Ontario’s Regulatory Change to the Payment of Directors

The system of Charity Law which Canada inherited from Britain upon Confederation was focused on the need to protect charitable property. Part of this system included rules which forbade those with control of such property from benefiting from it. These rules are still in place across the country but Ontario has taken a progressive attitude in this regard. Newly proposed regulations make Ontario’s system even more manageable.

The restrictions on Directors and Trustees are of a fiduciary nature. That is, they are of the highest and most strict type. Directors simply cannot benefit from the property of a charity whether registered or not, either directly or indirectly.

This common law rule has an interesting application. For example, a painter who is also the Director of a charity, may not charge for his services if he does work for the charity he directs. Even more strictly, an individual who is also the beneficiary of a charity may have trouble accessing the services provided by the charity provided in the course of its charitable work, if that individual is also a Director.

Ontario’s Charities Accounting Act includes a process by which a charity could ask for Court approval to a pay a Director for some good or service rendered to it by the Director. There is an expedited process for these requests, involving the consent of the Public Guardian and Trustee, which if given, does allow the charity to pay the Director as per the Court Order. This system is relatively obscure in Ontario and is completely unknown in the rest of the provinces. While Courts in the other provinces do have jurisdiction to address this issue, there is no legislation in any other province that allows for an obvious process to do so.

Ontario recently amended its rules to allow charities to pay Directors for goods or services rendered in certain circumstances without Court approval. This allowance to efficiency is welcome given that they seem to codify some of the circumstances in which the Public Guardian and Trustee would have given its consent under the old system and does away with the need for a Court order. Nevertheless, there are significant restrictions on the circumstances in which a charity could make such a payment. (We note that applies specifically to charities in Ontario that are incorporated and not to unincorporated associations or trusts). We would recommend that if and when these proposals become law, that charities review them with an eye to the restrictions prior to making any payments to Directors.

From a CRA perspective these payments are not going to attract any particular sanction. The Income Tax Act does include provisions which do not allow a charity to pay above fair market value to any Director, or anyone not at arm’s length from Director, but this would not be allowed under the Ontario proposals anyways so there is no conflict with the CRA rules.

We will write again on the specifics of the new regulations if and when they are passed into law. However, it bears mentioning that there is an old and large body of law that dictates how Directors must deal with each other in discussing matters of conflict of interest. With these small but useful changes proposed to the Charities Accounting Act these laws may now apply to Charities in Ontario as well. Much work will need to be done researching how this may be the case and its practical application.