Director's Duties and Responsibilities in the Charitable and Non ...

MILLER THOMSON LLPBarristers & SolicitorsTax Notesprocedures, with many tasks delegatedto the senior officers of the organization,while a newly incorporated localorganization, with a few individualsoccupying the roles of member,directorand officer, will mandate considerablymore ‘hands on’ involvement. The keyto management is proper delegation,and the key to proper delegation is toconsider what a prudent person woulddo under similar circumstances.Fiduciary DutyA director is entrusted with the abilityto exercise power over another and toaffect the legal or practical interests of avulnerable beneficiary. This expressionof a director’s fiduciary relationshipwith the organization imposes a fiduciaryduty on the director. Thus,a directormust exercise the utmost good faith,trust, confidence and candour, whileacting with the highest degree ofhonesty and loyalty toward, and witha view to the best interests of, thebeneficiary-organization.The fiduciary duty arises most frequentlyin a conflict of interest scenario. Wherea director owes loyalties to both thenon-profit or charitable organization andanother entity, a director must properlymanage the conflict by fully disclosingtheir interests and refraining fromvoting on the subject of the conflict.Duty to Act in Scope of AuthorityWhile the concept of scope of authorityis largely a historical curiosity in thecontext of for-profit entities that possessthe capacity, rights, powers and privilegesof a natural person,many non-profitand charitable organizations havespecific restrictions on their objectswhich are necessary to obtain theirspecial status. Accordingly, it is imperativefor directors to be aware of theinherent limitations on the activities ofthe organization,as expressed in theconstating documents.In the event the directors exceed theauthority of an organization, the ultravires doctrine may subject the directorsto personal liability for the organization’sillegal actions. A director mayavoid personal liability by opposingthe board’s motion and ensuring thatthis opposition is properly reflected inthe minutes of the organization. Byadhering to these seven duties, the nonprofitor charitable director canminimizing potential liability, whileensuring the future success of theorganization.Douglas ForerEdmonton, 780.429.9742dforer@millerthomon.caHugh KellyToronto, 416.595.8176hkelly@millerthomson.ca*This article originally appeared inthe 26 January 2001 issue of TheLawyer's Weekly.Urgent Note to CanadaCorporations Act CompaniesAre you up-to-date on your annual returnfilings? As a federally incorporatednon-share capital corporation, you arerequired to file annual returns undersubsection 133(1) of the CorporationsAct. Failure to file such returns can resultin loss of corporate status, with theresult that your assets escheat to(become the property of) the Crown.An extensive list of corporations indefault was published in the CanadaGazette on December 23,2000. Corporationson that list have one year fromDecember 23, 2000 to file the requiredreturns and thus regularize their status.Don’t delay. Please contact us if we canassist you in either verifying that yourreturns are up-to-date or whether yourorganization is listed and needs to filereturns to avoid dissolution.Susan ManwaringToronto, 416.595.8583smanwari@millerthomson.caBrenda TaylorMarkham, 905.415.6739btaylor@millerthomson.caPiercing the Corporate VeilIn a recent Ontario Court of Appealdecision,Lana International Ltd.et al.v.Menasco Aerospace Ltd., et al.(releasedon 7 September 2000), the court heldthat a corporate officer may be personallyliable in tort for actions performedin the scope of their employment.The case involved a corporate plaintiffwho had purchased eight sets oflanding gear from another corporatedefendant. The landing gear was to beused on Boeing 737s. After purchasingthe landing gear and reselling it, thelanding gear was recalled. Due to therecall and the manner in which it wascarried out, the Plaintiff sued for breachof contract, negligence, and negligentmisrepresentation. The Plaintiff issueda claim against the corporation, andtheir president as a personal defendant.After the Pre-Trial examination of thepresident, he asked to have the claimsagainst him dismissed. It was arguedsuccessfully before a judge that, sincehe was acting within the scope of hiscorporate responsibilities, he wasprotected from personal liability.The Plaintiff appealed successfully to ahigher court, which stated that thejudge had erroneously considered thatthe defendant was immune frompersonal liability for his actions solelybecause those actions were performedin the course of his duties to the corporationthat employed him.Among the allegations against the president,were that he authorized thewrongful act of selling the landinggears, he had acted negligently in failingto enforce the terms of the contractwith Boeing, and he had caused damageto the plaintiff’s business as a result offalse statements made during the recall.In reaching their decision, the courtstated:“As I read the judge’s reasons, heproceeded on the premise that if acorporate officer or employeeperforms a tortious act entirely inrelation to or within the scope of hiscorporate duties, he would for thatreason alone,be immune from liability.In my view, this states the protectionfrom liability too broadly.”The judgment is a reminder that corporateofficers can be personally liable for(negligent) conduct, even when actingin the course of their employment.Consequently, corporate officers shouldensure that they have adequate insurancecover to protect themselvesfrom such a possibility. But even withinsurance the lesson of this case isworth remembering: corporate officerscontinue to have a direct personal dutyto act in an honest and careful manner.Hugh KellyToronto, 416.595.8176hkelly@millerthomson.caRobert HickmanMarkham, 905.415.6755rhickman@millerthomson.ca

CHARITIES AND NOT-FOR-PROFITNew Ontario Charities AccountingAct RegulationsThe Ontario Charities Accounting Actpermits the issuance of regulations to:ii(i) indemnify directors and officers;i(ii) purchase insurance for directorsand officers;(iii) pool investment funds;(iv) remunerate its directors forservices provided.The Public Guardian and Trustee ofOntario has taken the position that all ofthese acts are otherwise breaches of trust.Pursuant to this authority, last monthOntario Regulation 04/01 (availableonline at http://192.75.156.68/ DBLaws/Regs/English/010004_e.htm) wasissued dealing with the indemnificationand insurance of directors and officersand with the pooling of trust funds.Although we expected that regulationswould also be released to permit directorsof a charity to be remunerated forservices other than as directors,this issuewas not dealt with in the Regulation.The new rules only permit indemnificationand insurance if the directoror officer acted honestly and in goodfaith. The rules also list a number offactors which must be considered by acorporation in giving an indemnity orpurchasing insurance for trustees ordirectors, such as:1. the degree of risk;2. other means available to deal withthe risk;3. the reasonableness of the insurancecost in relation to the risk;4. the reasonableness of the insurancecost in relation to revenue of thecharity;5. does the insurance or indemnityadvance the charity’s purposes?;6. no indemnity may be paid or insurancepurchased if to do so wouldmake the charity insolvent.Similarly, the rules permitting poolingof investment funds set out verydetailed recordkeeping and trackingrequirements.Charities which are considering changesto their policies in any of the areascovered by the new Regulation shouldcarefully consider the potential impactof the new Regulation, rememberingthat there is still no blanket permissionto insure or indemnify directors or topool funds; these are only permitted ifthe charity complies with the new rules.Robert HayhoeToronto, 416.595.8174rhayhoe@millerthomson.caNew Federal Privacy Legislationnow in forceThe new federal legislation on privacy,the recently enacted Personal InformationProtection and ElectronicDocuments Act, responds to theconcerns raised by the Canadian publicabout privacy issues.Because of constitutional issues withthe provinces, this Act will not apply toorganizations that collect,use or discloseinformation entirely within a provincefor three years 1 . However, Ontario willsoon introduce similar legislation thatwill probably apply to all activities ofnot-for-profit organizations. This Act alsoallows the use of electronic signatures.The Act applies to individuals. Themembers of most charities,most donorsand directors of all not-for-profit companiesare considered individuals. TheAct does not apply to information aboutcorporations, including corporatedonors.When an organization collects, uses ordiscloses personal information in thecourse of its commercial activities, itmust comply with the Model Code forthe Protection of Personal Informationwhich is a schedule to the Act. Informationabout an “identifiable individual”does not include the name,title,businessaddress or business phone number ofan employee of an organization.Many activities of organizations couldbe considered to be “commercial activities”– it is a particular transaction, actor conduct or any regular course ofconduct that is “of a commercial character”andspecifically includes selling,bartering or leasing donor, membershipor other fundraising lists.There will be an exception for informationthat is “publicly available”, asspecified by regulations to be madeunder the Act. The published draftregulations refer to:(a) names,addressesand telephone numbers in a phonebook (if the subscriber has the optionof being unlisted);(b) magazines,book,newspapers, or other publicationsavailable to the public, where the individualhas provided the information;(c)publicly available databases or registries;(d) court records; and (e) business orprofessional directories. Personal informationfrom (c), (d) or (e) can be usedwithout consent only to the extent thatits collection, use and disclosure relatedirectly to the purpose for which theinformation appears in the database,registry, record or directory.It is recommended that each organizationdevelop a policy to deal with suchthings as the purpose for collecting theinformation, keeping current, communicatingand destroying and obtainingconsent.You should also develop a “PrivacyStatement”to use on your web site orin connection with your collection ofpersonal information, which identifiesthe purposes and permissible uses inorder to obtain consent. The statementshould also advise how to contactyour organization if one has privacyconcerns.A “privacy officer”should be appointed.As individuals have the right to challengethe accuracy of the information youhave and to challenge your level ofcompliance with the Model Code,someone in your organization shouldbe trained and designated to deal withcomplaints and inquiries. This personshould also be held accountable foryour organization’s compliance.Your donor list is crucial. Creating andmaintaining it is an important activitythat just became more complicated. Asyour organization, like most charitableand not-for-profit organizations, regularlycollects and deals with personalinformation, you should consider thisnew legislation and put in place theappropriate policies to ensure that therequirements are satisfied.Paul JonesToronto, 416.595.2639pjones@millerthomson.ca.Registering your charity - Can itget any more difficult?We submit applications for registrationof a charity regularly on behalf of ourclients. Our recent experience leads usto write this article,first to comment onhow difficult the registration processhas become and second, to suggestsome tips to submitting effectiveapplications.Historically we could tell our clients itwould take 3-4 months to register acharity, whether a charitable organizationor foundation, with confidencethat within that time period we wouldhave success. Today, that time periodhas been extended to 7-9 months andin many cases the review seems tocontinue endlessly.1. There is a further exemption for personal health information for one year.

MILLER THOMSON LLPBarristers & SolicitorsThis commentary is not intended tobe a complaint about the CharitiesDirectorate at the Canada Customs andRevenue Agency (“CCRA”). The point issimply to highlight our curiosity onwhy it is taking so long to get throughthe registration process today.It may be that as a result of the revampof Revenue Canada to the CCRA,significant changes were made to thepersonnel in registration at CharitiesDirectorate. This may be part of thereason for the change. Further, thereseems to be a suggestion that applicationssubmitted today are less likely tobe charitable. This view may stem froma conclusion within the CCRA that allviable charities are already registered soany new applications must be forentities that are not charitable.The positive side of the registrationprocess is that the application form,although more detailed,is much cleareron what information is required forsubmission. One would expect thatthis would speed up the process ofapplication, but to date, the submissionof more detailed information (which ofcourse, is all based on proposed activitiessince the organization has notcommenced operations) has led toaudit like questioning.The frustration of this new developmentis ever increasing. The detailed informationprovided is prospective and not infact occurring at the time of submissionof the information. To be asked toprovide specifics as to details or identityof recipients of future gifts, is inefficientand unnecessary. The law providesthat such gifts must be made to otherqualified donees, and on future auditthat can be tracked. To require anapplicant to identify the recipients ofyet to be determined future giftsdemonstrates a lack of understandingwithin the registration system of thedistinction between application andfuture audits. This is but one example ofmany such detailed questions aboutactivities which are not yet taking place.Our experience is that the best way toachieve registration is to be verycareful. It is worthwhile to spend extratime and effort in completing theapplication. It is useful to use the sampleobjects listed in the Not for ProfitIncorporators Handbook published bythe Ontario government as a model forthe objects of your new charity. Inrecent discussion, CCRA has confirmedthat they agree with the formatting ofthose objects. If you use the sampleformats, the likelihood of debate on thecontent is reduced.Also, be meticulous when submitting thedetail of activities proposed. Be carefulhowever to note clearly that the activitiesdescribed are proposed and may be subjectto change once the charity is operational.This allows flexibility in moving forwardonce the organization is established.Finally, patience is a necessity. Generallythe registration is retroactive to the dateof submission of the application. It maytake a while to obtain the registration butit will eventually be processed.Our experience with the CharitiesDirectorate is that its officers are anxious tobe helpful. We all recognize that there arelimited resources available and that theworkloads are large. Some policy adjustmentshowever could be made whichwould assist in streamlining the processand reducing the application processingtime. In England, it takes no more thanthree weeks to register and in the UnitedStates the time required is less. Canada cando better, and we encourage the CCRA toimplement changes to improve theservice to Canadians wanting to helpsociety through registered charities.Susan ManwaringToronto, 416.595.8583smanwari@millerthomson.caWhat’s Happening aroundMiller Thomson• Doug Forer led a Legal EducationSociety of Alberta seminar on varioustopics relating to charities on January25, 2001 in Calgary and on January 26,2001 in Edmonton.• Robert Hayhoe will publish “A CriticalDescription of the Canadian TaxTreatment of Cross-Border CharitableGiving and Activities”in an upcomingCanadian Tax Journal.• Jasmine Sweatman spoke at OsgoodeHall Law School on March 7, 2001 at atwo-day seminar on The EssentialCurriculum in Charities on “ToughGoing: Estate Litigation & Administrationfor Charities”.Miller Thomson LLP Charities andNot-For-Profit LawyersCalgaryWilliam J.Fowlis 403.298.2413Sandra M.Mah 403.298.2466Greg P.Shannon 403.298.2482EdmontonDouglas J.Forer 780.429.9742Bruce N.Geiger 780.429.9774TorontoJennifer E.Babe 416.595.8555Mark R.Frederick 416.595.8175Robert J.Fuller 416.595.8514Robert B.Hayhoe 416.595.8174Hugh M.Kelly 416.595.8176Peter D.Lauwers 416.595.8177Susan M.Manwaring 416.595.8583Rosanne T.Rocchi 416.595.8532M.Jasmine Sweatman 416.595.8623Michael J.Wren 416.595.8184VancouverMartin N.Gifford 604.643.1264Alan A.Hobkirk 604.643.1218Donald H.Risk 604.643.1207Linda J.Yardley 604.643.1231Note:Miller Thomson’s Charities and Not-For-ProfitNewsletter is provided as an informationservice to our clients and is a summary ofcurrent legal issues of concern to businesspersons and their advisors. These articles arenot meant as legal opinions and readers arecautioned not to act on information providedin this newsletter without seeking specificlegal advice with respect to their uniquecircumstances. Your comments and suggestionsare most welcome and should bedirected to:The Editor, Miller Thomson LLP Charities andNot-For-Profit Newsletter at the Toronto officeat charitieseditor@millerthomson.ca.Miller Thomson LLPTORONTO, VANCOUVER, CALGARY,EDMONTON, MARKHAM, WHITEHORSE ANDWASHINGTON D.C.www.millerthomson.comAffiliations worldwide