Charities are commonly established as a corporation or society. However, the impending proclamation into force of the Canada Not-For-Profit Corporations Act will have significant implications for charities established as federally incorporated corporations and may necessitate a look at other methods of establishing a charity. In certain circumstances, it may be appropriate to establish a charity using a charitable trust. This article considers some of the advantages and disadvantages of using a charitable trust to establish a charity.

A. ADVANTAGES OF USING A CHARITABLE TRUST

Charitable trusts have advantages which are not conferred on corporations. These advantages include, but are not limited to:

  1. flexibility;  
  2. privacy; and  
  3. the relatively minimal cost and time required to establish a charitable trust.  

Flexibility

Charitable trusts are governed by common law, rather than statute. This means that charitable trusts are not incorporated and are not subject to corporate rules. Unlike corporations, a charitable trust has no federal or provincial reporting obligations and will not be required to prepare audited financial statements, unless otherwise specified in the document creating the trust.

The administration of the charitable trust will be governed by the terms of the written document creating the trust. The document creating the charitable trust may be drafted to give the trustees maximum flexibility in the administration of the trust, including to:  

  1. give the trustees broad discretion in fulfilling the objects of the charitable trust;  
  2. permit the trustees to establish their own operational rules for the charitable trust;  
  3. permit the trustees to act as trustees indefinitely and to provide for replacement trustees; and  
  4. permit amendments to be made to the objects and administration of the charitable trust.  

Privacy

Since charitable trusts are not incorporated, unless the charitable trust becomes a registered charity with the Charities Directorate of Canada Revenue Agency, the trust records are not a matter of public record. This is particularly advantageous in the creation of private foundations where privacy is often a principal concern.  

Time and Cost to Establish a Charitable Trust

Establishing a charitable trust is often quicker and more cost effective than incorporating a corporation. Unlike a corporation, there is no requirement to reserve a corporate name, register the corporation or pay any registration fees. In addition, there are no annual reports to maintain and file.

B. DISADVANTAGES OF USING A CHARITABLE TRUST

Liability Exposure

Perhaps the principal disadvantage to charitable trusts is the potential personal liability of the trustees for the debts and actions taken by the trustees of the charitable trust. Trusts do not have the same limited liability protection as corporations. Trustees are fiduciaries and are obliged to manage the property of the trust as a reasonable person would manage his or her own affairs. If a trustee fails to meet this standard, then he or she could be found liable for any losses.

However, steps may be taken to minimize the personal liability of trustees. Often, the document creating the trust will include a provision which limits the liability of trustees provided that they have acted in good faith and indemnifies the trustees for any debts, obligations or liabilities the trustees may incur in acting as trustee. In addition, it is becoming increasingly common for insurance to be obtained to protect trustees from the variety of claims that can arise from the management and administration of a trust. Another option is to have a corporation act as trustee of a charitable trust.

C. CONCLUSION

Although charitable trusts may not be appropriate for all charities, in light of the impending changes to federally incorporated corporations, serious consideration should be given to a charitable trust as an alternative to a corporation or society for the establishment of a charity.