The purpose of this policy is to help provide a framework within which the Children’s Treatment Centre Foundation of Chatham-Kent (the “Foundation”) can manage its funds prudently1 and show the Foundation supporters that their generosity is well placed.
Nature of the Foundation
Understanding the nature of the Foundation is important to understanding the Board’s investment responsibilities. The Foundation is a non-profit,2 charitable3 corporation, incorporated under the Ontario Corporations Act. The objects4 of the Foundation are as follows:
To receive and maintain a fund or funds and to apply all or part of the principal and income therefrom from time to time to any charity registered under the Income Tax Act (Canada) which benefits directly or indirectly the premises, facilities, programs, services, research, initiatives, operations, training, human resources and/or any other aspect from time to time of the Children’s Treatment Centre of Chatham-Kent (the “Centre”).
To establish, equip, maintain and operate facilities for the benefit of the Centre.
Canadian Revenue Agency (“CRA”) Classification
CRA classifies each charity it registers into one of three categories: charitable organization, public foundation or private foundation.5 The Foundation has been registered with CRA and is currently classified as a charitable organization.
Each of the CRA classifications for charities has specific rules as to how funds must be disbursed.6 These rules are referred to as “disbursement quota.” The disbursement quota for the Foundation are set out in Appendix A. The disbursement quota can impact liquidity requirements in the context of investment planning.
To ascertain the investment powers of the Foundation, attention must be paid to the following:7
Directors are required to adhere to the letters patent and by-laws of a corporation in the management of its affairs. In the context of investments it is therefore important to review these documents.
(a) Letters Patent.8 The letters patent of the Foundation is the document that brought the Foundation into existence and require the Foundation:
To invest the funds of the corporation in such manner as determined by the directors, and in making such investments the directors shall not be subject to the Trustee Act, but provided that such investments are reasonable, prudent and sagacious under the circumstances and do not constitute, either directly or indirectly, a conflict of interest.
(b) By-laws. By-laws are typically approved once letters patent for a charity have been issued and generally specify who may do what on behalf of the charity, the procedures for decision-making and details as to the organizational structure. Insofar as investments, the by-laws of the Foundation are silent. 9
A charity must adhere to any restrictions attached to any donation received.10 If the charity is unable to comply with such restrictions, the charity should decline the donation.11
Appendix B attached, lists all assets currently held by the Foundation that are subject to specific restrictions, including a summary of those restrictions.
Charities must keep and invest funds that are subject to restrictions separate from their general funds.12 It is now, however, possible to invest restricted funds with other restricted funds.13 The regulations under the Charities Accounting Act detail the requirements that must be met for such commingling.14
Trustee Act – Investment Provisions
The Trustee Act requires that the Foundation manage its investments with the care, skill, diligence and judgment that a prudent investor would exercise in making investments.15 The Trustee Act provides some guidance in this regard by setting out seven criteria that must be considered by directors when making investment decisions, in addition to mandating consideration of any other criteria that may be relevant in the circumstances and providing for diversification.16 A more detailed discussion of the mandatory criteria follows in sections VII and VIII of this Investment Policy as well as Appendix C.
4. Charitable Gifts Act – Restriction
The Ontario Charitable Gifts Act prevents charities, other than religious organizations, from owning more than 10% of any business.17
Charities Accounting Act – Restriction
The Charities Accounting Act prevents a charity, other than a religious organization, from holding land if it is not used for its charitable purposes.18
All investment decisions will be subject to the applicable law, the Letters Patent and By-laws of the Foundation.
1. Authority to Obtain Advice
The Trustee Act permits a charity to obtain investment advice.19 This is generally advisable if the investment assets of the charity are significant or when there is insufficient investment knowledge or experience within the organization to carry out all investment responsibilities. A charity may follow the advice of an investment counselor but only when a prudent investor would do so.20
The Foundation will obtain external investment advice when there is limited investment knowledge or expertise within the Foundation or when investment assets exceed $50,000.
2. Authority to Delegate Investment Functions
A charity may manage its investment assets on its own or subject to meeting certain requirements, delegate this responsibility to an investment counselor.21 In either case however, the directors of a charity retain the responsibility for reviewing the investment assets regularly.
The Foundation will delegate investment functions when the additional income and/or growth anticipated to be earned by delegation is expected to more than offset the additional related expense.
3. Selection of an Investment Counselor
The Trustee Act requires that a charity exercise prudence in the selection of an investment counselor whether it is for the obtaining of investment advice or managing investments.22 At the current time, there are no regulations outlining the required qualifications of such investment counselors, however, the following is generally suggested:
Registration with the Ontario Securities Commission. Generally, firms selling or providing advice on investments in Ontario must be registered with the Ontario Securities Commission.23 Moreover, any individual selling or providing advice on investments must also be registered. The Ontario Securities Commission registration of any individual investment counselor or firm that is retained will be confirmed.
Appropriate Level of Licensing. The Ontario Securities Commission offers different levels of licensing. It is therefore important to ensure that the investment counselor and firm being retained have the appropriate level of licensing. The appropriateness of the licensing level of any individual or firm will be confirmed.
Custody Arrangements. All investments owned by a charity should be retained in a safe place. The Foundation will consider the available options for the safe custody of investment assets.
Knowledge and Experience. The investment counselor should have a demonstrated understanding of charity law and trust law in addition to investment knowledge and experience. The knowledge and experience of any investment counselor considered will be assessed by, among other things, reviewing the investment counselor’s credentials, the firm brochure and compliance manual.
No Conflict of Interest. Any investment counselor or firm retained by the Foundation should not have any conflicts of interest. Any investment counselor or firm retained will provide a declaration indicating that he/she or it is not subject to any conflict of interest.
Confidence. The investment duties of directors are onerous and any failure to fulfill these duties can carry significant consequences. Directors will want to rely on any investment counselor retained to help them meet their investment duties. Any investment counselor retained must be approved by the Board.
4. Documenting the Investment Counselor Relationship
If a charity retains an investment counselor to manage its investments, it is required by the Trustee Act to enter into a written agreement with that counselor.24 In any event, a written agreement is recommended even in those situations where the role of the investment counselor is limited to providing advice. The Trustee Act requires that, at a minimum, the investment management agreement provide that:25
The investment counselor complies with the investment plan of the charity.
The investment counselor report to the charity at regular stated intervals. The Trustee Act is not specific regarding the reporting intervals or content for reports. Standard practice, however, provides for quarterly reporting intervals. Reports should include a schedule of the market value of all investments, a listing of all transactions (including income received) since the previous report, and investment performance measured on a total return, time-weighted basis and presented for the most recent quarter, year-to-date and the trailing year, 3 years and 5 years as available along with comparative industry data. It is also generally recommended that the investment counsellor annually report on how shares held in the investment portfolio were voted if they were voted against management recommendations.
In addition to the minimum requirements, it is generally advisable that the investment management agreement also addresses the following:
How instructions are to be communicated to the investment counsellor, with it generally recommended that all instructions be in writing.
Conflict of interest issues on the part of the investment counselor.
Scope of authority delegated.
Obligation on the investment counselor to provide notice in writing of any material changes in its investment outlook, strategy, portfolio structure, and ownership or senior personnel.
Termination of the agency agreement, with it generally recommended that the charity retain liberal termination rights.
It is generally advisable that the investment management agreement not:
Provide any kind of indemnity in favor of the investment counselor, especially if the indemnity is unlimited or relates to the acts and omissions of persons other than the charity.
Any Investment Management Agreement entered into by the Foundation will reflect the above and will require the investment counselor and related firm to comply with this Investment Policy. To evidence agreement in this regard, the investment counselor will initial each page of this Policy which should be attached to any Investment Management Agreement.
5. Monitoring the Performance of the Investment Counselor
If an investment counselor is retained by a charity for investment management, the directors of the charity must exercise prudence in monitoring the performance of the investment counselor.26 At a minimum, this includes:27
Reviewing the investment reports of the investment counselor.
Regularly reviewing the investment management agreement and how it is being put into effect, including considering whether the investment plan should be revised or replaced, replacing the plan if appropriate, and ensuring that the plan is being followed. To assist in assessing compliance, it is generally advisable that any investment counsellor retained be required to provide a compliance report on a quarterly basis confirming compliance or detailing any breach of policy or plan.
Providing directions, when appropriate, to the investment counselor.
Terminating the appointment of the investment counselor, if appropriate.
The Board28, either as a whole or delegated to their investment committee, will review, at least annually, the performance of the investment counsellor(s) retained by the Foundation for investment management.
This part of this Investment Policy elaborates on each of the seven mandatory investment criteria under the Trustee Act.28 Directors must consider each of the criterion to an equal extent, unless it can be demonstrated that it was prudent to prefer one criterion to another.29 Attached as Appendix C are explanatory notes regarding each of the investment criteria.
1. General Economic Conditions30
In light of the long-term horizon and specified liquidity needs of the Foundation, investments should be selected on the basis of a low level of risk.
2. Possible Effect of Inflation or Deflation
When possible, investment income equal to the rate of inflation should be retained each year and reinvested to prevent erosion of purchasing power over time.
3. The Expected Tax Consequences of Investment Decisions or Strategies
A higher level of fixed income investments should be maintained than would be the case for a taxable account with a similar risk tolerance.
4. The Role that Each Investment (Asset Class) or Course of Action plays within the Portfolio
Investment asset selection should be co-ordinated with the Foundation’s needs for liquidity, regularity of income and capital preservation or appreciation. The need for re-balancing of the investment portfolio should be assessed quarterly.
5. The Expected Total Return from Income and the Appreciation of Capital
The annual budgeting process for the Foundation including a forecast of cash requirements will be co-ordinated with an annual review of this Investment Policy.
6. Needs for Liquidity, Regularity of Income and Preservation or Appreciation of Capital
Capital Preservation and Appreciation: to prevent the erosion of the investment capital and protect the future well-being of the Foundation, the Foundation should try to ensure to the extent possible that the market value of the investments appreciate in an amount at least equal to inflation over the long term.
Liquidity: The need to use capital is low and, therefore, liquidity needs are also low.
Regularity of Income: The Foundation will eventually need to have a certain regularity of income to the extent it relives on the same to fund operating or capital projects. However, while the Foundation is being built up, income will not be taken except as may be necessary to comply with disbursement quota.
7. An Asset’s Special Relationship/Special Value, if any, to the Purposes of the Charity
The Foundation will segregate all assets where there is a special relationship or special value and consider these assets separately from those assets where there are no such special requirements. An annual review of these assets, including a third-party appraisal if required, should be undertaken to ensure that the sentimental value is still valid.
There are no other investment criteria relevant to the Foundation’s Funds.
The Trustee Act requires diversification of investments to the extent that is appropriate to the requirements of the charity and general economic and investment market conditions.30
What is this?
The concept of diversification is, simply, ‘not putting all of your eggs in one basket.’ In the investment context this means that an investor should buy different types of investments.
Why is this important?
Diversification is a mechanism to reduce volatility or market risk. By buying different types of investment assets and different investments within the same asset class, an investor is less likely to be adversely impacted in the event of a loss on any one investment. This is because the loss is hopefully isolated and hopefully offset by gains from another investment in the portfolio. This concept of diversification however only works as long as investments are allocated among assets that are not affected in the same way by economic, political or social developments. To achieve this, it is generally advisable to diversify investments along the following lines:
Equities. Publicly-traded companies and their related shares provide varied benefits and no single stock offers all of the benefits available in a diversified portfolio. For example, some securities provide a good dividend yield and reduce the volatility of portfolio returns, while others may provide a good capital gain. By acquiring investments that are not subject to the same influences on market value, a charity can reduce the covariance within the investment portfolio and increase safety of the principal.31 Accordingly, it is generally advisable to diversify as follows:
Country. Different countries offer different investment advantages. It is generally advisable though that no equity holding exceeds 10% of the total equity portfolio no matter the country.
Industry. The investment industry recognizes 10 industry groups, as identified by recognized rating agencies.32 It is generally advisable to diversify investments among these groups using individual securities, conglomerate stocks (those in more than one industry) or exchange-traded funds (closed end funds).
Size. Stocks may also be diversified by size, which is typically measured by asset size (small, medium or large capital corporations), market capitalization and/or total earnings. Given the nature of a charity, a majority of equity investments should be in large capital corporations.
Fixed Income Securities. Diversification is also relevant for fixed income securities. For example, high quality and short-term bonds provide less yield but more protection against inflation and loss of principal while low quality and long-term bonds provide a higher yield but less protection against inflation and loss of principal. Therefore, a fixed income portfolio should generally be diversified by both its term to maturity and its quality. Canadian federal bonds are of the highest quality and only need to be diversified by term. Unlike Canadian federal bonds, the quality of provincial, municipal and corporate bonds does vary and they should be diversified.
Equities should be diversified as follows:
- The Foundation should not invest only in Canadian investments but foreign investments as well.
- International investment should be diversified in line with the related international index and/or country indices, as appropriate.
- Any one corporate issuer should not exceed 10% of the equity portion of the investment portfolio based on market value.
- At least 75% of the equity holdings in the portfolio should be of large capital corporations as rated by a recognized rating agency.33
- The exposure to the equity and fixed income securities of any single publicly-traded corporation and its related entities should not exceed 10% of the total portfolio.
- Investments should be diversified among industry groups and the Foundation should have the ability to invest in any and at any times all industry groups.
Fixed income securities should be diversified as follows: Federal fixed income issues should represent at least 50% of the fixed income section of the portfolio; provincial bonds should represent no more than 30%; and municipal and corporate bonds should be no more than 20% each.
Investment Objectives and Strategy
1. Investment Objectives
Investment objectives should be detailed and specific, based on sound rationales, and their implementation should be measurable.
Having regard to the mandatory investment criteria referred to in parts VII and VIII of this Investment Policy, the investment objectives for the Foundation are as follows:
a) To maintain sufficient liquidity to meet all spending requirements as they arise which for the buildup phase of the Foundation shall be nominal.
b) To provide sufficient capital growth over time to preserve the purchasing power of the Foundation.
c) To optimize the total return with due regard for the investment criteria in Sections VI and VII.
2. Asset Mix Strategy
Establishing the asset mix combines the analysis of the investment criteria referenced in Parts VII and VIII of this Investment Policy and Plan, along with the investment objectives.33
|Asset||Allocation Target||Minimum Allocation||Maximum Allocation|
Fixed income investments should be at least 50% in Canada and Canada guaranteed bonds; not more than 30% in provincial and provincial guaranteed bonds; and not more than 20% in municipal, municipal guaranteed and corporate bonds.
All percentages are based on the current market value of the securities and may include exchange-traded funds (shares) in the related asset class, as appropriate.
(a) Cash and Short Term:
Canadian and U.S. short-term investments with a term of less than one year to maturity. All such investments must be rated at least A-134 or equivalent by a recognized rating agency.
(b) Fixed Income:
Canadian bonds, debentures, notes or other debt instruments of governments (federal, provincial, municipal) and corporations rated at least A35 or equivalent by a recognized rating agency.
U.S. bonds, debentures, notes or other debt instruments of governments (federal, state, municipal) and corporations rated at least A36 or equivalent by a recognized rating agency.
Foreign bonds, debentures, notes or other debt instruments of governments (federal, state, municipal) and corporations rated at least A37 or equivalent by a recognized rating agency.
Guaranteed Investment Certificates38 and term deposits (and the equivalent) of banks, trust companies, insurance companies or other eligible issuers.39
The common and/or convertible preferred shares of A-rated Canadian and U.S. corporations and internationally recognized companies.
In all cases where investment assets are not denominated in Canadian dollars consideration should be given to the related currency exchange risk. Currency exchange risk refers to the uncertainty about the rate at which revenues or costs denominated in one currency can be converted into another currency.
IX. Investment Policy and Plan Review
Investment Policies will be reviewed at least on an annual basis and whenever there is a material change in circumstances40. Initial review will be undertaken by the Finance and Investment Committee who will report the results of that review and any related recommendations to the Board on an annual basis.
Recognizing that our supporters want to know that their gifts are well placed; this policy will be posted on our web
site at www.childrenstreatmentfoundation-ck.com and copies shall be provided to anyone requesting the same.
Appendix A: Disbursement Quota (Public Foundation)
Revision Approved 2013/05/22
As a result of the 2010 federal budget, the information below applies only for fiscal periods ending on or after March 4, 2010.
The disbursement quota is the minimum amount a registered charity is required to spend each year on its own charitable activities, or on gifts to qualified donees (for example, other registered charities). The disbursement quota calculation is based on the value of a charity’s property not used for charitable activities or administration.
For a public foundation, the disbursement quota is calculated as follows:
If the average value of a registered charity’s property not used directly in charitable activities or administration during the 24 months before the beginning of the fiscal period exceeds $25,000, the charity’s disbursement quota is:
- 3.5% of the average value of that property
A registered charity can use line 5900 in Schedule 6 of the T3010 return it completes for the fiscal period to calculate its disbursement quota for that period.
What is “property not used directly in charitable activities or administration”?
For the purposes of calculating the disbursement quota, property includes any real estate or investment assets that were not used directly in charitable activities or administration. This may include, for example, cash in bank accounts, stocks, bonds, mutual funds, GICs, land and buildings.
How is the average value of property calculated?
The average value of property is based on a specified number of periods, decided by the charity, over a 24-month span. The 24-month span can be divided into two to eight equal, consecutive periods. The number of periods is usually chosen when the charity files its first information return. Once chosen, the charity must get written permission from the CRA to change it. For example, if a charity calculates an average value of its property only once a year, it will use two 12-month periods to calculate an average value. If it values its property every six months, then it will use four six-month periods to calculate an average value. To establish the average value, first determine the value of the charity’s property that is not used directly in charitable activities o administration at the end of each period within the 24-months. Then add all of the values together and divide the total by the number of periods. The result is the charity’s average value property for the purpose of calculating the disbursement quota.
- Paragraph 27.1(2)(b) of the Ontario Trustee Act, R.S.O. 1990, c. T-23 as amended, requires that a charity’s written investment plan be intended to ensure that investment functions will be exercised in the best interests of the purposes of the charity.
- The essential difference between a non-profit organization and a for-profit business lies in what is done with any profits. In a for-profit business, profits can be used to benefit shareholders whereas with a non-profit organization, profits can only be used to further the objects of the organization and cannot be used to benefit the members – see “Identifying the Variety of NPO’s”, a paper by Milena Protich presented May 29, 2001 at the Canadian Bar Association seminar: “The ABC’s of NPO’s: Getting Oriented in the World of “Not-For-Profit”
- In order for a non-profit corporation to qualify as a charity, its objects must be be for one or more of the following: relief of poverty, advancement of education, advancement of religion and/or any purpose beneficial to the community – see “What is a Charity”, a paper by Lisa Goldstein presented November 3, 1995 at the Canadian Bar Association seminar: “Without a View to Profit: Non-Profits and Charities.”
- The objects of The Association are set out in its Letters Patent.
- Canada Customs and Revenue Agency Booklet, “Registered Charities and the Income Tax Act” RC4108(E), page 4.
- Canada Customs and Revenue Agency Booklet, “Registered Charities and the Income Tax Act” RC4108(E), at page 11.
- A charity’s investment powers may also be additionally defined by special statutory provisions having specific application to a charity or certain contractual relations such as an affiliation agreement with a national charity. Any additional items such as these should be identified in this part of the Investment Policy.
- Terrance Carter in his September 20, 1999 article, “Legal Issues in Investments of Charitable Funds” available at www.charitylaw.ca states that it “is essential that each charity review its Letters Patent or Special Legislation to determine if the new trustee investment power will apply.”
- Typically, by-laws do not contain specific provisions relating to investments.
- See page 59 of “Donor Restricted Charitable Gifts: A Practical Overview Revisited” a paper by Terrance S. Carter presented October 27, 2000 at the Canadian Bar Association seminar: “Fundamental New Developments in the Law of Charities in Canada”.
- See page 12 of “Looking a Gift Horse in the Mouth: Avoiding Liability in Charitable Fundraising” a paper by Terrance S. Carter presented November 24, 1999 at the Law Society of Upper Canada Second Annual Estates and Trusts Forum; and page 93 of “Donor Restricted Charitable Gifts: A Practical Overview Revisited” a paper by Terrance S. Carter presented October 27, 2000 at the Canadian Bar Association seminar: “Fundamental New Developments in the Law of Charities in Canada”.
- See page 3 of Charities Bulletin #6 published by the Ontario Office of the Public Guardian and Trustee dated March 7, 2001 available at www.attorneygeneral.jus.gov.on.ca.
- Charities Accounting Act, Regulation 4/01 which took effect on January 17, 2001 permits commingling where it was previously prohibited.
- See Charities Accounting Act, Regulation 4/01 Section 3.
- Subsection 27(2) of the Ontario Trustee Act, R.S.O. 1990, c. T-23. Technically, the investment powers of charities, which by their letters patent are not restricted to Trustee Act investments, are not governed by the Act but if the letters patent require investments to be prudent; practically, it will amount to the same thing.
- Subsection 27(5) of the Ontario Trustee Act, R.S.O. 1990, c. T-23.
- Section 2, of the Charitable Gifts Act, R.S.O. 1990 c. C.8.
- Section 8, of the Charitable Gifts Act, R.S.O. 1990 c. C.10.
- On June 29, 2001 amendments to the Ontario Trustee Act took effect, permitting charities to obtain investment advice (see subsection 27(7)).
- Subsection 27(8) of OntarioTrustee Act R.S.O. 1990, c. T-23.
- On June 29, 2001, amendments to the Ontario Trustee Act took effect permitting charities to delegate investment functions to an investment agent (see section 27.1). Prior to these legislative amendments, the permissible role of investment agents was unclear. Some commentators have cautioned that the investment adviser should be different than the investment manager, stating that since, “an investment manager normally earns commission income from transactions in an investment account, such an investment manager would be in a conflict of interest if he or she also acted as the investment adviser. Therefore, it would be better if the investment adviser retained by the organization directly and paid on a fee for service basis – see page 25 of “Endowments by Design: Creating a Legacy of Faith and Trust” a 2000 paper by Elaine Roberts at www.cuc.ca.
- Section 27.1 of the OntarioTrustee Act, R.S.O. 1990, c. T-23.
- Ontario Securities Commission article, “Types of Advisers” at www.osc.gov.on.ca.
- Subsection 27.1(3) of the OntarioTrustee Act, R.S.O. 1990, c. T-23; however, note that this does not apply where the charity invests directly in mutual funds, pooled or segregated funds – see subsection 27.3.
- Clauses 27.1(3)(a) & (b) of the OntarioTrustee Act, R.S.O. 1990, c. T-23.
- Subsection 27.1(5) OntarioTrustee Act, R.S. O. 1990, C. T-23.
- Clauses 27.1(5)(b)(i)-(iv) Ontario Trustee Act, R.S. O. 1990, C. T-23.’
- Subsection 27(5) OntarioTrustee Act, R.S. O. 1990, C. T-23.
- The Attorney General of Ontario stated in a letter that a director who does not consider each criterion to the same degree will have to demonstrate that it was prudent to prefer one criterion to another.
- Subsection 27(6) Ontario Trustee Act, R.S.O. 1990, c. T-23.
- Uniform Law Conference of Canada: Civil Section – Prudent Investors – 1996 at page 6 – available at www.ulcc.ca.
- Recognized rating agencies include: Dominion Bond Rating Agency, Moody’s Investor Services and Standard and Poor’s.
- If endowment, capital program and/or cash flow assets of the charity are commingled in one investment portfolio, the objectives for each should be weighted to determine the appropriate asset mix for the specific portfolio.
- Recognized rating agencies include: Dominion Bond Rating Agency, Moody’s Investor Services and Standard and Poor’s.
- Same as footnote 57.
- Same as footnote 57.37 Same as footnote 57.
- In connection with the purchase of guaranteed investment certificates it is generally recommended that the availability of insurance coverage such as from Canadian Deposit Insurance Corporation be considered.
- Dominion AAA and other recognized agencies.