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Registered charities play an essential role in Québec society. To carry out their mission, they rely on the commitment of qualified individuals who serve as directors. A question frequently arises in this context: is it possible to compensate directors while complying with the applicable legal and tax framework?
What corporate laws provide
Generally, directors of a registered charity act on a volunteer basis. This approach is consistent with the organization’s non-profit mission, as well as with the expectations of donors and the general public.
That said, Québec corporate legislation does not, in and of itself, prohibit the compensation of directors. For example, the Companies Act (Québec) expressly provides that an organization may pay remuneration to its directors, unless its constating documents or by-laws provide otherwise.
Accordingly, before compensating its directors, an organization should first carefully review its constating documents, by-laws and any other applicable internal policies. If any of these documents prohibit the compensation of directors, it may nevertheless be possible to amend them.
Constraints imposed by tax authorities
Once it is determined that director compensation is permitted from a corporate law perspective, the organization must ensure that such compensation complies with the limits imposed by tax authorities.
The CRA expects that any compensation paid be reasonable. Although this concept is not expressly defined in tax legislation, it generally means that:
- compensation must not be paid solely by virtue of holding the position of director;
- compensation must correspond to the services actually rendered by the director; and
- where there is a non-arm’s-length relationship, the compensation must be comparable to what would be paid to a person acting at arm’s length.
Failure to pay “reasonable” compensation may expose the organization to significant tax penalties, ranging from the assessment of a penalty for an undue benefit for an amount equal to 105% of the value of the benefit, to the revocation of the organization’s registered charitable status.
Recommended governance best practices
When an organization considers compensating a director, it is advisable to adopt governance practices, including:
- documenting the services provided;
- demonstrating the reasonableness of the compensation (comparables or market studies); and
- maintaining comprehensive written records of the decisions made and the rationale behind them.
These measures are essential not only to mitigate risks in the event of an audit, but also to preserve the organization’s credibility and reputation with donors, partners and other stakeholders.
Conclusion
Every organization is unique. Its mission, structure, size and operational needs must be considered before determining whether compensating directors is appropriate, and above all, how it can be implemented in a compliant manner.
Are you considering compensating a director, or would you like to validate your current practices? We invite you to contact one of our Canadian Charity and Not-for-Profit lawyers to discuss your situation and obtain advice tailored to your specific needs.
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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