Foundation vs. Charitable Organization

The WE Charity scandal has been fascinating to charity watchers.  On July 22, it was revealed that the Canadian Government contracted with the WE Charity Foundation for the Canada Student Service Grant (CSSG) program, not the WE Charity as previously reported.

Parallel public foundations often co-exist with operating charities (charitable organizations), but the two-charity structure was confusing, it seems, to Federal Government.  It may also pose challenges for estate donors and lawyers.

WE Entities

First a note about WE Charity and it’s brand-new sister entity, WE Charity Foundation.  Global News reported that the Federal Government awarded the $912 million CSSG agreement to “a foundation that only received charity status last years and whose stated purpose was to ‘hold real estate’”.

Why would a contract for a massive youth program be signed with a legal entity that has not filed its first charity return and lacks the power to conduct its own charitable activities?  It didn’t have any employees.  It was registered to hold $37.5 million in charitable assets – all real estate.  At least until recently it was intended to be a charitable holding company.

WE Charity said “it decided to make the Foundation the ‘contracting party’ with the government on the advice of its lawyers due to concerns about legal liabilities stemming from the federal student program.”

There will be undoubtedly more to come on this story, but it does illustrate a common charity structure and highlights how it can be confusing to donors, especially estate donors.

Parallel Foundations

The concept of a parallel foundation has been used in Canada since the 1980s, initially in the hospital world.  Hospitals are typically “charitable organizations”, the “operating” charity category in Canada.  Hospitals are primarily government funded. To protect assets from the Ministry of Health, hospital create separate registered charities, which are typically “public foundation”.  These distinct legal entities also fundraise.

This two-part structure is now in wide-spread use in the charitable sector.  It has been deployed by universities, social service organizations, arts organizations and, now, WE Charity.  Sometimes the foundation has a high profile, staffing and clear fundraising mandates for the parent charitable organization.  Other times they are shell entities with minimal governance and no public profile. In almost every case, they are not “doing” entities.  They don’t run charitable programs.

Normally, the operating and holding charities work well together.  Insiders may report about power struggles and dominance of the “parent” charity, but most rifts simmer privately.  In a few rare cases, parallel foundations and hospitals have had messy public splits that have ended up in court.

Naming Charities in Wills

So how are estate donors and their lawyers to know what registered charity to name in a will?  The best solution is to call the foundation and/or the register charity and ask.

Some split donations for operating (charitable org) and endowment (foundation). Others do all fundraising in the foundation.  There are even examples, like WE, where the charitable organization does the fundraising, but transfers assets to the foundation for holding.

Bottom line: don’t make assumptions with your estate planning.  Even the Federal Government finds this topic complicated.