A NEW CHARITY?

You are a senior accountant with Edwin & Associates, CPAs, and work in the not-for-profit area of the firm. In June 2020, your firm was approached by Kalina and Reina, two sisters who had benefited from several educational scholarships to complete their engineering program at the University of Alberta.You and one of the partners recently met with the sisters to obtain additional information.

After five years of working as professional engineers, the sisters have decided to start a charity to raise funds for one scholarship at a time. Together with their friend Albert, they incorporated the organization called MyScholar.Org (MSO) under the Canada Not-for-profit Corporations Act (CNPCA) and have come to your firm for advice on obtaining "charitable status" with the Canada Revenue Agency (CRA).

The purpose of MSO as stated in its application with the CRA is "to provide scholarships." The sisters are hoping that once charitable status has been approved, Kalina, the managing director, plans to make a personal donation to MSO in Year 1 in the amount of $60,000. Her donation will be invested in marketable securities, until needed.

Reina and Albert also committed to contribute $50,000 in cash each. During Years 1 and 2, they intend to raise additional money by fundraising through social media. They hope to raise at least $100,000 in donations from the public each year. Year 2 may see limited charitable activities, so all excess funds of the charity will be invested.

Their college friend agreed to design MSO's website and manage its social media accounts in exchange for a $5,000 tax receipt. The organization also plans to solicit laptops from local computer manufacturing companies to be donated to deserving university students.

In Year 3, MSO expects that its operating costs will be scholarship grants of $8,000, laptops with approximate costs of $3,000 and marketing expenses of $3,000.

Recently, their other friend whose daughter will be going to university in three years has approached Kalina and indicated that once the charity is registered, he will commit to give $30,000 cash to MSO with instructions to invest the money and then pass it back to his daughter in Year 3. He hopes to receive a tax receipt for his donation.

The sisters are social-activists and are active in their chosen political party.They often participate in events to lobby the government for additional funding for colleges and universities as they are "tired" of hearing rumors educational institutions are considering raising tuitions due to a lack of government funding.They want all students to have the opportunities they had and feel an increase in tuitions will create "barriers" for students being able to access education that's affordable.

Kalina has asked about reporting requirements.Kalina specifically wants to know who what legislated reporting obligations the charity would be subjected to, and the level of assurance that would be required on the financial statements to ensure regulatory compliance.

Required:

What issues do you see with their current plans and what changes do you recommend with regards to:

1.Their application for charitable status with CRA with regards to their stated purpose.(Hint:Consider & discuss the three elements that must be present for CRA to see the organization as "charitable".)[6 marks]

2.Their planned Board composition. (Hint:Consider both CRA and CNPCA rules with respect to how the organization would be "classified" and what it would be allowed to do.) [8 marks]

3.Their requirement to meet the Disbursement quota.

a.Calculate the disbursement quota for Year 1 and Year 2. (For purposes of the calculations, do not account for the contingent donation of $30,000 from their friend.)[4 marks]

b.Given your calculations, discuss their planned operations in Year 3 and whether it's likely the disbursement quota would be met for that year.[4 marks]

c.Are there consequences for not meeting the disbursement quota?If so, what are they? What changes would you recommend the charity make to ensure a negative outcome is avoided?[4 marks]

4.Their ability to issue donation receipts for:

a.Gifts of cash.[2 marks]

b.Gifts of service (such as website development & managing social media accounts).[4 marks]

c.Gifts of property (such as the laptops to be donated to deserving university students)[4 marks]

d.Directed donations (such as the money to be invested and given to a particular beneficiary at a later time). [4 marks]

5.Their ability to participate in their chosen political party and lobby the government for changes.(Hint:Would it be acceptable to participate personally?What if they want to get the charity involved in political issues?) [4 marks]

6.Their ability to meet legislated financial reporting obligations.(Hint:Consider who the "users" of the financial statements would be, the type of financial information to be provided, and the level of assurance required - audit/review/ compilation.)[6 marks]