January 2000 volume 4, issue 1 

Recent legislative changes have introduced new challenges for Not-for-Profit Organizations (NPOs) in recent months. The regulatory requirements come at a time when NPOs are facing greater demand for service, less public funds and more widespread appeal for donors' dollars. In light of the amended legislation, NPO management and Boards of Directors are faced with a number of new issues that are worth considering:

One of these changes took place during 1999, when a significant amendment was made to the investment powers of registered charities. Charitable organizations are now allowed to invest trust funds more broadly than ever before and investments may include mutual funds.

Perhaps the greatest change to the investment power of charities, however, was the step to make it mandatory for a charity to develop and follow an investment plan. According to the new regulatory requirements, this documented investment plan should consider such areas as: general economic conditions, inflation or deflation, expected level of returns, the need for liquidity, receipt of income and the preservation or increase in capital. Even in those cases where a professional investment advisor is handling a charity's investments, the organization's Board of Directors is ultimately responsible to ensure that the investment assets are being prudently managed.

The legislation also stipulates that each director on the Board of Directors of a charity is responsible for carrying out his or her duties with the same care, diligence and skill that would be expected of a professional with the same knowledge and experience. For instance, a director who is a lawyer would be required to exercise more due care in legal matters than the non- lawyers sitting on the Board.

A recent Federal Court of Appeal found that the standard governing payroll deductions was just as rigorous as the standard applied to directors of "for profit" corporations. This standard requires directors to exercise the same high degree of care, diligence and skill as a for-profit director, in order to help prevent payroll deduction errors. The best way to exercise that due care, is a regular confirmation by the NPO's Executive Director that the remittances have been made, along with a review of periodic financial statements that detail the liability for source deductions.

Even when directors are exercising due care in carrying out their duties, it is an industry practice for NPOs to indemnify the directors against liabilities incurred by them in the performance of their duties. In many instances, the indemnification is supported by directors' and officers' liability insurance (D&O insurance).

Another recent change affects the purchase of D&O insurance by charities. Charitable NPOs are now prohibited from buying D&O insurance unless either of the following conditions applies:

1. the organization complies with regulations that permit the purchase, or
2. the organization or director obtains a court order permitting the purchase.

At this time, the regulations have not been promulgated, so organizations only have the option of obtaining a court order: a costly and time consuming process. In order to obtain the court order, the organization must demonstrate to the satisfaction of the Office of the Public Guardian and Trustee in Ontario that such insurance is beneficial to the organization, the level of insurance coverage and the premiums are reasonable, and there is a sufficient level of risk to warrant the insurance policy for the directors.

A recent Canada Customs and Revenue Agency (formerly Revenue Canada) newsletter included an announcement that the Charities Division was "committed to ensuring that registered charities file their annual Registered Charity Information Return (Form T3010) on time." If a charity does not file this return by the due date, which is six months after the end of the charity's fiscal period, the charitable status may be revoked. Until, and if, the charity is re-registered, the charitable organization may not issue tax receipts.

The Charities Division states in the newsletter that it is proposing to implement a new policy whereby a charity's registration will not be backdated to the date that it lost its registered status. There will also be a fee of $225 as an application fee for re-registration. Obviously the message here is to file the annual return on time!

Also note that when filling out Form T3010, two signing officers of the organization must complete the certification, not just one.

Finally, there have been changes to the distinction between sponsorship and a gift for charitable organizations. NPOs have been expanding into different areas of fundraising, and with that comes the dilemma of how to treat the support from a donor. Currently, a gift is defined as a transfer of property without consideration. In other words, a gift is made, with no control by the donor over what is done with the gift, except for maybe an indication of a preference as to how the gift might be used. The gift may not be returned to the donor and for that gift, the donor receives a charitable donation receipt.

Charitable organizations have strict disbursement quotas that must be adhered in order to maintain their status with Canada Customs and Revenue Agency (formerly Revenue Canada). These quotas are directly related to the amount of charitable donation receipts issued.

Sponsorships, on the other hand, are technically a contract. The sponsor may, for the transfer of money or assets to the organization, set the terms for the benefit to the sponsor (which is generally advertising or promotion). However, sponsorships do not generate a charitable donation receipt. Generally, sponsorships are more attractive for both the charitable organizations and the sponsors for two reasons. First, the charitable organization has more flexibility with respect to operations, since the disbursement quota is not affected. And second, the sponsor has a deduction for tax purposes as a business expense, and is in a position to ensure that the benefits it "contracted for" are received. Keep in mind that charitable organizations should ensure that there is a clear understanding of the terms of the gift/sponsorship up front to avoid any misunderstanding later.

Whether you are an employee or a volunteer of a NPO, there are many areas where you must proceed with caution to ensure that both your organization's and your personal assets are protected. For more information, contact your Wilkinson & Company LLP partner.

Jennifer Fisher, FCA is a partner with Wilkinson & Company LLP and specializes in serving not-for-profit clients. She holds various executive positions on Boards of Directors for local NPOs in the areas of social service and education.