BY TERRANCE S. CARTER & NANCY E. CLARIDGE
Originally published in LAW TIMES, Vol. 16 No. 32, October 24, 2005.
The past five years have in some respects been difficult for Canadian charitable organizations. Despite the continued generosity of Canadians - in 2003, donating $8 billion to charities and non-profit organizations according to Statistics Canada - the charitable sector hit a public relations disaster early in this decade. This came in the form of a series of news reports detailing various abuses by a number of charities and fundraising businesses, and two egregious cases where the courts ordered "charities" to pass accounts.
What came to light was a disturbing picture. In the absence of any rigorous government regulation, approximately 15 percent of the over 80,000 registered Canadian charities routinely spent more money on fundraising and administrative expenses than they did on their charitable works. A few of these were predatory organizations that traded on the goodwill of legitimate charities, while others were simply inefficient at fundraising.
Two of the more serious examples involved investigations by Ontario's Public Guardian and Trustee into the AIDS Society for Children (Ontario) and the National Society for Abused Women and Children. In both cases, the registered charities raised close to $1 million with little or none of the funds going to their intended causes. Fundraising businesses were used in both cases, taking between 75 and 80 percent of the funds in fees and expenses. From these debacles came important judicial guidelines with respect to charities, namely that directors of charitable organizations stand in a fiduciary relationship with the public for all moneys collected, that fundraising businesses have a duty to account for the gross receipts collected, and that fundraising contracts may be void as contrary to public policy if costs are extreme, i.e. 75 to 80 percent of the funds raised.
Despite these important judicial pronouncements, the cumulative effect of the revelations was to prejudice the overall reputation of legitimate charities in Canada. Further, it pointed to the dearth of regulations in the sector. Although Canada Revenue Agency may have effective tools to regulate registered charities under the Income Tax Act, its grasp does not extend to organizations that choose not to be registered, and the Act constrains the agency's ability to share information with the provinces which are constitutionally empowered to regulate charities. At the provincial level, there is very little regulation, with only four provinces enacting legislation addressing charitable fundraising.
It was within this climate in 2003 that the Uniform Law Conference of Canada commissioned a report from Professor Albert Oosterhoff, who recommended in 2004 that the Conference adopt a Uniform Charitable Fundraising Act, which would apply only to charitable organizations, and that consideration be given to changes to the Income Tax Act that would allow for closer integration between the two levels of government in order to share information. At its 2004 meeting, the Conference adopted the recommendations and directed Prof. Oosterhoff and a working group to prepare a draft act ("ULCC Act"). The legislation, together with a recommendation that all provinces enact the same, was adopted by the Conference at its August 2005 meeting in St. John's, Newfoundland.
The threefold purpose of the ULCC Act mirrors the concerns raised in the background report: ensuring members of the public have sufficient information to make informed decisions when contributing to charities; protecting the public from fraudulent, misleading or confusing solicitations; and establishing standards for charities and fundraising businesses in making solicitations. The ULCC Act borrows significantly from legislation enacted in Alberta, and to a lesser degree the other three provinces of Saskatchewan, Manitoba and Prince Edward Island that enacted such legislation, benefiting from their experience.
In addition to raising the spectre of uniform charities regulation across Canada, the ULCC Act introduces six areas of focus:
Whether a charity, fundraising business or individual motivated to raise aid for a current need, the ULCC Act regulates the time and manner in which such solicitations are made, providing a cooling-off period for the donor. It also ensures charities and fundraising businesses provide receipts for donations, maintains prescribed financial records, and makes them publicly available. Organizations that raise less than $25,000 annually would be exempt from these record-keeping provisions.
The ULCC Act prohibits charities from either soliciting donations or using a fundraising business unless it is registered or deemed to be registered under the ULCC Act. To be deemed to be registered, the organization must be a registered charity under the Income Tax Act. A charity that intends to raise less than $25,000 is exempt from the registration requirements unless they use a fundraising business.
With registration comes an emphasis on compliance with standards of practice, which requires both employees and volunteers to comply, and directors, officers and managers of the charity to take reasonable steps to ensure compliance.
The ULCC Act makes the licencing of fundraising businesses a prerequisite to their solicitation of donations on behalf of any charity. It also clearly delineates the boundaries of the fundraising business, making them a trustee for the contributions received on behalf of the charity. As such, it has no power to invest the money received, and must deposit the funds within three days of receipt into a bank account in the sole control of the charity.
Donor lists, which become the property of the charity and under its exclusive control, cannot be retained by the fundraising business. The ULCC Act also requires fundraising businesses to use "best efforts" to comply with a person's request to refrain from making solicitations or to remove the person's name from the donor list.
In addition to ensuring fundraising businesses and their employees, officers and directors comply with standards of practice, the ULCC Act prohibits fundraising businesses from making solicitations on behalf of charities when they or its officers/directors have an interest in the charity.
Written fundraising agreements setting out the rights and duties of both the charity and the fundraising business are mandatory under the ULCC Act. The agreement must establish the remuneration to be paid to the fundraising business, the methods of solicitation, and the circumstances and mechanism for termination of the contract.
The ULCC Act directs retail incentive donors to make their donations in accordance with representations made to the consumer. Further, it directs such donors to obtain the written consent of the charity prior to making any representations concerning sponsorship, endorsement or association. This includes any representation that donations will go to an identified charity.
Noting that one limitation of Alberta's act related to enforcement, the ULCC Act empowers the enforcement authority to conduct investigations and to obtain the assistance of the court. Contravention of the ULCC Act brings with it the possibility of suspension, cancellation or imposition of conditions on the charity's registration or the fundraising business' licence.
As Prof. Oosterhof noted, although the infractions are not rampant in the sector, they stand to undermine the integrity of the sector if allowed to continue unchecked. Through the adoption of uniform standards across the country, the charitable organizations, their donors and clients stand to benefit. The ULCC Act is a welcome addition to the Canadian legal landscape but now needs to be acted upon by the provinces as soon as possible.
* Terrance S. Carter practices with Carter & Associates and is Counsel
to Fasken Martineau DuMoulin LLP on charitable matters, and was a member of
the Uniform Law Conference of Canada working group on Uniform Fundraising Legislation.
Nancy E. Claridge is articling at the firm.