You are a senior accountant with Edwin & Associates, CPAs, and work in the not-for-profit area of the business. In June 2019, your firm was approached by Kalina and Reina, two sisters who had benefited from several educational scholarships to complete their engineering program. You and one of the partners recently met with the sisters to obtain additional information.

After five years of working, 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 becoming a charitable organization.

The purpose of MSO as stated in its application to register a charity for income tax purposes is "to provide scholarships." Once the charity status is 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 each. During Years 1 and 2, they intend to focus their efforts on fundraising through social media. They hope to raise at least $100,000 in donations from the public each year. Year 2 will see limited charitable activities, so all excess funds 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 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.

Kalina also wants to know the level of financial review that will 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.
2. Their planned board composition (consider CRA and CNPCA rules).
3. Calculate the disbursement quota for Y1 and Y2. Discuss their planned operations in Y3 given your calculations. For purposes of calculations, do not account for the contingent donation of $30,000 from their friend.
4. Issuing donation receipts.
5. Directed donations.
6. Financial review requirements (audit, review, compilation?) (CNPCA rules).