Understanding Endowments – Everything You Need to Know

1. Understanding Endowments – Everything You Need to Know Susan ManwaringMiller Thomson LLP416.595.8583smanwaring@millerthomson.com Brad OffmanMackenzie Investments 416.967.2189brad.offman@makenziefinancial.com CAGP GTA ROUNDTABLESeptember 20, 2012 CAGP GTA ROUNDTABLESeptember 20, 2012

2. Defining Endowments Do we have one? Should we have one? The Strategic Decision to Build or Grow Endowments The Regulatory Framework of Endowments Endowments – From Theory to Practice

3. Operational Issues Fundraising for Endowments Investments – The Regulatory Framework Case Studies – Real Examples from the Field Endowments – From Theory to Practice

4. Endowments “Endowment funds for charities are, in my opinion, on the brink of change from a traditional investment fund of perpetual duration for the long-term support of a charity to a charitable fund of action.” “The recent reforms of the disbursement quota rules, coupled with the ever-increasing sophistication of donors, will inevitably push traditional endowment funds from being plodding dinosaurs to fleet-footed gazelles.” Calvin Fong, Vancity Community Foundation

5. What is An Endowment? The Legal Definition Not much guidance here Is it in the Income Tax Act? The Right Definition? Capital Intact and Income used annually for Charitable Purposes The Understandable Definition? The Organization’s Savings Account

6. The Regulatory Framework – A Brief History • Donor’s Choice: Short or Long-Term • The “80-20” Rule • The “Ten-Year” Rule/Enduring Property • The Capital Accumulation Rule – 3.5% • How did endowments accumulate? • Strict Endowment Agreements • Board Directed Endowment Agreements • No Endowment Agreement

7. The Existing Regulatory Framework • DQ is highly simplified – only the 3.5% disbursement requirement still exists • The 80/20 rule is gone • The Ten-Year gift is gone • Massive implications for new charities and donors • Opens up the donor conversation • Potential implications for existing endowments

8. Regulatory Framework • Anti Avoidance provisions • Gifts between related parties must be spent within the following year unless a “designated” gift • Rules which prohibit a charity from engaging in transaction which delays the expenditure of funds on charitable activities

9. Groups of Charities – Take Note! • Transfers between non-arm’s length charities • Now 100% spending obligation unless designated • Remember to designate all intra-group transfers

10. The Case For Endowments Long-term cash flow ensures continuity of programs Smoothes out the peaks and valleys associated with traditional fundraising Safety net Reflects strength and stability of the organization Decreases fundraising costs

11. The Case Against Endowments Only a small portion of the donation actually goes to the “cause” Donors getting full tax break for charitable funds not being put to full use Will dissuade donors from supporting organization because it already has sufficient funding

12. The Case Against Endowments Repeal of 80% expenditure requirement 3.5% disbursement requirement for charitable organizations – now applies only when investment assets exceed $100,000 Elimination of “enduring property”, “specified gift”, “capital gains pool”

13. Implications For Existing Endowments • Questions to ask: • Do the new rules mean we can spend existing endowments differently? • Do the new rules mean the charity can encroach on capital? • Do the new rules permit spending on different activity?

14. Implications for Existing Endowments • The answer requires consideration of: • Terms of Gift – Donor perspective • Terms of Restriction – Internal or External • Ten year gift tax concerns – now irrelevant? • Common law / trust law issues • Public reputation/Donor relations

15. Existing Endowments – Encroachment • If real trust exists, cannot encroach unless • the terms of the “trust” permit encroachment or • Court Order – which, in effect, varies the trust – S.13 Charities Accounting Act (Ontario) • Public Guardian Trustee of Ontario has the authority in Ontario over the regulation of charities • Must be served if conclude court application required to vary terms of endowment • Parens patriae role filled by Attorney General in other provinces

16. Existing Endowments: Encroachment - Internally Restricted Funds • If the funds are internally restricted what can be done? • Donor contributions depend on the donor understanding of Fund • There should be flexibility in regards to the internally restricted funds unless the Board by its language created a trust

17. Implications For New Gifts • Greater Flexibility!

18. Flexibility - New Gifts • What is meant by capital? • What is meant by income? • Can the charity fund its commitments? • Can the charity encroach? • How should the charity invest? • total return model – no differentiation between interest, dividends and capital gains

19. Perpetuity • Is it necessary? • Income tax requirements - gone • Donor • Charity • Donor-imposed or board designated

20. Endowment Strategy Most charities sit somewhere in the middle of the two extremes For endowment building to be successful, there must be a strategic decision to focus on it. There must also be a strategic imperative. Board of Directors must support it Senior staff must support it Patience

21. Operational Readiness • Proper governance is critical • Policies • Gift acceptance • Endowment • Planned giving • Fundraising • Distribution/Disbursement

22. Raising Funds for Endowments Endowment fundraising is often synonymous with planned giving/legacy fundraising It doesn’t have to be that way…or does it? Organization that successfully integrate legacy gifts into the existing fund development culture will benefit most

23. Bringing home the bacon Board support is critical – is it the best deployment of organizational capital? Is there a case for support? Does the organization truly want to build its endowment? Who is responsible for endowment fundraising? Major gift fundraisers Planned giving officers How is the endowment funded?

24. Investments – Regulatory Framework • Constating documents may establish considerations and limitations • Generally found in Provincial Trustee Acts • Other relevant acts (Ontario) • Charities Accounting Act • Religious lands

25. Investments – Regulatory Framework – cont’d • Rules have become less restrictive over time • Basic tenets: • Prudent investor rule • Basic criteria established • Allows for advice and delegation

26. Shaping Up Your Investment Policy • If you have investments, you should have a formal, written policy with respect to the oversight and management of these investments • This document should serve as a guide for the charity and its investment manager for the ongoing management of its investments

27. Shaping Up Your Investment Policy • It is important to recognize that a charity may have investments for different purposes – endowed funds, operating funds, other restricted funds • This is NOT a “one size fits all” policy

28. Case Study – The Chair The Donor, Mackenzie Investments, wishes to make a gift to a large Canadian University to establish a new Chair at the Business School. Mackenzie has never made a gift to this organization. It is Mackenzie’s wish that the new Chair in Financial Planning Research be established and filled as soon as possible. The University has limited funding outside the gift to support the new position. The size of the potential gift is $1,000,000. The University estimates that the cost to recruit the Chair will be $50,000 and the “upfront” required costs of securing the position(salary, moving expenses, bonus) will be $250,000 The University also expects to receive support from other donors and some matching funding to support the long-term sustainability of the new Chair How should we structure the gift?

29. Case Study – The Chair • Here is what we did: • Mackenzie Investments made an upfront $1 million gift to the University. • The following spending arrangement was formally incorporated into the Gift • Agreement: • $50,000 would be spent in the first year on recruiting expenses • $250,000 would be spent in the second year on upfront costs • $700,000 would be permanently endowed to support the long-term • sustainability of the position with some flexibility built-in to the • arrangement. • Is this the correct structure?

30. Case Study: The Endowment Agreement • Major Foundation wants a precedent agreement • Fundraisers want agreement to reflect traditional notions of endowment • Internal operations and finance want flexibility as provided under the new ITA rules

31. Case Study: The Endowment Agreement Solutions: • Delete all references to income and capital • Reference the fund as an Endowment but clearly define spending • Add flexibility for Foundation to alter spending if and when needed • Annual payouts can be determined by reference to charity policies in some way investment and expenses are set by reference to charities policy • Ultimately Donor decides and negotiates but if start with position of flexibility ultimate agreement will be better

32. Thank You Brad OffmanMackenzie Investments 416.967.2189brad.offman@makenziefinancial.com Susan ManwaringMiller Thomson LLP416.595.8583smanwaring@millerthomson.com