Proposed Change Would Eliminate Certain Conflicts for Directors of Charities

Charity law holds directors of charitable corporations to strict duties to avoid conflicts of interest and to disgorge payments they may receive in violation of this duty. But a proposed new regulation under the Charities Accounting Act would relax this standard.

1. Policy Background

Charity law has long held directors of charitable corporations to strict duties to avoid conflicts of interest and to disgorge payments they may receive in violation of this strict duty.

An apparently unforgiving rule prohibiting directors from directly or indirectly receiving charitable property or the proceeds of charitable property is seen as an essential first bulwark in the legal system that protects charitable property from dissipation. Directors must act as pure trustees, without the possibility of personal gain. The question of market rates and overall fairness is therefore inadmissible in this context.

In the past, the office of the Public Guardian and Trustee has taken the position that any deviation from this strict rule can only be authorized by court order. But this requirement took time, imposed an added cost on the applicant and consumed scarce judicial resources.

2. Proposed Regulatory Relaxation of Common Law Rule

A relaxation of this strict rule was therefore called for, and it appears the PGT is prepared to relax the common law standard. The relaxation would take the form of amending a regulation under the Charities Accounting Act (Ontario).

Under the amendment (which is not yet in force), charitable corporations (but not charitable trusts) would be authorized to pay directors and certain persons connected with a director for goods, services or facilities without obtaining a court order. The regulation seeks to balance the need for charities to enter into advantageous transactions with the need to protect the public interest in ensuring that charitable property is not dissipated.

3. Scope of Payments Authorized

The proposed new rule is cast broadly, but is subject to several qualifications and carve-outs.

In general, a charitable corporation can make payments to its directors (or persons connected with the directors) for goods, services or facilities. Persons connected with a director include:

● A spouse, child, parent or sibling of the director (a "close relative").

● The employer of the director or a close relative. For example, if the employee of a bank or other financial institution sits on the charity's board, the financial institution would not require a court order to establish a deposit account for the charity.

● A business corporation of which the director, and his or her close relatives, collectively hold more than 5% of the shares.

● A business corporation in respect of which the director (or his or her close relative) acts as a director or officer.

● A not-for-profit corporation of which the director, and his or her close relatives, collectively hold more than 20% of the voting membership interests.

4. Exclusions

The new regulation would not apply to authorize payments for the following types of services:

● Acting as a director or employee of the charitable corporation. This would continue to prohibit director's fees, salaries, wages, commissions or other direct or indirect remuneration as a director or officer of the charitable corporation.

● Fundraising services or selling goods or services for fundraising purposes.

● The purchase or sale of real estate. This would prohibit the director (or a connected person) from selling real property to the charity or buying real property from the charity. It would not exclude the lease of real property from the charity as landlord or to the charity as tenant. It is less clear whether it would also prohibit the director, or connected person, if licensed as a real estate agent, from receiving a commission (as occurred in the 1998 case of Ontario (Public Guardian & Trustee) v. Unity Church of Truth).

5. Qualifying Conditions

Despite the broad authorization, the payment to a director or connected person must:

● Be made with a view to the charity's best interests.

● Be reasonable, in amount, for the goods, services or facilities provided.

● Not render the charity insolvent (including having its liabilities exceed the value of its assets).

6. Procedural Requirements

Before the board may authorize a payment to a director or connected person:

● The board must have at least five members. No more than 20% of the total number of directors can receive a payment in any fiscal year. In effect, the new rule does not apply to charities whose board consist of four directors or fewer. As well, unless the size of the board exceeds nine directors, the new rule allows payment to only one director or connected person in a fiscal year.

● Every director (including the conflicted director) must agree in writing to the maximum amount that can be paid for the goods, services or facilities and the payment cannot exceed this cap. Every director (other than the conflicted director) must agree in writing that he or she is satisfied that the conditions set out in the regulations have been met.

● The conflicted director cannot vote on the issue. Neither the conflicted director nor the connected person can take part in the board deliberations or attend any part of the board meeting during which the decision to authorize the payment is discussed.

● The board must consider any related guidance on payments issued by the PGT.

● The payment to directors or connected persons must be disclosed in the charity's annual financial statements. While it is unclear whether payments are aggregated or individualized, disclosure of individualized payments is the only way to ensure compliance.

7. Affiliate Exemption

The new regime would not apply to payments to (for-profit or not-for-profit) corporations that are wholly-owned by the charity, so long as neither a director nor a connected person (other than the affiliate itself) receives a benefit from the payment. These types of in-house payments do not result in any dissipation of charitable property and only technically engage the conflict of interest rules.

8. Concluding Comments

The proposed regulatory amendments should be welcome. They are narrow and include several built-in safeguards (such as independent board decision-making and disclosure) that should be adequate to protect the public interest. Requiring court orders in these narrowly defined circumstances is overkill and counter-productive to the charity. It often forced conflicted directors to resign unnecessarily, simply to avoid a conflict where the corporation's interests were adequately protected.

However, the new rule would not otherwise reduce the rigour of the common law rule prohibiting directors from profiting from their office. Nor does it override any provision of the articles/letters patent or by-laws of an Ontario or federally incorporated charity that expressly prohibit direct or indirect benefits to directors.