Ten-year gifts to charities are becoming an important tool in charitable fund raising, both for charities and donors. They help charities by being exempt from the 80% disbursement requirement that applies to donations received in the previous year. They help donors by making it easier to give gifts that are to be held for a longer term, whether it be for a minimum of ten-years or for longer, as in the case of a perpetual endowment fund. However, there are many legal issues involving ten-year gifts that are not well understood by charities.

Documenting ten-year gifts

Subsection 149.1(1) of the Income Tax Act describes a ten-year gift as … a gift subject to a trust or direction to the effect that property given, or property substituted therefore, is to be held by the [charitable organization] for a period of not less than ten-years …

The fact that a ten-year gift can include a directed gift as well as a charitable trust means that gifts to a charity that may not meet the requirements to create a charitable purpose trust may still constitute a ten-year gift where the requirements to document a ten-year gift under the ITA have been met.

Each ten-year gift must be evidenced by a document signed by the donor. The documentation must:

• clearly identify the donee charity, including its official name and registration number;
• indicate the amount of the gift;
• set out the date the gift is made;
• set out the name and address of the donor; and
• set out the serial number of the official receipt issued to the donor for the gift.

 

The documentation should then be attached to the charity’s duplicate copy of the receipt and retained with its other books and records.

The requirement that a ten-year gift must be a trust or a direction that is executed by the donor may be problematic when dealing with a public fund raising event, such as a dinner or auction, where the proceeds are to be added to an endowment or other type of ten-year gift. It’s unrealistic to expect that each person attending the event would be prepared to sign a direction or declaration of trust.

A solution might be for the event’s promotional materials to set out the requirements to establish a ten-year gift and to include a reply card to buy tickets stating that the completion and signing of the card is deemed to be the execution of a ten-year gift document, or alternatively to include all of the relevant information about the ten-year gift on the back of the tickets provided that the purchasers sign their tickets and the charity retains a duplicate copy.

Expenditure of income by foundations

Ten-year gifts remain subject to the 4.5% annual disbursement quota imposed on foundations. Unless a foundation has other income to meet the 4.5% disbursement quota on ten-year gifts that it holds, it is essential that the ten-year document permit the income earned on the gifts to be expended each year, and also that the annual income earned on the gift be at least 4.5% of its original value plus any resulting capital gains.

The ten-year gift must remain intact for ten-years, which means that none of the capital can be used to meet the quota. Therefore, before accepting a ten-year gift, a foundation must be satisfied that the gift will earn sufficient income to meet the 4.5% disbursement quota. If not, the board cannot disburse a portion of the capital to meet the quota. Instead, it should not accept the ten-year gift.

A related question is whether the document creating a ten-year gift can authorize the expenditure of capital gains earned on the gift by defining “income” to include resulting capital gains. In this regard, the Canada Customs & Revenue Agency has recently stated that capital gains earned from a gift are considered to be a portion of the “property given, or property substituted therefore” and that no capital gain earned on a ten-year gift can be disbursed for at least ten-years. It is thus important for charities that may have ten-year gift documentation permitting the disbursement of capital gains not to exercise that option. Otherwise, they would be in violation of the definition of a ten-year gift.

Consequences of expending capital before the ten years is up

If the capital of a ten-year gift, including any capital gains it generates, is expended within ten-years of the gift being made, certain consequences would result:

• The expenditure would be a breach of trust or a violation of the donor direction creating the ten-year gift.
• The portion of the capital expended would be added to the disbursement quota of the charity for the year in which the capital was expended. This, in effect, would result in a neutral effect upon the disbursement quota of the charity for that year.
• The more difficult question is whether the full amount of the ten-year gift collapses where only a portion of the capital is expended in any one year, but based on the wording of the ITA this doesn’t appear to be the case. As such, if only ten percent of a ten-year gift were disbursed in a year, it would appear that only the ten percent actually expended would be added to the disbursement quota.
• Based upon this, some charities have considered gradually disbursing a ten-year gift over a number of years, assuming that there would be no negative impact upon meeting its disbursement quota each year. However, CCRA may see a gradual disbursement as an intentional misuse of the ten-year gift, which might result in either deregistration of the charity or, alternatively, disallowance of the ten-year gift in the original year in which it was claimed.

 

Spending ten-year gifts after the ten years is up

The ten-year gift exemption only requires that a gift be held for “not less than ten-years.” Therefore, a trust or direction could create a ten-year gift that is to be held for longer than ten-years, or even in perpetuity as an endowment. In this regard, the donor could direct how the gift is to be expended after ten years. Silence on this issue by the donor would give the charity liberty to use the gift as the charity determined at the end of ten-years, regardless of the donor’s intentions.

Conversely, a gift listed as a ten-year gift on a charity’s annual return does not necessarily mean that the gift can be expended after ten years. The charity and its board of directors would need to carefully review the wording creating the gift to determine if any restrictions continue after ten years, such as the gift being held is perpetuity as an endowment.

Managing ten-year gifts

Charities often co-mingle restricted funds in a single account for investment purposes. Although this practice may be authorized by regulation (depending on the jurisdiction), charities would be wise to maintain each ten-year gift in a separate account. Although administratively awkward, this practise would help to ensure that:

• Since the capital of a ten-year gift, including any resulting capital gains, cannot be expended for at least ten-years, a charity must be able to identify the original gift and the capital gains earned thereon.
• There would be less chance that the capital of the gift would be expanded during the ten years in an attempt to meet the 4.5% disbursement quota.
• Since each donor may impose different terms on a ten-year gift, i.e. length of time the gift must be held, or the investment powers that are to apply, maintaining separate accounts for each ten-year gift would help the charity to keep track of and comply with the specific terms of each gift.

 

Terrance S. Carter practises at Carter and Associates in Orangeville, Ontario, and specializes in the area of charity and nonprofit law. This article is an excerpt from a longer paper by the author entitled “Donor Restricted Charitable Gifts, A Practical Overview Revisited,” which is available on the author’s web site: www.charitylaw.ca. For more information, call 519/942-0001, fax 519/942-0300, or email tcarter@carterslawfirm.com.