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INTRODUCTION
From time to time, the media prints stories of charity (or NFP) leadership gone awry. These stories generally range from allegations of mismanagement or profiteering to abuse. While often these transgressions are intentional, there are far more instances where charities, or their leadership, unintentionally break the laws that govern them. Usually, this is a result of ignorance - as often leaders of charities are well meaning, but not necessarily well versed in the complex area of charity law. Indeed, the responsibilities of charity directors are arguably more complex and greater than those in the private sector, and the penalty for dereliction of duty is more severe. Directors who abuse their position or do not carry out their responsibilities could incur severe personal, financial, and even criminal consequences, and the actions of a single director could effectively force the closure of even the most stable charity. Hence, it is critically important for directors, and senior charity leadership to have a comprehensive understanding of a charity's and director's responsibilities. To meet this need, this series of newsletters will deal with the concept of directors generally, the standard of care directors must meet, and general responsibilities with respect to the particular areas of fundraising, spending, and operations.
That being said , a newsletter is a poor replacement for formal instruction in avoiding the significant pitfalls of running a charity. For this reason, I have prepared a seminar presentation to educate charity leadership on their responsibilities with respect to the various Canadian laws - including anti-terrorism laws, related businesses, GST, and disbursement quotas. I am available to give this presentation and to customize this presentation for your particular organization. A sample of this presentation is available on my website at www.aptlaw.com/presentation.html . Please contact me to book an appointment.
As always, please remember that this newsletter is for informative purposes only and if you have any specific questions or comments about the items below or any other aspect of charity law, please contact me.
Wishing you all the best in this new year,
Adam
WHAT IS A CORPORATION?
A corporation is a legal entity separate from the individuals who run it. The corporation can be incorporated (i.e. born) under the laws of either a province or the country. As a corporation is a separate legal entity, it can hold bank accounts and act in its own name, and sue and be sued in its own right.
In a way, corporations are like children. Just as children have parents who must guide them and bear responsibility for their actions - so too are directors responsible for the actions of the corporation. However, whereas over time children can set their own priorities and accept more responsibility for the consequences of their decisions, legal entities always require the attention of their directors. (As someone once said of a pet dog - it is like a having a two year old that never grows up). This is for the obvious reason that a legal entity never actually acquires its own mind, and directors forever remain the 'operating mind' of the corporation; and just as parents are held legally responsible for the actions of minor children, so too are directors responsible for the actions (or inactions) of the corporation as well as their personal behavior towards it. Moreover, charities receive funds on behalf of, and work for, third parties (such as the poor, children, or religious communities) and therefore directors have control over funds that do not belong to either themselves or the charity. As a result, laws exist which hold the directors responsible for the investment, collection, spending and general use of these funds.
For our purposes, it is important to distinguish between a share corporation and a non-share corporation. The two differ in some significant ways but the essential existence of the corporation as a separate entity remains the same. One of the major differences is that a non-share corporation does not have shareholders but, rather, members who are admitted to the corporation. Another major and obvious difference is that share corporations exist to earn profit, while non-share corporations exist to perform certain objectives (technically called 'objects').
A 'not for profit corporation' is a term that applies to a corporation (usually non-share) whose objects do not qualify as charitable (i.e., an industry advocacy group or a political association) and is operated for any purpose except profit, and if a profit is earned it is not paid to the members. A charity can be any group, trust, corporation or other entity whose objects do qualify as charitable (a vast topic I will not canvas here). It is important to note that a corporation can qualify as a charity whether or not it registers with the Canada Revenue Agency and hence both the corporation and the directors must meet their legal responsibilities regardless of registration. Conversely, groups that undertake charitable activity, regardless of whether or not they are incorporated, are also subject to the legal requirements of charities as are their directors.
WHAT IS A DIRECTOR?
A director is the operating mind of a corporation. Without an active director, a corporation is nothing more than a numbered document with government filing requirements. Directors are the individuals who have legal authority to bind the corporation, direct the various operations of the corporation, and are ultimately the brains, arms, legs, lungs and heart of the corporation.
Technically, a 'director' refers to the duly elected director of a corporation, but for our purposes, unless specifically stated, I will use it to refer to the operating mind of a charity. The Courts have found people to be directors where they are in practice the operating mind of the corporation regardless of their due election as director. In 'directing' a charity, an individual has a number of duties to the charity, the members, the charitable objects, the public and the government. The remainder of this series will look at these different duties.
STANDARD OF CARE
Obviously, different people have different abilities, training and experiences that make them more or less capable of managing their duties as a director. Everybody has the ability to attend meetings and review basic documentation, but individuals with greater abilities are held to a higher standard than others. For example, in discussions about the finances of the corporation an accountant or other sophisticated financial professional may be held to a higher standard for the proper management of charity finances than others. For instance, Isaac, a teacher, sits on a charitable corporation board, which runs a synagogue. In the course of one of the corporate board meetings, the board discusses investing surplus funds. Naomi, a stockbroker, recommends a very risky mutual fund. Isaac must ask all the questions a man of his age, experience and training can be expected to ask. Naomi on the other hand should recognize that this is a very risky proposition. If the funds are lost, differing degrees of responsibility may be attached to each of them. Isaac may be responsible for not asking the questions expected of him but a Court would almost certainly find that Naomi bears greater responsibility for the loss, given her level of knowledge about the field. In sum, individuals with greater abilities have greater responsibilities.
I like to think of standard of care as a high jump competition. In order to enter the competition everyone must meet a basic minimum requirement, but after that, everyone jumps to clear the bar at their own personal best. Those who clear the bar have passed the test, but those who do not clear the bar at their own personal best height (and not someone else's) fail. Similarly, directors must work to 'clear the bar' by doing their personal best with regard to their education, abilities and experiences.
In the next edition, I will begin discussing the nature of some of these responsibilities. Adam Aptowitzer |
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