It is not uncommon to find Canadian registered charities paired with a “parallel” foundation—a separate but closely connected organization designed to amplify and complement the operating charity’s mission.
These parallel foundations, themselves registered charities and usually designated as public foundations, exist solely to support their partner charity by raising funds, managing investments, and holding endowments.
By separating day-to-day operations from fundraising and financial stewardship, this dual structure can provide greater flexibility, transparency, and long-term stability. It is typical to see this model in action with universities and their fundraising arms, powerful partnerships that can help fuel essential services, research, and innovation.
Below, we cover the advantages and risks of operating charities having a parallel foundation. We also discuss some other issues that charities should consider when working in tandem with a parallel foundation.
What are the advantages of having a parallel foundation?
A parallel foundation offers a number of advantages for an operating or “parent” charity. A parallel foundation:
- separates and enhances the fundraising function from the parent charity;
- develops a secure pool of assets upon which the long term sustainability of the parent charity can be achieved; or
- satisfies a perceived need to insulate asset pools from liabilities arising from the operational decisions of the parent charity.
Because of these advantages, parallel foundations are used by a broad range of “parent” charities that include, but are not limited to, universities, private schools, museums, galleries, health and social service charities and faith-based organizations.
What could go wrong?
The greatest risk with parallel foundations is the possibility that the foundation may go “rogue”—mismanaging funds, redirecting resources, or changing its charitable objects so it no longer supports the operating charity.
This risk becomes especially serious when the operating charity has transferred or entrusted some or all of its assets to the parallel foundation.
In worst case scenarios, if the relationship between the two organizations breaks down, the breakdown can jeopardize the operating charity’s financial stability and ability to fulfill its mission.
What happens when governance breaks down?
When the relationship between an operating charity and its parallel foundation breaks down, the most common diagnosis is a weak or flawed governance structure.
To avoid this, the operating charity should establish robust control mechanisms from the start—clear oversight, defined roles, and accountability measures—to help ensure the parallel foundation stays aligned with its intended purpose and continues to support the charity effectively.
A 2002 Ontario Superior Court decision offers a powerful cautionary tale. After transferring $10 million to its parallel foundation, a charity later asked for the funds back to help build a new facility. But there was a problem—the charity had no legal control over the foundation. When the foundation refused to return the money, the court sided with the foundation. Without clear authority or strong influence over the foundation, the charity had no way to ensure its funding priorities were respected.
How can my operating charity properly set up a parallel foundation?
There are several ways through which an operating charity can exercise control over a parallel foundation. Control can be embedded into the governance structure of the parallel foundation. For example:
- the parallel foundation’s charitable purposes could be drafted to benefit the operating charity exclusively (and not other registered charities);
- membership of the parallel foundation could be composed of the operating charity itself or a combination of directors of the operating charity and/or former directors of the operating charity;
- there could be a fixed number of director seats on the board of the parallel foundation that may only be filled by the operating charity; and
- the foundation’s governing documents include a dissolution provision that ensures that its assets will be transferred to the operating charity in the event of a wind-up of the foundation.
It is also possible for the parent charity and its parallel foundation to enter into a written agreement outlining how the two entities will coordinate their operations, clearly setting out the obligations and other deliverables expected of the parties.
What other factors should my operating charity consider?
Not to be discounted is the added administrative burden that comes from maintaining two legally distinct entities. For instance:
- both the operating charity and the parallel foundation will each have separate filing requirements with their applicable corporate regulator (i.e. the British Columbia Registrar of Companies, Corporations Canada, etc.) and the Canada Revenue Agency;
- both organizations must maintain separate accounting books and records, including financial statements and charitable receipting records; and
- both organizations must coordinate and attend to the annual corporate decision making of their respective members and directors which, despite potential overlaps in their composition, must be kept separate and distinct from one another.
How do the Income Tax Act anti-avoidance rules affect transfers?
There are also anti-avoidance rules that organizations should be aware of before transferring resources between each other. The Income Tax Act (Canada) provides that, if a registered charity receives a gift from another registered charity that is not at arm’s length, the recipient charity must spend 100% of the gift in the year of receipt or in the following year.
This expenditure requirement can be avoided if the donor charity “designates” the gift to the recipient charity. A gift becomes a “designated gift” if the donor charity identifies it as such in its T3010 Registered Charity Information Return for the year the gift is made. However, a donor charity cannot use the designated gift to satisfy its own disbursement quota, which is the minimum amount a registered Canadian charity must spend annually on its charitable activities or qualifying disbursements. This may require careful financial planning between the operating charity and the parallel foundation to ensure that both entities are meeting their disbursement quota obligations.
How can charities reduce donor confusion?
Another issue that organizations must consider is ensuring there is no donor confusion between the operating charity and the parallel foundation. Donors must be able to understand what entity they are donating to and for what purpose, and this may require spending significant time and energy communicating with donors and preparing fundraising materials.
To be sure, a charity may have valid reasons or face circumstances that warrant exerting less control over its parallel foundation. For example, when an operating charity has sufficient control over its parallel foundation, the operating charity may be required by accounting standards to prepare consolidated financial statements–an outcome that may not be desired. There are also considerations specific to particular sectors (e.g., public healthcare organizations) that may favour a more arm’s length relationship between an operating charity and a foundation. Charities must balance these considerations with the potential risks that may materialize where there is insufficient control.
Next steps for charities considering a parallel foundation
If carefully structured and governed, a parallel foundation can be a powerful tool to support an operating charity’s long‑term mission, financial stability, and fundraising capacity. However, the benefits come with additional governance, compliance, tax, and communication considerations that should be weighed at the planning stage.
Should you have any questions about this article, are considering setting up a parallel foundation, or would like to review an existing structure, please contact a lawyer of our Charity and Not-for-Profit group.
