• Separation Anxiety and Control Issues for Parallel Foundations
  • September 16, 2013 | Author: Victoria Prince
  • Law Firm: Borden Ladner Gervais LLP - Toronto Office
  • Many charities in Canada have established what are commonly known as a “parallel foundation”, which can generally be defined as a separate foundation, which is itself a charity that has been established by the “parent” charity. While many parallel foundations are focused primarily on raising and transferring funds to the parent charity, some also carry on their own charitable activities directly - for example, by running a scholarship program  or operating a related business. Notwithstanding, the most common reason for establishing a parallel foundation is to protect the assets of the parent charity by maintaining them in a separate entity and taking advantage of the “limited liability” feature of corporate law under which assets held in one corporation are unavailable to satisfy the liabilities of another separate corporation. Charities that have established a parallel foundation also typically  shift their fundraising efforts to the foundation with the goal of protecting funds generated on a going forward basis within a separate entity.

    For any organization considering whether to establish a parallel foundation, issues of control, connection and separation are inevitably raised, particularly in light of the decision in Re ChristianBrothers of Ireland in Canada1 (“Christian Brothers”), in which the Ontario Court of Appeal held that property held in a separate special purpose trust by a charity was exigible to compensate tort victims of the charity. While the decision in Christian Brothers was limited to the specific fact situation at hand, over the past decade it has caused the charitable sector to question whether the use of parallel foundations is a truly effective method for protecting a charity’s assets and whether future court decisions may curb the ability of a parallel foundation to offer that protection. Many have interpreted the ChristianBrothers decision as requiring more separation between a parent charity and a parallel foundation if the assets held in the foundation are to be truly protected. However, since parallel foundations are usually established to benefit the parent charity, the parent charity will want some control over the foundation to ensure that the operations of the foundation do just that - both when the foundation is established and into the future. The question thus faced by every charity seeking to establish a parallel foundation is how to structure the relationship so that a sufficient level of control is maintained over the foundation while ensuring that the operations of the charity and the foundation are not so intertwined so as to permit the liabilities of the charity to be funded by the foundation.

    Unfortunately, no case since Christian Brothershas analyzed the issue of whether the assets of a separate entity are exigible to the creditors of a charity. However, a couple of recent decisions have touched on when the assets of a separate entity are available to a charity, which may have an impact on future jurisprudence in this area. In the 2010 decision in L’Évêque Catholique Romain deBathurst v New Brunswick (Attorney General)2, the New Brunswick Court of Queen’s Bench allowed a diocese to broaden the objects of 21 trust funds holding funds intended to assist with the training of candidates for the priesthood so as to permit the diocese to access those funds to compensate victims of sexual abuse by its priests. In coming to its decision, the court noted that the primordial intention of the trusts’ creators pre-supposed the perpetuation of the diocese, which was facing financial demise in light of the claims of the sexual abuse victims.

    Conversely, in 2011, the Ontario Superior Court of Justice held in Victoria Order of Nurses for Canada v Greater Hamilton Wellness Foundation3 (“VON”) that a parallel foundation was in breach of its fiduciary and trust obligations when it, contrary to its objects, distributed funds to organizations other than its parent charity. The foundation was thus required to transfer its assets and income to its parent charity, which was found by the court to be beneficially entitled to the foundation’s property. Factors cited  by the court in coming to its decision in this case included: (a) the inclusion of the parent charity’s name in the original name of the parallel foundation; (b) representations made in fundraising and solicitation material indicating that the foundation’s funds would be used for the parent charity’s programs; (c) the fact that the parent charity was the initial source of funding for the foundation; (d) the existence of a Statement of Operating Principles between the parent charity and the foundation indicating that the foundation existed to provide resources to the parent charity, among other things; (e) the foundation’s history of exclusively funding the parent charity and its associated entities; (f) financial statements and annual information returns of the foundation that indicated that the parent charity was the exclusive beneficiary of its efforts; (g) the sharing of office space by the parent charity and the foundation; (h) the active participation by representatives from the parent charity in the foundation’s board meetings; and (i) the fact that the parent charity’s budget and the foundation’s funding decisions would be discussed at the same board meetings. While the facts in VON are distinguishable from circumstances in which a third party attempts to seize the assets of a parallel foundation to satisfy a parent charity’s liabilities, the factors examined by the court in this case may be instructive to courts in future cases when analyzing whether the assets of a parallel foundation should be made available in such a manner.

    In the aftermath of the Christian Brothers decision, the following helpful strategies have been developed in the charitable sector to mitigate the risk that a parallel foundation’s assets be made available to fund the liabilities of its parent charity, some of which were echoed by the court in VON in its analysis:

    • Avoid any representations indicating that the parent charity is responsible for the parallel foundation

    • Ensure that each entity is represented as distinct from the other at all times (e.g., use separate letterheads, logos, signs, brochures, etc.)

    • Establish independent top-level executives

    • Maintain different directors on each board to the extent possible

    • Maintain separate officers and employees (the same employees and officers may be used in some circumstances where one organization pays/invoices the other for the services of those employees and officers)

    • Maintain separate financial records and minute books

    • Maintain separate bank and investment accounts

    • Maintain separate office space to the extent possible

    • Avoid allowing one entity free use of the other’s property, whether office equipment, land or buildings, without properly documenting the arrangement

    • Establish separate accountants and other professionals for each entity

    • Properly formalize and document all loans between the entities

    • Avoid having one entity pay for the costs and expenses of the other

    It is strongly recommended that the relationship between a parent charity and a parallel foundation be reviewed very carefully from both a practical  and legal perspective upon the establishment of the foundation and on a regular basis thereafter so as to avoid any unintended consequences that may result from an insufficient level of control or separation between the two entities.


    1 47 OR (3d) 674, leave to appeal to SCC refused [2000] SCCA No 27.

    2 371 NBR (2d) 146.

    3 2011 ONSC 5684.