Members of a board of directors of a charity should not be compensated for their work. In Ontario, generally directors of charities are not entitled to compensation for serving on the board of a charity. In fact, by being a director of a charity that operates in Ontario you are very much constrained in terms of any dealings you have with the charity.
In Ontario, accountants serving on a board and their firms cannot do an audit of the charity and cannot charge the charity for accounting services. Law firms cannot charge for legal services provided to a charity, if for example, one of their partners is on the board of the charity. Directors are only entitled to reimbursement of reasonable expenses incurred to further the activities of the charity. Directors of charities that operate in Ontario cannot receive salaries, stipends, grants, honorariums, or consulting fees from a charity. There is a solution - if you wish to receive compensation from a charity, do not serve on the board of directors or try to obtain a court order allowing compensation.
The Ontario Public Guardian and Trustee notes with respect to director compensation for Ontario charities:
“5. 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.”
The Public Guardian and Trustee is concerned with how directors comply with trust law. The Charities Directorate on the other hand has a mandate to enforce the Income Tax Act and its requirement that there not be undue private benefit. Generally a charity should not be compensating people who hold the position of director with the charity.
CRA has a summary policy on this point:
“Summary Policy Date September 3, 2003 (Revised September 13, 2005)
Reference Number CSP - D10
Director / Trustee
Directors / trustees and like officials are persons who govern a registered charity. These persons hold positions that are usually identified in an organization’s governing document (e.g., president, treasurer and secretary).
Provincial law determines the circumstances under which a registered charity’s directors / trustees can receive compensation. In general, a registered charity cannot pay its directors / trustees simply for occupying their positions. However, some provinces permit a charity to have governing documents allowing for reasonable compensation for services that directors / trustees provide to the charity (e.g., the director is an employee).
Under the Income Tax Act, a registered charity that confers on a director / trustee an undue benefit is liable to a penalty equal to 105% of the amount of the benefit. This penalty increases to 110% and the suspension of tax-receipting privileges for a repeat infraction within 5 years. ”
This 1993 Information Letter from CRA sets out CRA’s position and may be helpful in understanding the difference between CRA’s Income Tax Act concern from the Public Guardians concerns about trustees and fiduciaries:
CIL - 1993 - 009
November 29, 1993
Subject: Compensation for directors of a charity
This is further to your facsimile of XXXXXX in which you request the Department’s opinion on whether a registered charity can give a member of its board of directors a lucrative contract. You also wanted to know what provisions of the Income Tax Act would affect the organization in such a situation. I would first like to provide some information on the position taken by Common Law courts on the compensation of directors of charities. They have ruled that it is unacceptable to compensate the members of the board of directors of a charity even for services rendered. Further, the Canadian provinces which, under the constitution have jurisdiction over charities, adopted divergent attitudes in this regard. Indeed, certain provinces enacted legislation allowing the directors to be paid fair and reasonable compensation for the services they provide the organization, while other provinces are more stringent in this regard. For example, Ontario does not issue letters patent to a charity whose general regulations permit directors to be compensated. For more information on the regulations in effect in the Province of Quebec, I recommend that you contact the Quebec ministère de la Justice or the office of the Quebec Procureur général, which may be able to answer your questions.
The Department of National Revenue is of the opinion that a charity can legitimately compensate a director for the services he or she renders to the organization (not for his or her role as a director) insofar as this compensation is fair and reasonable. Compensation that is disproportionate to the services rendered would contravene subparagraph 149.1(1)(b)(ii) of the Income Tax Act, which defines a charitable organization as an organization “no part of the income of which is payable to, or is otherwise available for, the personal benefit of any proprietor, member, shareholder, trustee or settler thereof”. Consequently, a charitable organization could contravene the provision of the Act by giving one of its directors “a lucrative contract”. This depends on the particular circumstances of each situation. Based on the facts provided in your letter, it seems that your client’s plan is acceptable for the purposes of the Income Tax Act since the director in question will be hired and compensated for the services he will render as a consultant. In the matter of the consultant’s compensation, the provisions of the Act will be complied with insofar as the organization had an employer-employee relationship with this individual and the compensation remains reasonable. If an employer-employee relationship ceases to exist, the charity must be able to demonstrate using documentary evidence that it took the necessary steps to have the activities carried out on its behalf (contract of service or specific contract of mandate between the charity and the consultant).
I hope that you will find this information useful.
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.