DUTIES, RESPONSIBILITIES AND POWERS OF DIRECTORS AND TRUSTEES OF CHARITIES
"Directors", "Trustees", and "Charitable Fiduciaries"
Directors manage charitable corporations. Trustees manage unincorporated charities and trusts. Directors and trustees have full responsibility for the administration and management of charities and must always ensure compliance with all laws.
Directors and trustees are expected to be actively involved in the charity's decision-making process. They should be selected on the basis of their experience, skills and knowledge. They will be ensuring that the charity operates effectively and within the law.
Directors and trustees are sometimes referred to as charitable fiduciaries.
Number of Directors Required
The number of directors or trustees should always be the number of people required for efficient management of the charity. The Corporations Act requires that an incorporated charity have a minimum of three directors and in some cases it may be appropriate to have more.
DUTIES OF A DIRECTOR OR TRUSTEE
Duties on Appointment as a Director or Trustee
A new director or trustee should know the purposes of the charity. These will be found in the Letters Patent if the charity is a corporation or in the document which creates the trust (the constitution for an unincorporated association or the trust deed for a trust). New directors or trustees should be familiar with the general requirements of charities law and if the charity is a corporation, of the Corporations Act.
The director or trustee should review the past administration of the charity. They have a duty to investigate any suspicious circumstances which suggest the charity's property has not been properly used. Action should be taken to correct any problems.
Duty to be Reasonable, Prudent and Judicious
Directors and trustees must handle the charity's property with the care, skill and diligence that a prudent person would use. They must treat the charity's property the way a careful person would treat their own property. They must always protect the charity's property from undue risk of loss and must ensure that no excessive administrative expenses are incurred.
Duty to Carry Out the Charitable Purposes
The charity's property can only be used for purposes of the charity. It cannot be used for any other purpose.
Charities may have more than one purpose. If a charity is incorporated the purposes are found in the corporation's Letters Patent. If the charity is not incorporated, they will be found in the document which creates the trust. If property is improperly used, directors or trustees may be required by a court to repay the money.
Some charities have funds or property that are supposed to be used for one specific purpose. The directors or trustees must make sure that the property is used for that purpose.
Duty to Avoid Conflict-of-Interest Situations
Directors and trustees should avoid conflicts of interest. A conflict of interest arises when a director or trustee has a personal interest in the result of a decision made by the charity.
Directors and trustees must always consider the interests of the charity and not allow their personal interests or preferences to affect their conduct and decisions.
Directors and trustees must also avoid the appearance of conflict of interest. Certain investments, such as loans to donors, directors or trustees of the charity, or to companies in which they have shares can be a breach of the duty of a director or trustee. Even if these investments are made at market rates, there may be an appearance of conflict of interest.
If the directors or trustees have any discretion in choosing the people who benefit from the charity, they must use this power with complete fairness. The choices must be fair and must also appear to be fair.
To avoid the appearance of conflict of interest, in general, a director or trustee should not transact business with the charity or accept any personal benefit from the charity. Authority to transact business with, or to be a client of, the charity can be given by Court Order. It may also be given in any regulations made under section 5.1 of the Charities Accounting Act.
Duty to Act Gratuitously
Generally a charity cannot pay a director to act in the capacity of a director. Also, a director cannot be paid for services provided in any other capacity unless permitted by a court order. In appropriate circumstances, payment for services other than as a director may be allowed by Court Order or by an Order made under section 13 of the Charities Accounting Act where it is in the charity's best interest to do so.
A trustee also cannot be paid for services in any capacity unless approved in advance either by the court or by an order made under section 13 of the Charities Accounting Act. A trustee may also be paid when authorized by the document which creates the trust. The document that creates the trust can also prohibit or restrict payment to trustees. A charity can reimburse a director or trustee for reasonable expenses.
Duty to Account
Directors and trustees are responsible for the charity's property. They must make sure that proper accounts are maintained and that invoices supporting the accounts are kept.
The Public Guardian and Trustee may ask a charity to file its financial statements with the Office of the Public Guardian and Trustee. A charity incorporated under the Ontario Corporations Act is required to prepare annual audited financial statements unless the annual income of the charity is less than $100,000 and all of the members consent each year to the exemption. These financial statements should detail the capital, assets, income, expenditures or disbursements and investments. Explanatory notes should show any conflicts-of-interest, non-arm's-length transactions or payments to directors in any capacity whatsoever. If any property is given to a charity for a special purpose, that should also be recorded in the financial statements. In certain cases, it may be necessary to include explanatory notes showing how the charitable activities were carried out.
The Public Guardian and Trustee may also request information about the management of a charity. Any charity can be compelled by the Public Guardian and Trustee to pass its accounts. This is a court process where the accounts are reviewed by a judge of the Superior Court of Justice. A charity will be asked to pass its accounts where there are serious concerns about the administration of the charity. Charitable trusts often pass their accounts voluntarily on a periodic basis.
Duty to Manage the Charity's Assets
The directors and trustees are responsible for the management of the charity's funds and assets. They should not delegate this responsibility to employees or financial consultants, although they may rely on the advice and assistance of such people if it is prudent to do so. Directors or trustees may use the management services of accountants, stockbrokers, and other financial consultants if the capital is substantial. They may pay for these services as part of the administrative expenses of the charity. Whatever form the financial service arrangements take the directors must, at all times, retain general control over the funds.
Directors and trustees must act in person and make all major decisions concerning the charity. They can delegate the day-to-day management of the charity to employees but they remain responsible and must maintain proper supervision and control over the work of the employees.
Duties in Connection with Specific Powers
Power to Invest
For trusts and other unincorporated charities the power to invest may be set out in the documents which create the charity. If no power to invest is stated, the trustees must follow the requirements set out in the Trustee Act.
The power of a charitable corporation to invest is usually set out in the Letters Patent of the corporation. If no power to invest is specified in the Letters Patent the charity must invest as set out in the Trustee Act. Directors of a charity have a duty to invest funds not immediately needed to carry out the charity's purposes.
Factors to Consider when Investing
The Trustee Act provides a useful guide as to the factors a director or trustee should consider when investing in a charity's property. There are seven criteria that directors and trustees should consider in addition to any others that are relevant to the circumstances. The seven criteria are:
- General economic conditions.
- The possible effects of inflation or deflation.
- The 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.
- An asset's special relationship or special value, if any, to the purposes of the charity.
(See also the Public Guardian and Trustee’s bulletins, ‘Investments by Directors and Trustees of Charities’, and with respect to combining special purpose funds for investment purposes, ‘Liability Insurance and Special Purpose Trust Funds’).
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.
Office of the Public Guardian and Trustee
Charitable Property Program
595 Bay Street, Suite 800
Toronto, ON M5G 2M6
Tel: (416) 326-1963 or in Ontario
toll free at 1-800-366-0335