Duty to Invest

Directors of charitable corporations and trustees of charitable trusts are responsible for the assets of the charities they manage. They have a duty to manage the funds responsibly. This includes investing funds not immediately needed to carry out the charity's purposes.

Most charities have limited powers of investment. Investment powers are usually set out in the document that created the charity. For example:

• If the charity was established by Special Act of the legislature, the investment powers of the charity may be set out in that Act.
• If the charity is a corporation established by letters patent, the power to invest is usually set out in the letters patent.
• If the charity is a trust, the power to invest is usually set out in the trust deed, will or constitution.

Wording of Investment Powers

The wording of the investment powers is important. The charity's funds must be invested as directed by the investment powers. Charities in Ontario usually have one of the following four investment powers:

1. The charity must make investments in accordance with the Trustee Act. The funds of these charities must be invested in the way set out in the Trustee Act as amended on June 29, 2001.
2. The funds of the charity must be invested prudently, but investments are not limited to investments authorized by law for trustees. Even though investments are not limited to those allowed for trustees, the Trustee Act provides a useful guide to making prudent investments.
3. The funds of the charity can be invested only in limited kinds of investments. These charities are bound by the document that creates the charity. They must follow the directions set out in that document even if other investments might provide a higher return. If directors or trustees are concerned that following the investment strategy set out in the document that creates the charity would be imprudent, then they should seek legal advice and consider varying the investment powers.
4. In some cases, the power to invest is not set out in the document that creates the charity. In those cases the charity must follow the requirements of the Trustee Act, as amended on June 29, 2001.

CHARITIES ACCOUNTING ACT

Under the Charities Accounting Act the investment provisions of the Trustee Act, specifically sections 27 to 31, apply to both incorporated and unincorporated charities.

Power to Own and Lease Realty

Under the Charities Accounting Act, a charity that holds real or personal property is required to use the property for its charitable purposes. Charities may now hold land for the purposes of leasing it or as an investment, provided the charity (a) is not prohibited from holding or leasing land by the terms of its investment powers; (b) uses the revenue generated for its charitable purposes; and (c) the investment is otherwise prudent given the particular investment powers of the charity.

TRUSTEE ACT

Important changes to the Trustee Act, affecting the investment powers of charities, came into effect on July 1, 1999, and on June 29, 2001. The changes increased the variety of investment options available to charities and allow delegation of investment decisions under certain conditions.

Authorized investments

Prior to July 1, 1999, the Trustee Act set out an authorized list of investments. Charities bound by that Act could only make investments found on the list.

On July 1, 1999, the Trustee Act was amended. Trustees are no longer confined to a pre-set list of investments. They can make any investment that a prudent investor might make, and can invest in mutual funds, pooled funds and segregated funds offered under contracts of insurance.

Under the current provisions, "a trustee must exercise the care, skill, diligence and judgement that a prudent investor would exercise in making investments". They have an overriding duty to act prudently and reasonably.

Factors to Consider when Investing

The Trustee Act sets out a list of seven factors a trustee must consider when making investments. These seven criteria are in addition to any others that are relevant to the circumstances of the charity. These criteria will be useful even to charities not required to follow the Trustee Act. The seven criteria are:

• general economic conditions;
• the possible effects of inflation or deflation;
• the expected tax consequences of the investment decisions or strategies;
• the role each investment or course of action plays within the charity's overall portfolio;
• the expected total return from income and growth of capital;
• needs of the charity for liquidity, regularity of income and preservation or appreciation of capital. The need to produce sufficient income to allow the charity to carry out its purposes must be balanced against the need to maintain and, if possible, increase the capital for the future; and
• an asset's special relationship or special value, if any, to the purposes of the charity or to its beneficiaries.

Diversification

The Trustee Act requires trustees to diversify "to an extent that is appropriate to the requirements of the trust and general economic and investment market conditions". This means that the directors and trustees should consider investing in a number of different institutions and a number of different types of investments. This reduces the risk to the charity.

Investment Plan

Every charity should have an investment plan. The plan should take into account a reasonable assessment of risk and return. The charity should consider whether or not it would be prudent to hire an advisor to assist in the development of the plan. However, the charity must maintain authority and responsibility for the overall investment plan and must ensure that the investment plan is followed and revised as necessary. Under the Trustee Act, a trustee is not liable for losses to charitable property if the loss arises from an investment which is made in accordance with an investment plan, taking into account reasonable assessments of risk and return, that a prudent investor could adopt under comparable circumstances.

Delegation of Investment Decisions

Changes to the Trustee Act and the Charities Accounting Act allow trustees, including trustees of charitable trusts and directors of charitable corporations, to delegate authority to make investment decisions under certain conditions. Those conditions are set out in the amendments to the Trustee Act.

Conditions that must be met by the trustee

Trustees can delegate investment decisions to an agent but they remain responsible for monitoring the activities of the agent and the performance of the investments.

Trustees must also exercise prudence in selecting the agent and overseeing the activities of the agent. Before delegating investment functions to an agent trustees must:

• Prepare a written investment plan, intended to ensure that the agent will act in the best interests of the charity.
• Enter into a written agreement with the agent. The contract between the agent and the trustee must set the parameters within which the agent must act. It must require the agent to comply with the investment plan and to report to the trustee at regular intervals.

Trustees are required to review all reports of the agent and to review regularly the agreement between the agent and the trustee. This review includes a review of the investment plan. Trustees should consider whether the investment plan is being followed and whether it needs to be revised. Trustees must also consider whether the agent needs directions or should be replaced.

Duties of an Agent

Agents employed by trustees to invest trust money must also act with care.

The duties of agents are set out in the legislation. Where an agent has breached a duty and a loss to the trust has resulted, the loss can be recovered from the agent.

The duties of an agent are:

• to act with the standard of care of a person in the business of investing the money of others;
• to comply with the terms of the agreement between the agent and the trustee, and;
• to act in accordance with the plan for investment of trust property.

An agent to whom decision-making authority has been delegated cannot in turn delegate that authority to another person.

RECORD KEEPING

Directors and trustees must make sure that proper records of the charity’s investments are maintained and that supporting documents are kept. A charity incorporated under the Ontario Corporations Act is required to prepare annual audited financial statements unless its annual income is less than $100,000 and all of the members consent each year to the exemption. A charity’s financial statements, whether audited or unaudited, should detail the investments of the charity. Annual financial statements do not need to be filed with the Public Guardian and Trustee unless the Public Guardian and Trustee asks a charity to do so.

SPECIAL PURPOSE FUNDS

Sometimes charities hold funds for special or restricted purposes. Examples of special purpose funds are money given to a university for a scholarship fund or money given to a medical charity for cancer research. Charities must keep special or restricted purpose funds separate from their general funds. This means that special or restricted purpose funds must be invested separately from a charity's general funds. Charities must also keep separate records for those investments.

The regulations under the Charities Accounting Act (O. Reg 4/01) allow special purpose funds to be invested with other special purpose funds. The requirements that a charity must meet when combining special purpose funds together for investment purposes are set out in the Regulation.

Occasionally a written document that gives money to a charity sets out restrictions on how that money can be invested. The charity must comply with the document. This means that a charity cannot make investments inconsistent with a will or trust deed giving money to the charity.