Canada: CNCA Creates New Opportunity For Quebec Donors To Make Restricted Gifts

Last Updated: June 16 2015
Article by Troy McEachren and Christos Panagopoulos

Donors today have increased expectations on the use of their donations and an increased desire to participate in how their donations are spent. Because charities know involved donors typically give more than uninvolved ones, charities are increasingly permitting donors to restrict the use of their gifts or allowing donors to make recommendations as to how their donation dollars are spent.

Several legal vehicles are available to donors to allow for donor participation. One of those vehicles is the charitable purpose trust. In essence, a charitable purpose trust is a trust that is administered by its trustee for the furtherance of a charitable purpose. When a donor makes a gift to a charity using a charitable purpose trust, he or she creates a separate trust that must be administered in accordance with trust law. Specifically, this includes the prohibition from using the gift for purposes other than those set out in the trust deed.

The Canada Revenue Agency (the "CRA") accepts that if the trustee is already a registered charity, a charitable purpose trust is not required to be registered by the CRA as a separate registered charity. This avoids registration delays in establishing charitable purpose trusts.

General Prohibition Against Corporate Trustees in Quebec

In 1994, with the adoption of the Civil Code of Québec (the "CCQ"), Quebec introduced the concept of the social trust. Setting aside the common law definition of "charity" in Quebec, a social trust is essentially a charitable purpose trust. The CCQ provides that a social trust is a trust constituted for a purpose of general interest such as a cultural, educational, philanthropic, religious or scientific purpose. Pursuant to the CCQ, social trusts are prohibited from having the pursuit of profit or the operation of a business as its main object. The CCQ provides a complete set of rules for the operation of social trusts and, for donors wishing to restrict their gifts, would be a convenient and efficient vehicle through which to do so. Unfortunately, a charity's use of social trusts in Quebec is not easily reconciled with the CCQ's general prohibition against corporations acting as trustees.

Although the CCQ provides that corporations which are authorized by law may act as trustees, the CCQ does not provide any guidance as to what type of legal authorization is contemplated by this exception. Notably, however, it is accepted by doctrine that "the law" can be either an act of the Quebec legislature or of Parliament.

Some types of registered charities, such as health care or social service institutions (as well as foundations of such organizations), have been specifically authorized in Quebec to act as trustees. We can now add not-for-profit corporations governed by the Canada Not-for-profit Corporations Act (the "CNCA").

Prior to the enactment of the CNCA, the treatment under Quebec law of restricted gifts to incorporated charities was somewhat uncertain. This was due, as noted above, to the general prohibition under the CCQ which prevents corporations from acting as trustees. Unlike the common law where restricted gifts are generally understood to create a charitable purpose trust within the corporate charity (which is subject to a reasonably well-developed body of legal rules), the legal rules that apply to similar restricted gifts in Quebec were less clear. This uncertainty extended to how the gift would be treated in the event of a dispute or the need to repurpose the donated funds. With the enactment of the CNCA, federally incorporated charities are provided with more certainty as to the nature and treatment of a restricted gift established by way of a social trust.

Additional Exception Created by the CNCA

A potentially unintended consequence of the new federal statute is that it authorizes corporations to act as trustees in Quebec. Importantly, however, this authorization is not automatic simply by virtue of a corporation having been incorporated under the CNCA. The CNCA makes clear, for instance, that unless property transferred to the corporation is the subject of an express trust for a specific purpose, that property is owned beneficially by and vested in the corporation. Furthermore, the CNCA makes clear that the directors of the corporation are not the trustees for any property of the corporation, even property held in trust. The corporation becomes the trustee only when property is specifically transferred to a corporation in trust.

Importantly, the CNCA does not prescribe the law that governs trusts. This means that generally where property is transferred to a corporation in trust, the trust document would be subject to Quebec provincial law. Nonetheless, it appears that the CNCA provides the requisite legislative authorization required by the CCQ for corporations (at least those incorporated under the CNCA) to serve as trustees. Given the nature of a registered charity, it goes without saying that this would apply to social trusts contemplated by the CCQ.

Interestingly, the CCQ provides that where a beneficiary of a trust is also a trustee of the trust, that beneficiary must act together with another trustee who is neither a settlor nor a beneficiary of the trust. Accordingly, some may suggest that where a trust has been created to be administered solely by a registered charity in a manner that furthers that charity's purposes, the charity is acting as a trustee for which it is a beneficiary and, therefore, the authorization under the CNCA does not apply to registered charities. However, because the authorizing section of the CNCA refers to trusts which have been created for "a specific purpose or purposes", the corporation to which the trust property is transferred is not a beneficiary of the trust per se. This means that where a donor wishes to make a gift by way of establishing a charitable purpose (or "social") trust, the charity may act as trustee without contravention of the CCQ.

With the CNCA, Parliament has created modern corporate legislation to govern non-share capital corporations. A legal vehicle now exists, which permits donors to make charitable gifts in a manner that was only expressly permitted in common law provinces and opens the door to Quebec donors wishing to restrict their gifts for use toward a specific purpose.

We are convinced this modern approach will be well-received by Quebec donors. Charities operating in Quebec are encouraged to contact one of our charity law specialists for advice on establishing a social trust where donors have expressed the desire to make a restricted gift.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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