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New rules for directors good for charities: O'Brien

Changes to the law around charities will mean that the organizations will have more freedom to access the resources of their directors, Toronto health lawyer Kathy O’Brien tells AdvocateDaily.com.

“The changes allow more flexibility in how they engage with the members of their board and their families,” she says. 

O’Brien, a partner with DDO Health Law, says the changes are part of the regulations under Ontario's Charities Accounting Act, a piece of legislation that guides how trustees can use charitable property. A director of a charity is a trustee. The Act imposes significant penalties on trustees who misuse the charity's property, she says.

Prior to the April 1 changes, the law stated that no director of an Ontario charity could financially benefit from that charity unless they had the approval of the court, she says.

“That rule prevented such things as a director being paid for services they provided for the charity,” she says. 

“For example, if a director was an accountant, she was unable to provide accounting services to the charity for a fee, or if a lawyer sat on a charitable board, he could not charge a fee to provide legal services for the organization — even though it may make sense for that person to do the work because they know the organization and there may be efficiencies there.”

The old rules also prevented a close family member from working for the charity for money, O’Brien says.

“Until April 1, all of those relationships for payment were prohibited for charities,” she says. 

O’Brien notes that the Ontario government released new draft regulations in the summer of 2017.

“I was very enthused by the draft regulations and now those changes have become law — with some tweaks,” she says. 

The new law sets out a framework that allows directors and people connected to them, in certain circumstances, to be paid for the goods and services they provide to the charity, O’Brien explains.

“It allows a charitable corporation to pay for the goods, services or facilities that are either provided by one of its directors or a person connected to them,” she says. 

“There’s a long list of people who are connected with the director but it’s mainly family such as a spouse, child, parent, grandparent and sibling. It also includes the employer of any of those people.”

Charities also have a checklist to follow, O’Brien says.

“The first thing is that the board has to ensure that paying the director or a person connected to them is in the best interest of the charity,” she says. 

“It has to be a reasonable amount — fair market value. You can’t pay a premium for these services. All of the members of the board have to agree, in writing, that the amount is reasonable and that it won’t exceed a certain amount. Whoever is providing the service also has to consent to the cap.”

The board has to be composed of at least five members, including the director who is receiving the compensation, O’Brien says. 

“Really small boards aren’t going to be able to do this,” she says. 

There are, however, certain types of transactions that are still going to be prohibited, O’Brien adds.

“You can’t pay someone for sitting on the board. They have to do that voluntarily and for no compensation,” she says. “They can’t receive payment for being an employee so a director of a charity can never be an employee.”

O’Brien says the new rules include a regimented framework to prevent abuse.

“There are meaningful safeguards in place.”

O’Brien says the law change is positive for charities because it will allow them to access the talents of people sitting on their boards.  

It means that a director who is also a lawyer can draft bylaws or review contracts for that charity, and their knowledge of the organization will allow them to work efficiently, O’Brien says. That lawyer would arguably understand the risk tolerance of the organization and any nuances, and wouldn’t have to bill for time spent doing background research, she says. 

Under the old rules, a lawyer would be prohibited from doing that work unless it was for free.

“I think it’s actually cost-effective for charities to use director services. It will allow them to use the resources of their board members and it’s always going to be fair compensation,” she says. “It’s a win-win for the director and the charity.”

O'Brien is frequently hired to provide legal guidance to charities and is helping Ontario organizations develop policies and checklists to utilize the new rules. 

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