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