On April 1, 2018, Ontario Regulation 112/18 (the “Amendment”) came into effect amending O. Reg 4/01 (Approved Acts of Executors and Trustees) under the Charities Accounting Act (the “Act”).
The Amendment modifies the existing Ontario common law rule that prohibits a charitable corporation from compensating a director (or any person related to him/her) for any reason (other than reimbursement of expenses) without first obtaining a court order. The same rule does not necessarily apply to trustees of charitable trusts.
The Amendment allows a charitable corporation to compensate a director, or a person connected to a director, for provision of goods, services or facilities, if certain requirements are satisfied – and subject to certain limitations.
In place of a court order, the Amendment obligates a charitable corporation to implement various safeguards aimed at ensuring that the proposed transaction is in the best interests of the charity. Specifically, a charitable corporation seeking to compensate a director or person related to a director must meet the following conditions:
- the transaction must be made with a view to the charity’s best interests;
- the amount of the payment must be reasonable for the goods, services or facilities provided and cannot exceed the amount expressly authorized by the board; and
- the payment must not cause the charity’s liabilities to exceed the value of its charitable property, or cause the charity to become insolvent.
The Amendment also lays out a number of conditions that the board of a charitable corporation must satisfy to authorize the payment, including:
- the charity must have at least four independent voting directors (not including the one receiving payment);
- the director (or person connected to the director) to receive the payment cannot participate in or attend deliberations regarding the proposed transaction, nor vote on it;
- the directors (including the director receiving the payment) must unanimously agree on the maximum amount of the payment;
- the directors (excluding the director receiving the payment) must unanimously agree that the regulation’s conditions have been satisfied; and
- the board must consider any guidance issued by the Public Guardian and Trustee.
Information regarding any payments to directors or persons connected to directors must be noted in the charity’s financial statements and must be placed before the members at the annual meeting of members.
There is also a limit to the charity’s ability to enter into transactions with directors: no more than 20% of the charity’s directors can receive any such payment, or be connected to persons receiving such a payment.
Persons That Are “Connected to a Director”
The Amendment identifies those persons who are deemed to be a “person connected to a director” as the following:
- A spouse, child, parent, grandparent or sibling of the director.
- The employer of the director or of a person described in paragraph 1.
- A corporation with share capital, if, singly or jointly, the director or a person described in paragraph 1 beneficially owns, controls or has direction over more than 5% of the corporation’s shares.
- A corporation without share capital, if, singly or jointly, the director or a person described in paragraph 1 beneficially owns, controls or has direction over more than 20% of the voting membership interests of the corporation.
- Subject to certain exceptions, a corporation with or without share capital for which the director or a person described in paragraph 1 acts as director or officer.
- A partnership in which the director or a person described in paragraph 1 is a partner, or in which a corporation described in paragraph 3, 4 or 5 is a partner.
- A partner in a partnership described in paragraph 6.
Prohibited Payments (Absent Court Order)
Certain payments may not be authorized by the procedures set forth in the Amendment, and remain prohibited without a court order. These include payments for services provided as a director or an employee of the charity, payments for fundraising services and payments in connection with the purchase or sale of real estate.
Though some will argue that this Amendment does not go far enough, it does bring at least some welcome degree of moderation to an overly restrictive common law rule, and relief to charities with directors that can provide assistance beyond governance.