Topics: News, What's New from the Charities Directorate of CRA, Canadian Charity Law, Ethics and Canadian Charities
I am looking at a number of old audit letters from CRA. In one of the audit letters it discusses the CRA’s views on director compensation. We have previously discussed this issue on our blog. Here are some paragraphs from a CRA letter calling for the revocation of a particular registered charity’s status with one of the concerns being director compensation.
Here are the paragraphs from a CRA letter dealing with the revocation of status:
“5.LACK OF INTERNAL CONTROLS/BENEFITS TO DIRECTORS
Paragraph 149.1(1)(a) of the Act defines a charitable organization, in part, as an organization all the resources of which are devoted to charitable activities carried on by the organization itself. The directors of the Charity are required to have in place controls which ensure the safety of the Charity’s assets. Envision Global Charity lacks such controls. The board of directors did not ensure that there were proper controls in place to safeguard the charity’s resources and that its resources were devoted to charitable activities.
This is evidenced as follows:
a) Directors submit invoices to the Charity for services rendered
b) These same directors approve their own invoices on behalf of the Charity
c) These same directors sign the cheques to pay their own invoices
Based on the above practice, and the lack of an independent auditor, the directors are able to pay themselves any amount without recourse.
Additionally, paragraph 149.1 (1 )(b) of the Act defines a charitable organization, in part, 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:
1) All four current directors of the Charity received remuneration (directly or indirectly) which appears excessive compared to the charitable activities performed by the Charity. Over the course of 2002, 2003 and 2004, only one shipment was sent to Cuba. During this time however, the directors (or corporations owned by directors) were paid on a regular basis amounts totalling $345,000. This is in direct contradiction to clause 14.01 of the Charity’s By-Law which states directors ” ... shall serve as such without remuneration and no Member of the Board shall directly or indirectly receive any profit from his or her position as such, nor shall any Member of the Board receive any direct or indirect remuneration from the Corporation, except where specifically permitted by law, provided• that Directors may be reimbursed for reasonable expenses incurred by them in the performance of their duties”.
The position of various authorities is outlined below for your reference.
a) The Ontario and other Common Law Courts have ruled that it unacceptable to compensate the members of the board of directors of a charity even for services rendered.
b) Canadian Provinces have divergent opinions regarding compensation of directors. Certain provinces allow fair and reasonable compensation for services rendered, while other provinces are more strict in this regard. For example, Ontario will not issue Letters Patent to a charity whose general regulations permit directors to be compensated.
c) The Department of National Revenue is of the opinion that a charity can compensate a director for services rendered as long as the compensation is fair and reasonable. Compensation that is disproportionate to the services rendered would contravene subparagraph 149.1 (1)(b) of the Income Tax Act.
The common theme amongst these authorities is that remuneration paid to directors must be reasonable under the circumstances. The charitable activities performed by the Charity in 2002, 2003, and 2004 would not appear to warrant payment to directors of $345,000. This amount is therefore not reasonable under the circumstances.
The apparent misuse of the Charity’s funds exposes important lapses in the Charity’s direction and control over its resources.”
Here is an earlier piece on director compensation: http://www.globalphilanthropy.ca/index.php/blog/comments/some_historical_cra_letters_when_revocation/
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.