The Ontario Public Guardian and Trustee has issued a “Statement on Accessing Restricted Purpose Trust Funds Prior to Obtaining a Court Order During the COVID19 Pandemic“.   Thank you to the CCCC for putting up the statement.

 

The statement will help Ontario charities (whether registered charities or not) or other groups that hold restricted charitable funds to understand how to deal with the COVID-19 pandemic.

First and most important restricted funds are restricted.  Restrictions can be as to purpose or timing or both.  So this includes funds that need to be spent on music programs and/or perpetual endowments.  If you take restricted funds inappropriately there can be numerous consequences including breach of trust, directors to forced to pay personally for the amounts spent, etc.

Second, the PGT recognizes the gravity of the situation and says that charities may use restricted funds subject to a number of conditions which are noted below.  After you have gone through all of the conditions you will note that this Statement will probably not be helpful for most charities but it is interesting to note.

 

PGT conditions

• The organization is in danger of closing, which includes becoming insolvent or filing for bankruptcy or receivership, unless it can access the funds;
• The organization may only access the funds as a last resort. Non-restricted funds, including reserve funds, should be used first;
• The organization must first notify the PGT. Notification should include the name and address of the organization; the name of the perpetual endowment fund or the restricted purpose trust fund; and the name, address and telephone number of a contact person for the organization. The PGT will accept notification via email to cynthia.spencer@ontario.ca;
All board members must approve the decision to use or encroach upon the funds and the decision should be documented contemporaneously. (The documentation will be required for the section 13 application referred to below);
• Subject to the next bullet point, the funds must be used only for operating expenses and the contractual obligations of the charity. Operating expenses include: salaries, building expenses, utilities;
If a charity’s purposes enable it to provide services in response to the COVID19 pandemic, the funds may be used for such services;

• The organization must keep an accounting of the use of the funds;
The organization shall apply for an order approving the encroachment under section 13 of the Charities Accounting Act within a reasonable time after the pandemic has subsided;
The funds must not be transferred to another organization except in compliance with previously existing contractual obligations;
• The amounts withdrawn should be reasonable given the circumstances of the organization; and
• If it is necessary to sell stocks, bonds or other securities, the PGT will consider the sale reasonable even if there is a loss of capital, provided such investments are sold to an arms-length third party on the open market.

 

This Statement has a lot of requirements and may be helpful to some charities but I think probably not that helpful.   With the recent Federal government announcement on wage subsidies etc hopefully fewer charities will be insolvent or close to closing.   Many organizations are not “in danger of closing, which includes becoming insolvent or filing for bankruptcy or receivership” and therefore this Statement does not apply to them,

Under this Statement your organization will require all board members to approve the decision and then you need to notify the PGT . The funds can only be used for certain expenses.  The organization will have to later apply for a court order under Section 13 of the Charities Accounting Act approving the encroachment.  The funds used must also be “reasonable given the circumstances of the organization” – not clear what that means or how PGT or the courts will interpret it.

 

What we do know is that the courts in Ontario and elsewhere in Canada are reluctant to give cy pres orders varying restrictions unless their requirements are met.   According to PGT’s s. 13 Guide, Procedures for Obtaining an Order under s. 13 of the Charities Accounting Act, a cy-pres order can only obtained in the following circumstances:

“where it has become impossible or impracticable to apply charitable property to the original purposes. New purposes, which are as similar as possible to the original purposes, can be substituted for the original purposes (for example, where a charity has been wound up or ceased to exist, funds may be applied cy-près to a charity with similar objects)”

I think most people know what “impossible” means.  “impracticable” might be confusing for some and they may think that it means impractical – but that is not accurate.  It is almost a synonym for impossible. One definition on the internet is “impossible in practice to do or carry out.”

My suggestion is to understand the work involved in a Section 13 application because unless you are dealing with a large amount of money this process is probably not worthwhile.  Also, will your organization have the resources and energy in the future to do all that work?   I am concerned that some organizations at the best of times were not that organized and in this very bad situation in a few months they may not even be operating.  What will be the consequence for groups who use the funds for something other than the restrictions but they don’t obtain a Section 13 order?

Also, it is not clear for example how PGT defines  “operating expenses” and specifically what is not included in operating expenses.

There are other considerations including that sometimes those who gave the restricted gifts may not pleased with this approach.

There are different ways that restricted gifts can be amended or used outside of their initially stated purposes.   It is too bad that the PGT did not remind people for example that if there is an amendment clause that might be able to be used or alternatively there might be a cy pres clause already in the gift agreement.  In other words, before one even considers the option provided under this Statement there is a lot of analysis that needs to be done.  In the case of amendment and cy pres clause they would need to be closely followed.

One reminder to donors and charities is important – that it is not possible for a donor and charity to agree to change a restricted gift after the gift has been made unless there is a reservation of such rights in a gift agreement such as amendment clause, otherwise you will require a Section 13 order or court order.   Also this is a stark reminder of the dangers of restricted gifts.   Donors and charities should be very careful before entering into restricted gifts.  Charities should have a gift acceptance policy that carefully regulates restrictions and at a minimum should have template gift agreements that if there are restrictions they contain amendment clauses and possibly cy pres language.

There will be some cases where this PGT Statement is helpful.   We have assisted many charities with understanding the gift restrictions that they have and the possible options for creating greater flexibility in poorly prepared or inflexible gift agreements.   This PGT Statement will be a last resort for a few charities that don’t have unrestricted reserves, are facing closure and have enough energy and unrestricted funds in the future to make a Section 13 order.

The archaic and difficult provincial rules dealing with restricted gifts should probably be reviewed.

 

 

Here is the full text of the Statement:

Ministry of the Attorney General
Office of the Public Guardian and Trustee Toronto Regional Office
595 Bay Street, Suite 800
Toronto, ON MSG 2M6
Tel: (416) 326-1963
Fax: (416) 326-1969
Toti Free: (800) 366-0335

Accessing Restricted Purpose Trust Funds
Prior to Obtaining a Court Order
During the COVID19 Pandemic

In light of the difficult economic consequences created by the COVID19 Pandemic, the Public Guardian and Trustee (PGT) has developed temporary guidelines to allow charities that are in danger of closing to access the income and capital of restricted purpose trust funds when necessary to enable them to continue their day-to-day operations.
Restricted purpose trust funds include the income and capital of perpetual endowment funds, and the income and capital of trust funds held for a restricted charitable purpose (the funds).
Charities may access and use the funds subject to each of the following conditions:

• The organization is in danger of closing, which includes becoming insolvent or filing for bankruptcy or receivership, unless it can access the funds;
• The organization may only access the funds as a last resort. Non-restricted funds, including reserve funds, should be used first;
• The organization must first notify the PGT. Notification should include the name and address of the organization; the name of the perpetual endowment fund or the restricted purpose trust fund; and the name, address and telephone number of a contact person for the organization. The PGT will accept notification via email to cynthia.spencer@ontario.ca;
• All board members must approve the decision to use or encroach upon the funds and the decision should be documented contemporaneously. (The documentation will be required for the section 13 application referred to below);
• Subject to the next bullet point, the funds must be used only for operating expenses and the contractual obligations of the charity. Operating expenses include: salaries, building expenses, utilities;
• If a charity’s purposes enable it to provide services in response to the COVID19 pandemic, the funds may be used for such services;

• The organization must keep an accounting of the use of the funds;
• The organization shall apply for an order approving the encroachment under section 13 of the Charities Accounting Act within a reasonable time after the pandemic has subsided;
• The funds must not be transferred to another organization except in compliance with previously existing contractual obligations;
• The amounts withdrawn should be reasonable given the circumstances of the organization; and
• If it is necessary to sell stocks, bonds or other securities, the PGT will consider the sale reasonable even inhere is a loss of capital, provided such investments are sold to an arms-length third party on the open market.

 

If you have any questions or are uncertain whether your situation fits within these parameters, please contact counsel for the PGT, Charitable Property Program: Cynthia Spencer (cynthia.spencer@ontario.ca) or Dana DeSante (dana.desante@ontario.ca).