There is a backlash brewing against charities that are putting up desperate requests for funding but when people look at their annual report, financial statements, website or T3010 they see that the charity has a lot of money or other assets. The backlash is going to be particularly harsh against charities with significant assets who for various reasons decide to be “fiscally responsible” and lay off staff or cut disbursements to other charities (for example because of the stock market decline). Every charity that has, or appears to have a large amount of assets (cash, investments, reserves, buildings etc) AND wishes to fundraise more should have an explanation as to why they have those reserves. This is called a reserve fund policy.
There is nothing wrong with charities having reserves – in fact having unrestricted funds is vital for most charities to whether fluctuations in income, different expenditure requirements and perhaps even one day the necessity to shut down. However, the public and even many in the charity sector, do not understand the difference between assets, endowments, perpetual endowments, reserves, cash, etc. They see funds listed as assets and many assume that these are freely available for expenditure by the charity.
Perception is often more important than reality. If a charity is viewed by the public as callous or indifferent that could create problems for many years to come.
In terms of the reserve fund policy, if you have a $10m foundation and are not asking anyone to donate to your foundation you don’t need to have a reserve fund policy.
If you are a charity with no reserves (which is unfortunate and sometimes unavoidable or perhaps reckless in some circumstances) then you don’t have a reserve and don’t need a reserve fund policy.
All other Canadian registered charities should have a reserve fund policy or potentially face a backlash from donors and the public. Registered charities, unlike non-profit organizations under the ITA, can have unlimited reserves – the only issue is if a charity has so much money then perhaps they should not be asking others for donations.
A charity may have assets of 10m. That does not mean that they have 10m ready to be spent dealing with the COVID crisis. Here are a number of explanations:
- It may all be tied up in a building that is used for the charity’s charitable programs. (BTW there may be a 7m mortgage on the property as well!)
- It may be part of a perpetual endowment to be used for some purposes (don’t get me going on how perpetual endowments can be a disaster and are certainly not a rainy day fund unless set up properly which few are in a way that there is flexibility)
- It may be funds from the government or another funder that have to be used for a particular program.
- The objects of the charity may be quite limited and not really relevant to responding to the COVID crisis anyway.
How is the public or a donor to know this unless they each individually call the charity and spends time talking to their finance staff or the charity has a reserve fund policy? So I will suggest that charities that have reserves and don’t have a reserve fund policy then think about crafting one and make it public to minimize risk to your charity’s reputation.
CRA in its Fundraising Guidance explains the importance of having a reserve fund policy. By the way this is not “new”. The guidance has been around since 2012.
Fundraising without an identifiable use or need for the proceeds
63. Registered charities can only raise funds that are necessary to fulfill their mandates. Fundraising activities should not be undertaken simply because the charity has the opportunity to raise additional funds. There must be an identified use or need for the money. Depending on a charity’s particular circumstances, an identified use or need could include funds required for current and ongoing charitable (and other acceptable) activities or funds to be maintained as reserves. However, when a charity has sufficient income for its identified uses or needs, the need for new fundraising may be questionable.
64. Canadian law requires that a registered charity be established and operated for charitable purposes and devote its resources to charitable activities. While the CRA recognizes that charities can, and often should, maintain reserves, fundraising that results in an unjustified level of reserves may indicate that the charity is failing to meet this requirement. Footnote24
Justifying a charity’s level of reserves means being able to demonstrate, by reference to a charity’s current position and future prospects, why holding a particular level of reserves is right for the charity at that time. For example, a charity might reasonably anticipate an economic downturn that will reduce its donation income in the next fiscal year, which it can make up for by spending part of its reserves on its charitable activities. For more information, see Appendix C – Best Practices – Developing a reserve fund policy.
65. In addition, fundraising without an identified use or need for the proceeds can be an indicator that fundraising has become a collateral purpose of the charity. It may also indicate the delivery of an unacceptable private benefit.66. A charity that initiates new fundraising activities should be able to show it has considered:
– the ability of current revenues and reserves to meet existing and reasonably projected organizational needs; and
– specific plans for the additional funds to be raised and the capacity of the charity to implement these plans.
67. Finally, every charity is responsible for ensuring that its fundraising appeals do not misrepresent the charity’s financial position. For example, a charity with apparently unjustified reserves that launches a fundraising appeal giving the impression that the charity is in urgent need of funds could be carrying out a fundraising activity that is misleading (contrary to public policy) or deceptive.
Maintaining a reserve fund policy and ensuring that fundraising is for an identified use or need
162. A reserve fund policy may assist a charity when planning, explaining, and justifying its approach to fundraising to donors and to the CRA. It may help to ensure that a charity fundraises with an identifiable use or need, reducing the risk of failing to devote resources to charitable activities or engaging in fundraising that forms a collateral purpose. A transparent and publicly accessible policy may also help ensure that fundraising appeals are not misleading or deceptive by misrepresenting the charity’s financial position and the extent or urgency of its need for funds.
163. The size of a justifiable reserve fund will depend on a charity’s particular situation. For example, when establishing a reserve fund, the charity could show it has taken into account factors such as:
– its typical annual expenditures;
– its size;
– its long-term plans;
– its donor base;
– its projected revenue;
– its current and projected economic conditions;
– anticipated changes to the environment in which the charity operates;
– contingencies; and
– known risks being faced.
164. It is important that the policy be reviewed periodically to take into account the changing needs of the charity.
There are many reasons to have a reserve fund policy including that it forces the board to consider what amount of reserves is reasonable and having adequate reserves is important for the long term sustainability of an organization.
Here are some takeaways and thoughts:
1) Have a reserve fund policy if you have assets and wish to fundraise further.
2) Check all restricted gifts as to “Whether they are actually restricted?”, “What the restrictions are?”, “Whether there is an ability in the gift agreement to amend the agreement?”, Whether there is a ‘cy pres’ clause in the gift agreement which allows for changes to the use of the funds in certain circumstances?”. If you want the flexibility to deal with the COVID crisis – then sometimes there is more flexibility than you think.
3) Check your objects and consider whether they should be changed to give you more flexibility to deal with future circumstances. Charities are only supposed to do charitable programs within their objects.
4) Push your provincial governments to consider legislation that gives charities more flexibility in terms of dealing with restricted funds as the current cy pres system where a charity asks the court for permission to vary a restricted gift is very restrictive. Keep in mind this is not an area of Federal jurisdiction so please don’t bug CRA about it. If the Federal government were to increase the DQ requirement that might also be helpful. Again it is not CRA that sets the rate – it is the Finance Department.
5) Be very careful about accepting restricted gifts when the world is changing so rapidly and your organization may not even exist in a year or two and if you absolutely have to take in a restricted gift then make sure there is an amendment clause and a cy pres clause (for example if the donor dies and the board thinks it is in the best interest of the organization to adjust the purpose of the gift). Most traditional perpetual endowments are the least flexible way for a charity to hold money – they also are often underwater in bad times when money is needed the most.
6) Make sure on your charity website etc that you have the ability for donors to provide unrestricted gifts – I just made a donation today to a charity had had 3 options for different programs but no option for unrestricted which is unfortunate.
7) If you are asking in a public appeal, for example, to provide funds for COVID work make sure that the appeal is broad enough in terms of purposes. Perhaps also have a secondary purpose if (optimistically speaking) a large amount of funds is raised and there is a cure etc for COVID. You don’t want to have money in your bank account that you cannot use – whether a large amount or a small amount and there are many things that can be changing. You may raise a lot of money to help people with COVID in your town and perhaps no one gets it in your town or you raise a lot of money and your charity has to shut down for an extended period of time and you cannot spend any of the money for another year – you don’t want to have to go to court for a cy pres order which is costly and time-consuming to be able to convince a judge that the funds should be able to be spent on a different virus or health care need. A little bit of thought in a public appeal can save years of agony.
8) If you have a large reserve and don’t need to fundraise at the moment be careful about the level of fundraising you are doing and what you are communicating to the donors and the public.
9) Some organizations that were barely solvent at the best of times may under the current stress no longer survive. Organizations should also give some thought to working with others including back-office partnerships, mergers, etc that could be necessary.
10) Now might not be the best time to start trying to build up a big reserve – this was something that should have been done years ago – if you don’t have a sufficient reserve put it on your list of things to work on later in the year or next year.
11) Many funders are considering increases in disbursements at this time as well as having those funds, and earlier payouts, be considered unrestricted. Depending on the nature of the funds this is not always possible, but it is certainly ideal when funders can do that.
By Mark Blumberg, Blumbergs