The Ontario Government is amending Regulation 4/01 under the Charities Accounting Act to change the rules on payments to directors of Ontario charitable corporations (the "Regulation"). [1] The amendment is available here. The Regulation will be effective on April 1, 2018.
The Regulation will give charitable corporations more flexibility to make certain payments to directors and persons connected to directors for goods, services and facilities without needing to obtain a court order.
Background to the Changes
All charities that operate in Ontario, regardless of whether they are incorporated in Ontario, are subject to the jurisdiction of the Ontario Public Guardian and Trustee (the "PGT") and applicable charities laws.
The general legal rule is that a director of a charity cannot transact business with the charity or accept personal benefits from the charity. This includes direct and indirect payments or benefits (e.g. through a spouse or a business owned by the director).
As a result, a charity cannot pay directors' fees (other than reasonable expense reimbursements) nor can it pay directors for services provided in another capacity (e.g. as an employee or service provider) unless permitted by a court order or an order made under section 13 of the Charities Accounting Act.[2] This captures, for example, a CEO of a company or a partner of a law firm who serves on the board of a charity. Until now, a charity would not have been able to pay for services from that company or firm without a court order approving of the arrangement.
The Regulation will provide a welcome alternate process for the board to approve of many such arrangements.
The New Regulation
Conditions for Permitted Payments
In order to use this process to pay a director or a Connected Person (defined below) for goods, services or facilities, a charity will need to meet various requirements:
1. the payment needs to:
(a) be made with a view to the charitable corporation's best interests;
(b) be reasonable for the goods, services or facilities provided;
(c) not result in the amount of the corporation's debts and liabilities exceeding the value of the charitable property's value or render the corporation insolvent;
(d) not exceed the maximum amount agreed to by all of the directors (see next)
2. before the board can authorize the payment:
(a) all directors (including the director who is to receive the payment) must agree in writing on a maximum amount that can be paid for the goods, services or facilities and, if the payment is to benefit another person who is related to a director, that person must also agree in writing;
(b) all directors (other than the director receiving the payment) must agree in writing that that they are satisfied that all conditions in the regulation have been met, and
(c) the board must consider any guidance issued by the PGT (We are still awaiting the PGT's Guidance on the Regulation, which we expect to be released in due course);
3. there need to be at least four directors on the board, not counting the director(s) who will receive the benefit;
4. neither the director who would receive the payment, nor any Connected Person, can (i) take part in the deliberations, (ii) attend any part of a board meeting during which the decision to authorize the payment is discussed, or (iii) participate in any vote of the board on the issue;
5. the total number of directors receiving payments from the charity, or whose Connected Persons are receiving payments, cannot be more than 20% of the total number of directors during the financial year; and
6. all payments need to be reported at the annual general meeting and noted in the charity's financial statements.
Payments to a not-for-profit corporation or a wholly-owned subsidiary are largely exempt from the above requirements as long as a director or Connected Person (other than the corporation itself) will not receive any benefit from the payment.
Application to "Connected Persons"
The Regulation broadly defines who are "persons connected to a director" (for the purposes of this bulletin, "Connected Persons"). The definition includes:
- A spouse, child, parent, grandparent or sibling of the director (a "Relative").
- The employer of the director or of a Relative of the director.
- A corporation with share capital, if, individually or jointly, the director or a Relative of a director beneficially owns, controls or has direction over more than 5% of the corporation's shares.
- A corporation without share capital, if, individually or jointly, the director or Relative of a director beneficially owns, controls or has direction over more than 20 per cent of the outstanding voting membership interests of the corporation.
- A corporation with or without share capital for which the director or a Relative of a director acts as director or officer.
- A partnership in which the director or a Relative of a director 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.
Limits on Payments
The Regulation contains important limits on when the approval process can be used. It cannot be used to approve of direct or indirect payment for services provided by a director:
- in their capacity as a director or employee of the charity;
- for fundraising services or goods or services for fundraising purposes; or
- in connection with the purchase or sale of real estate.
In these cases, a section 13 order or court order will still need to be sought.
Implications
The Regulation will make it much easier for charitable corporations to obtain approval for board members and their businesses to provide services to the charity. Of course, charities will still need to seek an order to approve of arrangements for an employee, such as a CEO, to sit on the board. An order will also be required where the transaction involves fundraising services or the purchase or sale of real estate. But there are many other arrangements will be able to be approved using this board approval process without needing to resort to a court order. This is a welcome change.
If you have further questions about director benefits or how the new Regulation will work or apply to your organization, please contact one of the authors.
[1] O. Reg. 112/18 will amend O. Reg. 4/01 (Approved Acts of Executors and Trustees).
[2] The Public Hospitals Act, which requires certain hospital employees to sit, ex officio and non-voting on the board, is a statutory exception to the common law rule.
