Gwenyth Stadig, Partner, Amber LeBlanc, Articling Student, Upama Poudyal, Associate, Gowling WLG (Canada) LLP

When a testator located in Ontario intends to create a charity through their will and fund it with estate assets, it is essential to understand Ontario’s rules regarding compensation of charity directors. Generally, directors of charities cannot receive remuneration, with limited exceptions and potential approval pathways. Estate-planning professionals should ensure the will, constating documents of the new charity, and any related governance documents of the new charity are drafted with these rules in mind to preserve the testator’s intent and avoid running afoul of charity regulators.

In Canada, a charity must exist at law as either a corporation or a trust.[1] Corporations which are charities are generally incorporated pursuant to either the Canada Not-for-profit Corporations Act (“CNCA”)[2] or the relevant provincial non-share capital corporation regime (the Not-for-Profit Corporations Act, 2010 (“ONCA”)[3] in Ontario). While these statutes may make the issue of director compensation seem deceptively simple, they apply broadly to all non-share capital corporations, not just charities. Charities and their directors are subject to additional common law rules, and charities operating in Ontario are also subject to the Charities Accounting Act (“CAA”)[4] and its regulations.

Charities must be established and operated for at least one specific charitable purpose which falls within one or more of the following common law categories: the relief of poverty, advancement of religion, advancement of education, or other purposes beneficial to the community. Once registered, a charity is subject to stringent tax compliance rules and regulations to ensure that it continues to serve the public benefit in accordance with its stated charitable purpose(s) exclusively.

Accordingly, charities are expected to use their property (including their funds) only for their stated charitable purpose(s). Any other use of their property can only be authorized through an application to the Superior Court of Justice, or by applying to the Canada Revenue Agency in advance to amend their charitable purpose(s).[5]

Under common law, directors are treated as quasi-trustees for the purpose of managing charity property, and have a corresponding strict fiduciary duty to the charity. This fiduciary duty requires that directors act with diligence, loyalty, and in the best interests of the charity, as well as avoid conflicts of interest. Directors cannot accept a benefit from the charities they serve. Because of their fiduciary obligations to act in the charity’s best interest, it could be a conflict of interest or breach of trust for them to then compensate themselves. In other words, directors cannot have a personal interest in the financial decisions of the charity.[6] The consequence of this is that unless granted by the court, a director of a charity cannot be remunerated for performing their duty as a director whatsoever.

In addition to common law fiduciary principles, the Approved Acts of Executors and Trustees Regulation under the CAA makes a clear statement: directors cannot be paid simply for taking on the role of director.[7] This is not a blanket prohibition on paying individuals in director roles in all circumstances. Individuals who are directors of a charity can be compensated for work done outside of their capacity as a director.[8] For example, if a director also happened to be the executor of the estate that established the charity, their offering of services regarding the management of the charity’s assets for a defined period of time in the settlement of the estate for the benefit of the charity would likely be seen as a delivered service they could be paid for. However, the regulations detail a strict procedure to be followed for charities to be able to make such payments.

The consequences of not understanding these rules around remuneration could have severe tax implications. There are penalties under the Income Tax Act for conferring undue benefits on a person out of the charity’s property.[9] In addition, with repeated infractions, a charity could lose its authority to issue donation receipts, or face losing registered charity status.[10]

These rules are important for estate planners and administrators to keep in mind. Testamentary charitable giving can be a powerful estate and tax planning tool, which can also greatly benefit worthy causes – being mindful of director compensation rules is one way to avoid a pitfall which can jeopardize charitable status and undermine the testator’s intent.

 

[1] The vast majority of charities in Canada are corporations.

[2] Canada Not-for-profit Corporations Act, SC 2009, c 23 [CNCA].

[3] Not-for-Profit Corporations Act, 2010, SO 2010, c 15 [ONCA].

[4] Charities Accounting Act, RSO 1990, c10 [CAA].

[5] CAA, s 13.

[6] Government of Ontario, “Charities: directors and trustees” (4 October 2022), online: <https://www.ontario.ca/page/charities-directors-and-trustees>.

[7] Approved Acts of Executors and Trustees, O Reg 4/01, s 2.1(4).

[8] Approved Acts of Executors and Trustees, O Reg 4/01, s 2.1(2).

[9] Income Tax Act, RSC 1985, c. 1, ss 188.1(4)-(5) [ITA].

[10] ITA, s 168(1)(b) & 188.2(1)(b).