Independence of a Foundation from its Operating Charity

In Bloorview Children's Hospital Foundation v. Bloorview MacMillan Centre (decided 2002), Justice Pitt of the Ontario Superior Court of Justice held that, on the facts, a charitable foundation was independent of its separately incorporated operating charity and was entitled to decide for itself whether to advance foundation monies for an expansion of the operating charity's facilities.

1. Facts

Bloorview Children's Hospital Foundation was incorporated as a non-share capital corporation under Part III of under the Ontario Corporations Act ("Act") in 1982. The foundation was formed to help insulate the Bloorview Children's Hospital (which later became the Bloorview MacMillan Centre) from having to include the healthy surplus on its balance sheet for purposes of obtaining Ontario-government operating grants.

Therefore, the foundation was formed with all of the applicants for incorporation drawn from the hospital board and its committees. The objects of the foundation set out in its letters patent were described as:

● Primarily to apply the funds for the benefit of the patients of the hospital, including capital expenditures; and

● Secondly to:

● be the fund-receiving body of the hospital; and

● generally use the funds for the improvement of patient care or other charitable activities related to disabled young persons carried on by hospitals and other registered charities.

Upon dissolution of the corporation, the remaining property of the foundation was to be distributed to the hospital.

The foundation became a registered charity with Canada Revenue Agency in June 1983. Shortly thereafter, the hospital transferred $10 million in unrestricted funds to the foundation, removing that amount from the hospital's balance sheet.

Initially, the board of the hospital controlled the composition of the foundation board. However, between 1993 and 1998, the governance structure of the foundation was changed so that the members of the foundation consisted only of the foundation directors (a closed membership structure).

In 2000, the hospital requested that the foundation contribute $15 million for hospital construction. The foundation did not pay over the funds and did not make a final affirmative response to the hospital's demand. The hospital then brought an action to challenge the changes to the governance structure that had the effect of making the foundation independent of the hospital.

2. Rulings

Justice Pitt of the Ontario Superior Court of Justice ruled as follows:

● Funds given by the hospital to the foundation belong to the foundation.

● Nevertheless, the foundation cannot treat the considered requests made by the hospital as if they came from a stranger.

● The directors of a non-share capital corporation must act only in the best interest of the corporation in accordance with its objects.

● As a minimum, the foundation, charged as it is with the welfare of the patients of the hospital, must give careful and fair consideration to any request for assistance made by the hospital, which itself has the same objects of protecting the interests of its patients.

● The correctness of the decision to build the new hospital is not a clear-cut decision. Reasonable people may differ about it and the ultimate decision to finance it rests with the foundation. The foundation's directors alone can be held accountable for the decision. The foundation's board must consider the possibility that the decision to build a new hospital is particularly unwise.

● There was nothing in the foundation's original by-law which prevented the directors from passing subsequent by-laws, even to convert the corporation into a closed membership.

3. Key Observations

Bloorview is an important case in laying out the relationship between a foundation and its operating charity. Much depends on how the objects of the foundation are cast. The letters patent of the foundation in Bloorview did not make the hospital the exclusive recipient of all funds under the control of the foundation. While the court required the directors of the foundation to give careful and fair consideration to any request for financial assistance made by the hospital (which was not to be treated as a stranger), the foundation's board also had a duty to act independently and make its own informed business decision in carrying out the corporation's charitable objects.

Bloorview is also important in emphasizing that boards and members of a not-for-profit ("NFP") corporation are entitled to amend or replace their governing documents (in this case, the articles and by-laws of the foundation) in accordance with the underlying statute. A collateral attack on these changes can only justify the court's intervention if the challenge is made promptly by a party who can satisfy the court that it has standing.