parents in such financial stress that they are unable to pay current fees then the past due problem will only worsen. For example, if a parent owes $600 consider asking for an additional $50 per week until the arrears are paid. A 12 week repayment term may seem long. However, it is better to collect current fees each month and the arrears over a long period of time than to lose a full-fee paying parent altogether.

Amounts due from board members
Collection of past due amounts from board members is an especially difficult issue. The supervisor reports to the board and it is generally inappropriate to ask staff to collect from their boss. Also, board members often become friends during their term in office and collecting debts from friends can get uncomfortable. You might consider having a policy of disclosing by name all amounts owing by board members at monthly board meetings and having the executive committee be responsible for the collection of those amounts. You might also consider asking board members in arrears over a certain period (e.g. 60 days) to resign. You must be seen to be taking action by the members of the childcare centre to avoid accusations of favoritism.

Collection from families no longer receiving care
Once families have withdrawn children from care it is difficult to collect unpaid fees. Gentle weekly phone calls and letters sometimes work. Turning the problem over to a collection agency can result in collection of 50 cents on the dollar. However, the techniques used by these agencies are usually not very subtle. Creating ill will in your community could damage the reputation of your centre and make it more difficult to attract new fee paying parents.

Centres sometimes consider taking parents to small claims court for collection of amounts under $5000. This process takes time and it helps if you have someone with experience with small claims court to consult with. We are aware of some centres that have received last minute out-of-court settlements. However, many cases wind up in court. If you do go this route and obtain a favorable judgment then we recommend asking for payment to be made through the court. A favorable judgment does not always ensure you will actually receive payment.

Summary
Collecting debts can be both unpleasant and time consuming. Prevention is the best cure. Develop and document parent and board/staff policies, monitor parent receivables regularly and try to resolve problems in a compassionate manner before they become significant.

Following are a few early warning signs that, in our experience, generally precede financial difficulty. Any one or a combination of them can often be dealt with and rectified over a number of months. The trick is to identify financial difficulties and act promptly as a problem identified six months in advance can almost always be resolved.

Declining enrolment
The most obvious indicator of financial difficulty is one of persistent declining enrolment. Actual declines in enrolment are preceded by a shrinking waiting list. Boards should insist on a monthly report on the status of the waiting list as well as on actual enrolment levels.

Waiting lists must be tended. At least once a quarter every family on the waiting list should be contacted and families no longer needing care should be deleted. We know of one centre which closed its waiting list down at 120. Eighteen months later there was an unexpected vacancy in the toddler room. Not a single parent on the waiting list was still interested in care. It took the centre two months to fill the vacancy at a cost of $1,600 in foregone revenue.

Increasing Salary Costs As A Percentage of Fees
Centres typically have a fairly stable ratio of salaries to fees. For most centres this ranges between 70% and 90% with 80% being typical for multi-age programs. Increasing salary costs as a percentage of fees results from:

1. dropping enrolment levels without adjustment of staff costs;
2. rising staff costs resulting from factors such as maternity leave, increased use of casual staff and, in some cases overstaffing.

Regularly reviewing the percentage of staffing costs to parent and Metro fees can give you an indication of your centre’s financial health.

Declining Financial Cushion
A healthy childcare centre will generally have an accumulated surplus or financial cushion (the excess of current financial assets over liabilities) of between one and three months’ expenses. For example, if you have a centre with a $360,000 expense budget, an adequate financial cushion is in the range from $30,000 to $90,000. If your surplus declines below one month’s expenses then you have limited resources to carry you through financial difficulties such as losses in the summer or a sharp decline in enrolment.

Typically, centres build up their accumulated surplus when they are at or near full enrolment and steadily reduce this cushion when enrolment drops below 95% for an extended period of time.

If your accumulated surplus is below one month’s expenses then you should attempt to budget a small surplus on an annual basis until the cushion is built up again.

Increase in accounts receivable
Steady increases in accounts receivable from parents and Metro can be indicative of financial problems. Failure to monitor and collect parent receivables is a sign of a lack of attention to finances at the centre. Consistent lateness in receipt of subsidy from Metro almost always results from lack of attention to bookkeeping and financial matters in general.

Insufficient and/or late reporting of financial information
If you are receiving insufficient financial information to determine whether you are in financial health on a monthly basis and/or if the information provided is more than one month old you have no way of knowing whether problems await you further on in the year. A current financial report should be prepared for each Board meeting. Financial reports should ideally consist of a report on enrolment trends together with a brief financial statement showing performance for the past month, current financial position and a comparison of actual results with the budget approved by the Board earlier in the year.

1. Do you prepare an annual budget?
2. Is it prepared before the year starts?
3. Is it approved by the board?
4. Is it updated periodically?
5. Do you have a monthly cash flow forecast?
6. Is it used by the board in settling fee/expense policy?
7. Enrollment expectations are reviewed by the board at least quarterly?
8. Are you advised of changes in financial legislation (tax) and regulations?
9. Does your board/finance committee meet regularly and discuss financial matters?

Do you know where you stand today?
A. Cash

1. Are deposits made regularly?
2. Are parent names and period covered by fees deposited marked clearly in the deposit book?
3. Cancelled cheques are returned by bank
4. Are all bank accounts reconciled monthly to the accounting records? (not first to the cheque stubs).
5. Is the board is advised monthly of cash on hand.

B. Receivables

1. A monthly list of parent and metro receivables is prepared and shown to the treasurer.
2. Receivables from Metro Children’s Services, MCSS, GST, etc are monitored monthly?

C. Payables

1. A file of unpaid invoices is kept?
2. Bills are paid promptly?

D. Grants and government rebates

1. You know each month how much is owing to staff for salary grants received but not yet disbursed?
2. All grant forms for the last year have been submitted on time?
3. You are advised of new funding sources on a timely basis?
4. You know your eligibility status for GST rebates and, if eligible, you have received a rebate in the last year?

Are your assets safe?

1. Purchases of significance are approved in advance?
2. Two signing officers sign all cheques and review supporting invoices.
3. Bank accounts are reconciled monthly and someone other than the bookkeeper reviews the reconciliation.
4. Parent receivables are promptly followed up at the board level on a regular basis.
5. All Revenue Canada remittances have been submitted on time?
6. All payroll payments have been made on time?
7. Your last T4 and EHT returns were filed on time?

Corporate Governance

1. You have had an audit within the last year?
2. Filings with Consumer and Corporate affairs are up to date?
3. You have filed a tax return/charity information return within the last year?

Setting up a Finance Committee
Your Board of Directors should tailor the design of a Finance Committee to suit its needs. As there are no legal requirements under Ontario or Canadian Incorporation statutes to have a Finance Committee, your Board can design and set the terms of reference for the Committee as it sees fit. Following are some suggestions to consider when setting terms of reference and assigning responsibilities.

Remember that it is critical for your Board to document in writing the role and responsibilities of the Finance Committee. Documentation will provide for continuity over time and give new Finance Committee members a clearer understanding of their responsibilities.

Who should sit on the Committee
As the Finance Committee will be a sub-committee of the Board of Directors, it is important that members of the Board form the committee. You could recruit non-Board members to provide advice on an ongoing basis provided non-Board member participation is not prohibited in the by-laws of your organization. This is also a way to recruit and train future Board members.

We recommend having at least three members on your Finance Committee to foster discussion. Recruiting Board members with non-financial experience can provide fresh points of view and varied experiences. We believe it is as important to have Finance Committee members who question the way things are done as it is to have members with preset notions of how finances should be managed.

The staff person responsible for your organization’s finances should be asked to attend most Finance Committee meetings. This will help ensure that the Committee receives accurate information and is advised of changes in the organization’s financial circumstances on a timely basis.

You could also invite your auditor to at least one Finance Committee meeting each year. The Committee should review the findings of the annual audit and discuss any concerns and/or suggestions regarding internal control at that meeting.

What the Finance Committee should review
The Finance Committee should review and be responsible for reporting to the Board all aspects of the financial management framework including:

• establishing budgets to meet the organization’s objectives
• regular monitoring of the financial position of the organization
• comparing where you are financially with where you planned to be and recommending appropriate adjustments to the Board.

The Finance Committee should also look at areas of internal control and ensure that you get the most from your financial resources.

The terms of reference for your Finance Committee could include the following:

Monitoring the Budgeting Process
The level of Finance Committee involvement in the budget preparation process will depend on the financial capabilities of your organization’s staff. Some Committees will primarily provide a supervisory role whereas others will find themselves preparing the annual budgets. In either case the Finance Committee should be responsible for presenting the annual budget to the Board once it is completed.

Regular reports comparing actual financial results with budgeted forecasts should be made by the Committee to the Board throughout the year. The Committee should periodically (at least quarterly) review the critical underlying budget assumptions (enrolment, fees charged, number of staff and salaries paid, etc.) and recommend appropriate budget adjustments to the Board.

The Committee should make recommendations to the Board for fee increases where necessary and report if and when funds are available for salary increases. While it would generally not be appropriate for the Finance Committee to recommend individual raises to the Board (this is usually left up to the Personnel Committee), it would be their responsibility to determine how much in total is available for raises on an annual basis.

Monitoring day-to-day record keeping
The Finance Committee should determine whether the day-to-day internal controls of the organization are functioning as expected. This review should be done at least once a year. If circumstances change during the year then an interim review may be appropriate. For example, if parent fees receivable steadily increase over several months it would be appropriate for the Finance Committee to review whether the organization’s policies of debt collection are being followed and determine whether the policies themselves are effective. The Finance Committee could also consider having staff report on the status of financial reporting systems on a quarterly basis. Consider using a financial management checklist to help this process.

The Finance Committee should approve significant changes in day-to-day accounting systems such as implementing new accounting software and reallocation of record keeping duties (e.g. hiring a bookkeeper).

Financial reporting
The Finance Committee should:

• review internal financial statements on a regular basis to make sure that the statements make sense and that financial trends are brought to the attention of the Board of Directors.
• review the annual audited financial statements prior to presentation to the Board of Directors and discuss the statements with the auditor if necessary. Items to be discussed with the auditor could include:
  • any changes in accounting policies and practices
  • recommendations for improving internal controls
  • observations the auditor might have regarding the financial efficiency and future financial viability of the organization.
• recommend to the Board of Directors the selection of an auditor for the following year together with the anticipated fees.
• present the financial statements and a brief annual financial report to the members of the organization at the Annual General Meeting.
• review funding submissions to various government bodies prior to submission, including municipal budgets (e.g. the Metro Children’s Services budget), the grant utilization forms required by the Province of Ontario and Pay Equity reports if applicable. Consideration should also be given to reviewing T4 Summaries, annual employee health tax and income tax/Charity Information Returns and other reports as required by various levels of government. The level of detail of the Committee’s review will depend on the financial expertise of staff at your organization. Remember that no matter how expert your committee members and staff are, the Board is responsible for ensuring the ongoing financial viability of the organization.

Keeping assets safe
At least annually the Finance Committee should review financial policies to ensure safety of assets. The Committee should review whether the policies governing the signing of cheques, use of organization credit cards and purchase of investments (T-Bills, GICs) continue to be appropriate and have been adhered to throughout the year.

Frequency of meetings
The Board and members of the Finance Committee should determine the frequency of the Committee’s meetings. We recommend that the Committee meet at least quarterly. These meetings should not, however, replace the review and discussion of financial information at the monthly Board meetings. Following is a sample agenda:

February

• Review T4s, etc.
• Review the annual audited financial statements
• Review budget assumptions for the period to June 30

May

• Review the organization’s summer budget
• Review prepared grant utilization forms, corporate tax returns and other government reporting forms as applicable

August

• Re-review budget assumptions for the fall
• Compare actual results for the summer with those budgeted

October

• Review the following year’s municipal subsidy budget if applicable
• Prepare a budget of revenue and expenses and monthly cash flow for the upcoming fiscal year
• Discuss financial reporting and any related concerns with the auditor if appropriate.

• Assemble payroll information for T4/T4-A preparation

FEBRUARY

• Final date for T4/T4A submission is month end
• Review monthly cash flow assumptions and adjust monthly cash flow forecast if necessary (*)

MARCH

• Annual financial statement should be finalized and approved by the board (*)
• If eligible, prepare application for GST rebate (*)
• Complete and submit EHT annual return by March 15

APRIL

• Prepare cash flow forecast for summer period

MAY

• Prepare Worker’s Compensation return if applicable

JUNE

• Final date for filing of Revenue Canada returns (T2/T3010/T1044) is June 30 (*)
• Annual General Meeting held before month end (*)
• Update/finalize summer period cash flow forecast
• MCSS grant utilization forms due (DOG/WEG) (*)(**)
• Provincial Annual Return and Special Notice filings due (*)

JULY

• Review summer cash flow forecast assumptions and adjust budget if necessary

AUGUST

• Enjoy well deserved rest!

SEPTEMBER

• Assemble information for Metro Children’s Services budget (Metro Toronto only)(**)
• Update monthly cash flow forecast for changes in enrolment/service levels (*)

OCTOBER

• Complete Metro Children’s Services budget by month end (**)

NOVEMBER

• Assemble information for next year=s monthly cash flow forecast

DECEMBER

• Finalize and obtain board approval for next year’s monthly cash flow forecast (*)
• Review staff salaries and fees charged (*)

NOTES:
* This schedule assumes a budgeting process based on a calendar year. If your budget is for a different period, for example from April to March, then you should adjust the items marked with an asterisk accordingly.
** Applies to childcare centres only.

• computer systems are checked regularly to make sure they are free of computer viruses
• computers are safe from theft and from unauthorized use at your organization
• electronically stored information can be restored in the event of a computer disaster.

Computer viruses
Computer viruses get a lot of nasty press these days. If you download information/files from the Internet, use shareware or pirated software, give unsupervised access to users, or use disks that were written by another computer then you are at risk of catching a computer virus. The impact of a virus can be as benign as leaving a message on your screen or as devastating as destroying all of your files.

Generally you won’t know a virus has invaded your system until its too late unless you have an up-to-date anti-virus program checking all incoming files. Computer vaccination programs are available commercially at reasonable prices and are easy to install. Electronic viruses mutate as quickly as their organic counterparts. You should therefore regularly install updates of your anti-virus software.

Theft and unauthorized use
Unfortunately, financial and other pressures on individuals can occasionally lead to theft of cash, computers or other assets within an organization. Regretfully most business thefts are carried out by people within an organization. You should review security controls over computer hardware and software (such as programs used to print cheques and donation receipts and to record transactions) to minimize the risk of theft and the attendant aggravation and effort involved in replacing the stolen property and/or data.

The points that follow should assist your Board and staff in carrying out a review of your organization’s computer system controls. The list is not exhaustive. It is intended to point out some of the issues you should consider.

Protection

• Develop a written policy on computer security. Policies help people understand the importance of maintaining the accuracy, completeness and security of electronic information. Writing policies can also help your Board and staff to focus on issues of critical importance.
• Use passwords to make sure only authorized users have access to your system. Passwords can control access to computers and can restrict access to specific information stored on the system (e.g. personnel files). Passwords are only effective if they are known only to those personnel given the authority to use them. Occasionally a person will share a password with others in the organization to speed up a task. Also, some employees paste their password in a public place so that they won’t forget it. (Our favourite is the post-it note on the computer monitor). This sharing of passwords can: lead to confusion as to who has worked on a project; allow a person to make changes when he/she is not normally authorized to do so; allow the unauthorized loading of software which could contain a virus or simply be undesirable/inappropriate.
  Passwords should always be changed when any person who has the password no longer works with the organization.
• Promote high employee morale. Some computer losses result from the actions of disgruntled employees. When staff feel they are dealt with fairly there is less threat of unauthorized use of an organization’s assets and computers and fewer acts of vandalism.
  Financial strain has a direct impact on the resources available for staff remuneration. This is especially true in service organizations where staff costs are often the highest expense. Where funds are very tight you will need to promote high morale through creative recognition and reward schemes using non-financial benefits.
• Know the areas of potential input and processing errors in your systems. Most organizations use purchased software packages. Financial and other commercially available packages ordinarily have checks and balances built into them to ensure accuracy of information entered and processed. Some packages, including many commercially available donor database programs, are designed for maximum flexibility and present an increased opportunity for errors to occur. You should review your systems to understand how and where errors could occur and then develop adequate controls to ensure errors either do not occur or are caught before affecting reporting. Management should always review summarized data to ensure it makes overall sense.
• Hosting a website or an Internet domain on your in-house computer system can provide hackers with access to your stored information. As few not-for-profit organizations host websites on their own computer systems this is generally not a concern. Hosting a website or a domain on your Internet provider’s system does not expose your organization to any increased risk to unauthorized access by external users.

Detection

• Make sure clear transaction trails exist. Commercially packaged programs often have a built-in log that tracks who accesses the system and dates work as it is entered. The ability to review and trace when and where transactions are entered can be useful. For instance, if a person entering information is interrupted then he/she needs to be able to determine where to pickup entering data. In this case a data entry log will help to avoid entering data twice or not at all. A data entry log is also essential to investigate suspected cases of fraud.
• Ensure entries can be traced backwards and forwards through the processing cycle. This is referred to as having an audit trail. Your electronic records should contain sufficient detail to allow for transactions to be traced to the relevant individual, funder, supplier and employee. You should also be able to trace the entry through to supporting documentation such as invoices, payroll records, bank deposit books and cancelled cheques.

Recovery of Electronically Stored Information
If your computer is stolen or damaged you will need to reconstruct your data files. The easiest way to do this is to restore from a recent backup of crucial files. Backups should be made weekly or monthly, depending on the volume of transactions in your organization. Establish and document policies for how often backups are to be carried out, where backup files are to be stored and for how long.

For larger organizations, a second computer on the premises can be used for short-term backup. Information can be copied to it on a daily or weekly basis. If the main computer crashes then the second one provides a quick backup source and only a day or a week’s worth of data need be restored. An offsite backup of key information should still be maintained in case both computers are damaged in a fire or flood.

It is important to know the costs that would be involved in reconstructing data in case of a loss. Most organizations know the importance of keeping backup copies of financial data. However, other pools of data may be more costly to reconstruct or you may not be able to reconstruct them at all. Donor and medical record databases are two examples of information that could be very difficult to reconstruct. Your Board should ensure that all significant pools of data, including financial records, are backed up on a regular basis and the backup kept off-site.

Classification of revenue can make a significant difference if you are not a registered charity and if your revenue from government sources is below the 40% mark. If you currently net direct operating grants against salaries in your financial statements then you may not meet the 40% threshold. For example:

In scenario A, the government grant (DOG/WEG) revenue is disclosed in the financial statements as revenue and comprises 40% of total revenue. This not-for-profit centre is therefore eligible for a 70% refund of HST paid. In scenario B, the same grants have been netted against salary costs and therefore, in the absence of other government grant revenue, the 40% does not appear to have been met in the financial statements. The 70% HST refund could be lost.

In summary, if you are at or close to the 40% threshold of government revenue to total revenue and you are a not-for-profit centre then you should carefully review your financial statement disclosure of revenue from government sources to ensure that you will be eligible for the refund of 70% of HST paid.

Establish fundraising objectives
The goal of a fundraising campaign is, obviously, to receive money and gifts-in-kind. However, raising money is not an end in itself. Your Board of Directors should first clearly identify the reason additional funds are needed by the organization. Matching the organization’s fundraising objectives with the interests of its members increases the likelihood of a successful campaign. Some common objectives are:

• Purchasing specific items: Fundraising for specific purchases is one of the most common objectives and the easiest to promote. Asking for donations for computer equipment or specific enhancements, such as a music program, is a much easier task than asking for money to eliminate a deficit as the objective is positive and tangible.
• Improving your financial position: If your organization is having difficulty obtaining sufficient funds to meet operating expenses on a day-to-day basis then your Board may determine that a fundraising campaign is necessary.
  Unfortunately, fundraising to remain solvent usually does not work for organizations whose revenue is primarily generated by fees and memberships. For example, a childcare centre with capacity for 60 children and monthly expenses of $25,000 may need to raise up to $2,000 a month to make up for lost revenue if enrolment drops below the break-even point by only two children. Raising $2,000 a year, let alone every month, from fundraising is a challenge for most not-for-profit childcare centres. The centre would be better off first focusing its efforts on bringing enrolment back up to the break-even level.
  Similarly, if fifty percent of government grant revenue is eliminated, your organization should first work towards redesigning its program to cope with the reductions and then determine whether it is appropriate to support the redesigned program with extra fundraising dollars.
• Sense of community: An often overlooked benefit of fundraising is an increased sense of community among members of the not-for-profit organization. For example, a childcare centre might put on a fundraising dinner and dance for the children’s parents. As well as raising money for the centre, the parents get a chance to meet and, hopefully, have a fun evening resulting in a more closely knit community.

Develop a fundraising plan
Once the fundraising objectives have been clearly articulated then setting a plan to achieve them need not be difficult. The plan should specify:

• How much money, net of fundraising expenses, is to be raised and when the money will be needed. It is important that the fundraising goal be net of expenses as the organization only benefits from net resources raised.
• Whether the fundraising campaign is to be an ongoing campaign or a one-shot effort.
• Exactly what resources of the organization are available to the fundraising team including money, staff and volunteer time.
• Who the target audience is for the campaign.
• Efficiency benchmarks. For example, requiring that a campaign generate at least a set amount , net of expenses, per volunteer hour (e.g. $40 per hour) and that administrative expenses be no more than a specified percent (e.g. 10%) of gross receipts raised.

Reporting results to the Board of Directors
The fundraising committee should make regular financial reports to the Board of Directors including:

• A statement of revenue and expenses for each campaign and a comparison with the original forecast. Again, the report should focus on revenue less related fundraising expenses and not gross receipts.
• Whether efficiency benchmarks (e.g. dollars per volunteer hour) are being met and if not what recommendations the fundraising committee has to improve returns.

For ease of reporting and tracking of expenditures all fundraising proceeds should be deposited in a bank account separate from that used for general operations. Note that this must be done by law for all gaming campaigns such as bingo, Nevada ticket sales, and raffles. We also strongly recommend separate accounts for campaigns where donors have been promised that their contributions will be used for specific purchases. Efficiency considerations

1. The Board of Directors should set up a fundraising committee to select appropriate campaigns and make sure they are executed in as efficient a manner as possible. Maintaining some continuity of committee members from year to year will ensure successful and not-so-successful experiences are passed on as lessons learned from Board to Board. [See Volume I Issue 10, p.45 for comments on establishing Board committees]
   One of the responsibilities of the fundraising committee should be to monitor fundraising trends in the not-for-profit industry. Campaigns such as bingo and direct marketing have become less effective as more and more organizations have begun taking advantage of them. Staying one step ahead of the fundraising pack is difficult but necessary. Monitoring efficiency benchmarks should give the Board an idea when a particular fundraising strategy is running out of steam and a change is required.
2. Try to match the duration of a fundraising campaign with the period over which your organization needs the money. Specifically, if your organization needs additional money every month then select a fundraiser that will generate funds each month. If your organization can philosophically accept using gambling proceeds then consider applying for a bingo or Nevada license that will generate funds on a continuous basis. If gambling proceeds are ideologically unacceptable you must look elsewhere. If, on the other hand, you want to raise funds for a single purchase a one-shot fundraising campaign may be more appropriate.
3. Not-for-profit organizations frequently undertake a fundraiser and assume that staff will fit it in along with their regular duties. This may or may not be possible and in many instances staff do the fundraising on their own time.
   Budgeting staff time and determining when the work will be done brings the Board’s staffing decisions to a conscious level. If overtime is necessary it should be acknowledged. To ensure the Board is aware of the extent of staff involvement, set a budget for staff hours and ask for regular reports of whether hours spent are greater or less than expected.
4. Volunteer time is a resource which is often just as valuable as paid staff time when it comes to fundraising. The fundraising committee should estimate how much volunteer time is required as part of selecting a fundraising campaign. The anticipated dollars raised for each volunteer hour should be compared to the benchmark established by the Board of Directors. If the return is lower than required it may be time to find a more efficient (i.e. profitable) campaign.

Categories of fundraising campaigns
Selecting the appropriate fundraising campaign can be a difficult task. Fundraising campaigns usually fall into one of four categories. Each has its own strengths, weaknesses and legal requirements.

1. Donor appeals: Donation drives for money (flyers, door-to-door campaigns, direct marketing) work best when the organization has a well known cause with a large public from which to solicit funds. Donor appeals often require a large initial investment in volunteer time (door-to-door canvassing) and/or money ( the printing and mailing costs of direct mail). The ability of your organization to issue charitable donation receipts is generally necessary for running a successful campaign.
2. Sale of merchandise: Sale of merchandise works best when you have a dedicated membership. Sales of food products, clothing, gift wrap and coupon books are popular items. Reduce the risk of incurring significant up-front costs that may not be recovered. For example, ordering more t-shirts than can be sold for a t-shirt sale campaign could result in your organization actually losing money. Selecting a fundraising campaign where merchandise is purchased after orders are taken will reduce this risk. The down side is that impulse purchases are less likely to be made and every sale can require a follow-up visit to deliver the merchandise.
   Given recent bad press involving the sale of coupon books you would be well advised to do your homework on the reliability of the distributors of the books. Ask distributors for several references from well known organizations selling the books and be sure to follow them up.
3. Gaming: Using bingo, Nevada, raffle, Monte Carlo and other gambling schemes for fundraising can provide a steady stream of revenue if your organization itself is lucky and if revenue from gambling is philosophically acceptable. These campaigns often require a significant investment in volunteer time if they are to be run legally. They also have strict government reporting requirements. In our experience returns per volunteer and staff hour from these sources have declined significantly over the past few years as more and more organizations, especially government organizations, have jumped on the gaming bandwagon.
4. Social and professional development events: Events such as fun fairs, dinner dances and professional conferences can be good for community building and can generate significant money. They also require much volunteer and staff time both to stage the events and to obtain donations from businesses and individuals. Generally these events can be held annually at best and are therefore most useful for one-time fundraising needs. Many organizations without a steady stream of fee revenue, such as school parent councils, use events such as spring or fall fun fairs to raise the majority of their fundraising dollars.
   There is generally no need to obtain licenses for these events unless you plan to sell liquor or conduct a raffle as part of the festivities.

In conclusion, fundraising is not for the faint of heart. It requires energy, effort and commitment. Start by setting objectives then develop a plan and match the campaign with your cash needs. Remember, fundraising does not replace sound financial management for meeting day-to-day expenses.

Focus on the primary objective of your organization
Providing quality childcare at an affordable price is the primary objective of most licensed childcare centres. Most, if not all, of the major decisions your board must make can be analyzed in terms of a trade-off between benefits and costs; the benefit being quality childcare and the cost being affordability. You might find it useful to step back and focus on this objective when the decision making gets stuck.

Clear and honest communication
Clear and honest communication between board members, staff and parents is critical to quality care. In an environment of financial stress the worry of being laid off is always present. If staff do not believe they are receiving clear and honest communication then unrest and dissension can develop. This will raise tension in the centre and may reduce the quality of care provided. Consequently, your board should ensure that lines of communication between the board and the supervisor, and the supervisor and the staff are not only honest and clear but are perceived to be honest and clear by all groups. This is a quality of care issue.

Deal with the significant
When discussing financial plans and necessities in an environment of cost cutting it is crucial that your board focus on the significant. For example, if your monthly cash flow shows you are short a significant amount of cash each month (say $3,000) and cost reduction is the only remedy then you must focus on reducing significant costs. Staff salaries and benefits are generally the only category that even come close to significant levels of expenditure. Focusing the discussion on reducing expenses for play supplies, food or trips will serve only to reduce the quality of care provided and will not resolve the real issue, a cash flow crisis. In short, keep the board focused on significant items and attempt to avoid the trivial.

Consider giving staff responsibility for all expenditure decisions up to annual or monthly amounts approved by the board. This could reduce discussion of a lot of detail at the board level.

Focus on the future
Focus on the future trends and developments and try not to get buried in analyzing the past. Enrolment trends are the most significant indicator of future financial health. Have your board focus on enrolment trends at each meeting. Update your monthly cash flow forecast for the remainder of the year for changes in your estimates and discuss what you need to do in the future to achieve your objectives.

There are many excellent books to provide a starting point for volunteer board members wanting to read more about efficient and effective not-for-profit governance.

In summary, focusing on the overall objective of your childcare centre, ensuring there is an environment of honest and clear communication and focusing on significant items only will help your board run the organization in an efficient and effective manner.

Employer Provided Childcare
Interestingly enough, there is no taxable benefit in the hands of the employee in cases where:

• the employer establishes an in-house childcare facility or leases space to provide a childcare facility off premises,
• the employer pays for all operating expenses of that facility and
• the facility is available to all employees either free of charge or for a minimal fee.

The childcare facility must be available to all employees and not just to a group such as management and, furthermore, all parents using the centre must be charged the same discounted fees.

Workplace childcare centres often result in significant costs to employers. Even though these costs are deductible from business income the employer costs are often perceived to exceed the benefits of providing subsidized workplace childcare. Consequently, employer subsidized workplace childcare centres tend to be few and far between and the generous tax provisions available to employees are consequently rarely available.

Employer Subsidized Childcare
Amounts paid by employers directly to an employee to defray childcare costs incurred by the employee will result in a taxable benefit to him or her. For example, if an employee receives $10/day from an employer to help defray the $30/day cost of toddler care then the $10/day will be taxed in the hands of the employee. The full cost of care paid for by the employee of $30/day is, however, eligible for the childcare expense deduction noted in the article “Deducting Childcare Expenses”.

It is important to note that from a cash standpoint employees are always better off having employers defray childcare expenses to whatever extent possible. For example, an employee receiving a $10/day taxable benefit could have their childcare cash outlay reduced by $6/day ($10 received from the employer less additional tax payable of $4). This assumes the allowance does not result in a reduction in their base pay. Employees not receiving the taxable allowance will have to come up with an additional $6/day out of their own pocket.

From the employer’s standpoint the full amount of any childcare allowance should be deductible as an employment expense against business income for tax purposes.

Childcare provided to centre staff
Some centres provide either free or discounted childcare to centre staff who have children. There are a number of compelling psychological advantages to staff for having their children looked after at their place of work.

However, the childcare centre must factor a staff discount policy into its fee assumptions when preparing its monthly cash flow forecast. Several staff might take advantage of this policy at once thereby significantly reducing fee revenue.

Discounts and/or free childcare will result in a taxable benefit to the employee equal to the difference between normal fees charged by the centre and amounts actually paid by the staff. Cash flow advantages are similar to those noted above.

Deductibility of employer subsidized fees
Please note that childcare expenses are only eligible for the childcare expense deduction to the extent that they have been paid by the taxpayer. If an employer pays a subsidy directly to a centre then the employee may only deduct the amount of the fees they actually pay to the centre. For example, if stated pre-schooler fees are $25/day and because of an employer subsidy an employee only has to pay $15/day then only the $15/day is eligible to be deducted as a childcare expense by the employee. On the other hand, if an employee were to pay the full $25/day to the childcare centre and then be reimbursed $10/day by the employer then the employee would be able to deduct the full $25/day as a childcare expense up to the maximum allowed. Note that in both cases the employee will have to include the $10/day subsidy in taxable income.

Summary
In summary, employees are almost always better off having their employer either fully pay or partly defray the costs of their childcare. A tax deduction to the employee is only available for amounts paid in the year to the childcare provider. Consequently, employees should arrange to be reimbursed personally by the employer for any cost defrayment.

In the past many centres have covered summer losses with surpluses earned during the rest of the year. Given declining enrolments and the possible reduction of subsidized spaces, centres may not have surpluses to rely on for subsidizing summer programs. As a result reducing summer losses and maintaining a viable program all year long are critical.

April is the time to finalize summer plans. If your centre’s summer program isn’t planned by the middle of May parents may make alternative care arrangements. Following are some suggestions to help cover summer costs.

Do you expect a loss this summer?

First you need to determine whether your summer program is expected to cover costs or run at a loss. Prepare a simple budget for July and August.

• Estimate revenue on a room-by-room basis.
• Ensure that you treat salary grants consistently. Include salary grants in revenue and grants paid out in staff costs or exclude both grant revenue and expenses to be consistent.
• Keep other expense categories to a minimum. Exclude overhead costs (e.g. insurance) which you must be pay regardless of whether or not you operate in the summer.
• Here is an example:

You now have an idea of whether your summer program will incur a loss or not. Losses arise from one of two sources: too little revenue or too many expenses. Let’s look at how you might both increase revenue and decrease costs.

Controlling revenue losses
A drop in enrolment is the single biggest reason for losses in the summer. To keep enrolment numbers up and revenue high:

• determine how many children already at the centre will continue on in the summer. Survey the parents to get an idea of how committed they are to enrolling in the summer.
• ask parents for a modest deposit to help firm up their commitment.
• promote your fabulous summer program within your existing parent body. Current parents are the best and most convenient source of “customers”. Ask for their ideas and suggestions.
• having trouble filling your program? Find out why. Are you offering the type of summer program that your families want? Is your program too expensive? You must be prepared to offer a program that fits the needs of your community if you are to fill your centre for the summer.
• know your competition. If a relatively inexpensive Parks & Recreation program is operating next door then you may have to design your program differently than if you are the only “camp” in the area.
• advertise what is unique about your centre (french immersion, close to the park/beach, access to computers). Use these selling points to attract parents.
• obtain and advertise that you have staff with the skills to offer a full day summer program that both challenges and excites the children. Program creativity is often the essential ingredient needed to fill your centre in the summer.

Setting summer fees
If you expect your centre to be full then you are well on the way to maximizing your centre”s revenue. However, you may still have to increase fees to pay for extended school-age programming and possibly for increased July and August casual staff. To calculate how much you may need to increase fees you must first estimate expected extra costs. Lets assume you intend to offer a program for 6 to 12 year olds with an average enrolment of 13 throughout the summer (i.e. anticipating 2 vacancies). Extra costs can be calculated as follows:

If you are currently charging $12/day you will now need to charge $22/day for 6 to 12 year old children during the summer. Will school-age parents be willing to pay this? Survey the parents now to find out.

Cost cutting measures
What if you do not expect have a full program? This can be very expensive. For example, being short five preschool children for the two summer months could cost your centre in the order of $6,000. You need to determine how to reduce costs to cope with this. Here are some strategies you should consider:

Focus on reducing significant costs
As mentioned in our last issue (Volume 1 Issue 3, p. 9), any attempt to significantly reduce costs must focus on salaries and benefits as these expenses typically make-up 80% of total costs. Cutting less costly program items such as trips, food and supplies may not result in sufficient decreases and these components of a program are generally critical to quality of care and to attracting parents. If you remove trips from the budget to save $400 for a month you could end up with a program that neither parents nor children like very much.

Minimizing staff costs
In the summer centres often need higher than normal levels of casual staff to fill in when regular staff take vacations. Some techniques to minimize casual staff costs are:

• Match staff vacations with child vacations. Survey parents and determine when they expect to be on vacation. Allow staff vacations at times when parts of the program can be closed down as a result of child vacations. Advantages of prescribing staff vacations are reduced casual staff costs and reduced orientation time needed to train new staff. However, prescribed vacation dates may not be convenient for staff. Often there are not enough children on vacation at any point in time to permit a significant reduction in staff time. You will need to go through a fairly detailed staffing exercise to determine if this policy will work for you.
• Do not allow staff to take summer vacations. Insist that staff take vacations either before or after the summer period. While this policy may reduce casual staff costs it could have a negative effect on staff morale which in turn can affect the quality of care given.

If your centre experiences an enrolment drop in the summer then you may need to reduce core staff costs to avoid a loss. Ways to do this include:
Ask if any staff want to take an unpaid leave of absence for the summer. Staff are often keen to do this if given sufficient notice.

• Ask staff to work a reduced work week. Staff might enjoy an extra day off each week or a shortened work day. A shortened work week is often better than no job at all. Note that this option can have a negative impact on employment insurance (‘EI”) benefits if a staff member is subsequently laid-off on either a temporary or permanent basis as insurable earnings will be reduced. [Note that "unemployment insurance" is now referred to as "employment insurance".]
• Consider laying off a staff member for the summer. Determine whether the staff member will be eligible for EI benefits if they are unable to find replacement work for July and August.

There are many ways to reduce staff costs during the summer period. You need to make sure that you adequately balance staff and childcare needs with financial necessity in the process.

Closing the centre for a week or two
Some centres choose to close for one or two weeks in the summer. You need to look very closely at the financial consequences before you choose this option. Generally costs saved are not significant. Staff are usually required to take their vacation during the (two week) closure. This may or may not be convenient for staff and their families and may result in morale problems at the centre.

Two possible advantages of a summer closure are:

• all staff are off simultaneously. Staff can all return to work refreshed and with renewed enthusiasm.
• the centre can be thoroughly cleaned during the closure.

Lets look at an example of a two week closure where parents are not charged. In this example, as is often the case, revenue losses exceed cost reductions. The closure costs the centre money.

In this situation staff receive their regular pay while they are on vacation. As a result there are no reductions in normal salary costs. The cost reductions come from being able to reduce casual staff throughout the summer as all regular staff are expected to work during the same seven weeks (they all have to take the same two weeks off as well). This casual staff savings generally does not offset the revenue reduction. You can also see that reduced program costs such as food and trips result in only relatively minor cost savings. Also note that Toronto Children’s Services will generally not pay for days the centre is closed if parents are not charged. Children transferred out to other centres for the period of closure may not transfer back.

Centres that close for a period without charging parents are usually worse off financially than if they stayed open throughout the period.

The second variation on this theme is closure for one or two weeks while continuing to charge parents for childcare. In our above example the centre would reduce costs by $3,700 while not reducing revenue in the short-term at all. This $3,700 saving would be at the expense of possibly annoying parents. Loss of one full-fee paying parent as a result of this policy would cost the centre dearly for each month the vacancy remains. Given that attracting full fee paying parents and maintaining enrolment is currently so difficult this course of action is not recommended.

September reservation fees
You could consider the possibility of charging parents who withdraw their children from the centre in the summer a fee to reserve spaces in the fall. We have found that this works well only if your centre has a substantial waiting list for the fall. If you do not have a waiting list then parents will often take a gamble that spaces will be available at the end of the summer and merely re-register in September. Also, the advantages of charging a holding deposit are probably outweighed by the negative impact of parents having to pay fees without receiving care.

Closure for the whole summer
There are situations which would make closure of the centre for the summer months the most advisable situation. These include:

• Your community does not need summer care.
• You are unable to match summer costs with revenues and your centre’s financial cushion is insufficient to tide it over the summer months.
• You are unable to find and hire sufficiently qualified staff to put on a high quality summer program.

In these situations your centre would offer a ten month program and close down for July and August. Offering a ten month program poses difficulties mainly for those centres with a significant number of spaces funded by Toronto Children’s Services. Children transferred out to alternate care arrangements in the summer months may choose not to return in September. Consequently, the option of closure for the summer months is generally taken only by centres with a high proportion of full-fee paying parents. If your centre is going to close for the summer first consider the following:

• Staff should receive temporary lay-off notices in writing. There is no requirement for the centre to make severance payments or give pay-in-lieu of notice for temporary closures not exceeding thirteen weeks. Staff should be informed well in advance of the decision to close so they can make summer plans themselves.
• A Record Of Employment should be prepared for each staff person on the date of the temporary lay-off so that staff can apply for EI benefits for the summer period. Staff are entitled to benefits based on their insurable earnings for the prior twenty weeks and, of course, subject to the EI waiting period in effect at the time the temporary lay-off takes effect.
• Ensure all parents are aware of your plans for closure well in advance of the summer. Finalize fall registration plans in May or earlier and consider firming up registration plans by requesting a small fee deposit from returning parents.
• Be sure that you inform MCSS of your plans to operate a ten month program. Your salary grant payments (DOG and WEG) will be reduced accordingly as both are affected by months of operation over the year.
• Inform Toronto Children’s Services of your decision to close for two months.

The decision to close the centre for the summer is a serious one and should only be made by your Board after discussions with all parties involved including parents, staff, MCSS and Toronto Children’s Services.