On July 10, 2017, the Ontario government published a draft amendment to a regulation under the Ontario Charities Accounting Act (the “Act”). The proposed amendment would modify the Ontario common law rule that currently prohibits a charity’s directors from receiving any compensation from the charity, for directorial or other services, without a court order.
In Ontario, cases involving unethical charity operators have led the courts to impose a rule requiring that a charity obtain a court order authorizing any payment (other than expense reimbursement) to a director, or a person related to the director. Such order can be sought in co-operation with the Public Guardian and Trustee (Ontario Ministry of the Attorney General) under an abbreviated process pursuant to section 13 of the Act (a “Section 13 Order”).
This rule has forced charities to weigh the benefits of a proposed transaction with a director against the cost of obtaining a court order or the risk of non-compliance.
Proposed rule changes
The proposed amendment to the Act’s regulation would allow a charity to compensate a director, or persons connected to a director, for provision of goods, services or facilities, if certain requirements are satisfied.
In place of a Section 13 Order, the proposed amendment would obligate a charity to implement various safeguards aimed at ensuring that the proposed transaction is in the best interests of the charity. In the consultation draft of the proposed amendment, a charity seeking to compensate a director or person related to a director would have to 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 consultation draft of the proposed amendment also lays out a number of conditions that a charity’s board must satisfy to authorize the payment, including:
- the charity must have at least four directors on its board in addition to the director who is to receive payment or who is connected to the person 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.
There is also a limit to the charity’s opportunity to enter into transactions with directors. In each financial year of the charitable corporation, no more than 20% of the charity’s directors may receive any such payment, or be connected to persons receiving such a payment.
Scope of persons that are "connected to a director"
The proposed amendment identifies the categories of persons who would be deemed to be a “person connected to a director” such that they are caught by the rule:
- 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 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 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.
Types of payments that cannot be authorized by the board
Certain types of payments cannot be authorized by the procedures set forth in the proposed amendment, and would remain prohibited without a Section 13 Order. These would 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.
Public comments on the draft amendment can be submitted until August 29, 2017 to the Office of the Public Guardian and Trustee.