Supreme Court's Refusal To Grant Leave To Appeal In Christian Brother Case Prejudices Charities
By TERRANCE S. CARTER, B.A.,
LL.B.
CHARITY
LAW BULLETIN No. 3 - March 26th,
2001
The recent decision
by the Supreme Court of Canada ("S.C.C") on November 16, 2000 denying
leave to appeal from the Ontario Court of Appeal decision in Christian
Brothers of Ireland in Canada (Re) 2000, 47 O.R. (3d) 674 (Ont. C.A.),
("Ont. C.A. Decision") has caused confusion for charities and will
prejudice the financial viability of the charitable sector in Canada. In permitting tort creditors to seize
special purpose charitable trusts of a charity, the Ont. C.A. Decision will
likely become one of the most important decisions affecting charities in Canada
in recent memory, primarily due to the negative impact it will have upon major
donations to charities.
By exposing special
purpose charitable trusts to claims of creditors, the Ont. C.A. has undermined
one of the primary means by which charities raise monies from donors. Special purpose charitable trusts used by
charities include endowment funds, scholarship funds, building funds, 10- year
gifts under the Income Tax Act, donor advised funds placed with
community foundations, and testamentary gifts where the testator imposes restrictions
on the use of funds. As donors become
more sophisticated with their giving and demand more accountability from
charities, the use of special purpose charitable trusts is becoming more and
more a major fundraising vehicle, particularly for donors making large gifts to
charities. However, as a result of the
Ont. C.A. Decision, charities will now be unable to assure donors that special
purpose charitable trusts will be protected and accordingly, this important
means of fundraising will likely be curtailed in the future.
An earlier
commentary on the impact of the Ont. C.A. Decision and possible strategies that
may be developed in response to the decision are contained in an article by the
author included in the June 30, 2000 issue of Charity & the Law Update
available at charitylaw.ca, as well as in a longer article by the author
entitled “Donor Restricted Charitable Gifts: A Practical Overview Revisited”
dated November 22, 2000, also available at www.charitylaw.ca.
Some additional
comments concerning the rationale of
the Ont. C.A. Decision and its long- term impact upon charities are set out
below as follows:
·
Although not specifically stated in the Ont. C.A. Decision, the
rationale by which the Court has been able to conclude that special purpose
charitable trusts are exigible, without at the same time blatantly
contradicting established principles of trust law in relation to the protection
of trust property, is to make a distinction between private trusts and
charitable trusts. There appears to be
an underlying assumption by the Ont.C.A. that a special purpose charitable
trust held by a charity as trustee is tantamount to a trustee holding property
in trust for itself, thereby precluding
a trust in the first place. This
line of reasoning comes from a misconception that special purpose charitable
trusts do not have identifiable beneficiaries to enforce a charitable purpose
trust. Therefore, it is as if the
charity is holding the charitable property in question for itself, subject only
to a trustee-like fiduciary obligation to comply with the requirements of the
donor.
While the Ont.
C.A., and counsel who advocated the
position before the Court, failed to recognize is that a basic attribute of a
charitable purpose trust is that it is a unique trust that is exempt from the
requirement that there be identifiable beneficiaries. The reason why special status is given at law to a charitable
purpose trust is that the public-at-large receives the benefit of a charitable
purpose and as such are collectively considered to constitute the beneficiaries
of the trust. Since it would be
impossible for all members of the public to enforce the trust, it falls upon
the Attorney General on behalf of the Crown to enforce the terms of the
charitable purpose in accordance with its parens patriae role in
overseeing charitable property. Given
that a charitable purpose trust is recognized at law to be as much a valid
trust as a private trust, it follows that the decision by the Ont. C.A. in
allowing tort creditors to seize property held by a charity in a special
purpose charitable trust could arguably mean that any trust property held by a
trustee, including trust property held pursuant to a private trust, might be
subject to claims against the trustee personally. Since such a result would be inconceivable as contradicting
established principles of private trust
law, the same should be true in relation to charitable purpose trusts.
·
The Ont. C.A. Decision may result in discriminatory treatment between
otherwise identical special purpose charitable
trusts. Some special purpose
charitable trust documents include wording that permit the trust to be amended
in order to ensure that the trust property can continue to be used for the
intended charitable purpose, similar to what a court can do pursuant to its
inherent cy-prés scheme making power.
An example would be the inclusion of a clause in a charitable trust
document stating that if the special purpose charitable trust in question becomes impossible or
impracticable to carry out, the trustee may apply the fund to another similar
charitable purpose without the necessity of obtaining a court order. Practically, this would mean that a charity
facing insolvency, a winding up order, or bankruptcy, that was holding a special
purpose charitable trust may be able to transfer the fund to another charity
and thereby protect that fund. However,
the majority of special purpose charitable trusts, particularly testamentary
trusts drafted before the mid nineteen-nineties, would not likely have included
adequate cy-pres clauses and therefore will now be susceptible to claims
by tort creditors.
·
Discriminatory results may also occur between perpetual endowment funds
given to incorporated entities and those given to incorporated charities. The Ont. C.A.Decision has raised the
question whether charitable purpose trusts require identifiable beneficiaries
who are distinct from the charity as trustee.
If so, the decision leaves in question whether charitable purpose trusts
are in fact real trusts at all as opposed to constituting a trustee-like fiduciary obligation only. This in turn adversely affects the validity
of perpetual endowment funds given to charities that are unincorporated
associations. A gift of an endowment
fund to an incorporated charity is not dependant upon the gift being a special
purpose charitable purpose trust, since a charitable corporation can hold
property in accordance with its corporate objects whether or not there is a
charitable purpose trust. However, unincorporated
charities do not have the legal capacity to receive gifts absolutely, as they
are not legal entities at law. In order
to overcome the rule against perpetual ownership of trust property, gifts of
perpetual endowment funds to unincorporated charities can only be valid if the
gift constitutes a charitable purpose trust.
Since the Ont. C.A. Decision has called into question whether charitable
purpose trusts exist at law, the validity of perpetual endowment funds to
unincorporated charities may now be left in doubt. This may lead to increased estate litigation involving gifts of
endowment funds to unincorporated charities, such as testamentary endowment
funds to local churches and other small charities.
·
Many lawyers who have advised charities and/or donors that special
purpose charitable trusts are exempt from claims against a charity will now
have to explain why gifts that had
previously been given by donors, and were presumed to be protected from claims
as trust property, are now not protected.
In the future, lawyers may be found liable if they fail to advise
clients, both charities and/or donors, that special purpose charitable trusts
are no longer protected from the claims of tort creditors and that alternatives
should be canvassed in an attempt to “credit-proof” special purpose charitable
trusts where possible.
Given the serious
impact that the Ont. C.A. Decision has had upon charities, it is regrettable
that leave to appeal to the S.C.C. was not granted. The only practical alternative is to seek legislative protection
for special purpose charitable trusts through remedial legislation at the
provincial level. Given the serious
impact that the Ont. C.A. Decision will have upon charities, it is hoped that
provincial governments will be receptive to legislative initiatives in this
regard in order to ensure the long term financial stability of the charitable
sector in Canada.
Terrance S. Carter
practices at Carter and Associates in Orangeville, Ontario and is affiliated
with and counsel to Fasken, Martineau, DuMoulin LLP in Toronto, Ontario. He
specializes in the area of charity and not-for-profit law.
DISCLAIMER:
This Legal Update is provided as an information
service to our clients and is a summary of legal matters. It is not meant to be
a legal opinion. Readers are cautioned not to act on information provided
herein without seeking specific legal advice with respect to their unique
circumstances. Comments and suggestions are welcome.
BARRISTERS, SOLICITORS & TRADE-MARK AGENT
211 Broadway, P.O. Box 440
Orangeville, Ontario, L9W 5G2
Telephone: (519) 942-0001
Fax: (519) 942-0300
Terrance S. Carter practices at Carter and
Associates in Orangeville, Ontario,
And specializes in the area of charity and
not-for-profit law.
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