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1. Preliminary Considerations Involving Donor Restricted Charitable Gifts
 

2. The Difference Between Unrestricted and Donor Restricted Charitable Gifts
 

3. Types of Donor Restricted Charitable Gifts
 

4. Failure of Donor Restrictions
 

5. Duties Associated with Donor Restricted Charitable Gifts

6. Enforcing Donor Restrictions
 

7. Avoiding Pitfalls Involving Donor Restricted Charitable Gifts

1. There is a lot of confusion about Donor Restricted Funds, for instance

• what is the difference between endowment funds and donor advised funds?
• is a donor restriction enforceable against a charity?
• can a donor subsequently change a restriction without court approval?
• what should a charity do when it can no longer comply with a donor restriction?

 

 

2. Donor restricted charitable gifts can range from endowment funds, building funds, conditional gifts, restricted funds and trust deeds

3. Donor restricted charitable gifts affect almost every charity at one time or another

• testamentary gifts
• endowment funds
• public fundraising programs
• transfer of funds between charities


4. The legal obligations involving donor restricted charitable gifts are frequently not addressed by charities, their board of directors, donors or even professional advisors
 

6. The lack of attention is due in part because donor restricted charitable gifts involve numerous overlapping and confusing areas of the law including:

• trust and estate law
• income tax law
• rules of equity
• contract law
• corporate law
• association law
• fiduciary obligations

 

 

7. A Donor restricted charitable gift is generally a type of a "charitable purpose trust" and as such constitutes a type of "charity within a charity" whereby a charity holds funds for a limited and specific charitable purpose
 

8. The nature of a charitable purpose trust ("purpose trust") has certain unique characteristics that include the following:

• the purpose trust does not require a beneficiary
• the purpose trust is not void for uncertainty of objects
• the purpose trust is exempt from the rule against remoteness of vesting
• the purpose trust is exempt from the rule against perpetual trusts
• a court can exercise a scheme making power to overcome impractical objects with the purpose trust

 

 

9. Does a charitable purpose trust have application to a charitable corporation?

• this is a very confused area of the law
• recent Christian Brothers decision, (1998), 37 O.R. (3d) 367 (currently under appeal) held that a charitable corporation does not hold its general assets in trust for its charitable purposes

 
• but a charitable corporation that holds charitable funds for a special charitable purpose would be considered to be holding those funds in trust for that purpose
• an unincorporated charity by necessity would hold all of its property by trustees pursuant to a charitable purpose trust

 




C. THE DIFFERENCE BETWEEN UNRESTRICTED AND

DONOR RESTRICTED CHARITABLE GIFTS


 




1. Unrestricted charitable gift:

• an unrestricted charitable gift is a gift given for the general charitable purpose of a charity that is not subject to any restrictions or limitations imposed by the donor
• an unrestricted gift can be used by the board of the charity in its discretion to pursue any of its general charitable purposes
• the board may designate the gift to be used for a particular specific purpose and may then subsequently designate the gift for another purpose without being in violation of the terms of the gift
• ie, board designated funds or internal restricted funds

 

 

2. Donor restricted charitable gift:

• a donor restricted charity gift is a gift for a charitable purpose which is subject to certain restrictions, conditions or limitations imposed by the donor, either directly or indirectly
• different types of donor restrictions will carry different legal consequences
• all restrictions must be complied with except where varied by court order, failing which the board of directors will be in breach of trust
• it is important to identify when a gift is a donor restricted charitable gift and if so then to insure that its terms are complied with

 




D. TYPES OF DONOR RESTRICTED CHARITABLE GIFTS


 




1. Special purpose charitable trusts:

• the nature of a special purpose charitable trust:


- a gift held by a charity in trust for a specific charitable purpose within the parameters of the charitable purposes of the charity

- often referred to as a "special purpose fund", "endowment fund", or "restricted fund"

- such gift is in fact a "charity within a charity"

• the requirements for the creation of a special purpose charitable trust:


- generally established when a donor expresses an intention that the charity hold monies or property for a specific charitable purpose within the general charitable purposes of that charity

- i.e., an endowment fund or a public fundraising appeal for a specific charitable purpose, such as a scholarship program

- recent Christian Brothers decision has challenged the traditional approach of what is a special purpose charitable trust

- Christian Brothers decision suggests that there must be a "true" charitable purpose trust and that such trust requires the three certainties, ie. certainty of intention, certainty of subject matter, and certainty of objects

- the Christian Brother decision presumes that with the exception of a "true" charitable purpose trust, gifts to a charity do not constitute a trust and that such gifts are the beneficial assets of the charity instead of being held in trust

- if a gift is not a "true" charitable purpose trust, then the terms of the gift would only constitute a "precatory trust", i.e., not an actual trust but only a moral obligation without legal obligation upon the charity

- a "precatory gift" given to a charity would mean that such gift would form part of the general assets of the charity and therefore would be subject to seizure by creditors

- while the Christian Brothers decision may be good for charities, since restrictions may be lessened, it is bad for donors who may be concerned that they may not have correctly established a "true" charitable purpose trust that could be enforced against a charity

- it is unlikely that the Public Guardian and Trustee ("PGT") of Ontario will broadly apply the Christian Brothers Decision, since Section 4 (d) of the Charities Accounting Act of Ontario permits the PGT to obtain an order to force a charity to comply with the written "directions" of a donor whether there is a special purpose charitable trust or not

- the Christian Brothers Decision will also not preclude the public from applying under Section 6 (1) of the Charities Accounting Act to seek an order requiring a public inquiry of fundraising practices without notice to the charity

• endowment funds:


- the capital of an endowment fund is normally held in perpetuity, not necessarily only for ten years as provided for under the Income Tax Act

- endowment funds can be established by the donor, by the charity, or by a combination of the charity and the donor, as is frequently done by community foundations

- lawyers may be exposed to liability if they fail to ensure that endowment funds are properly established as a special purpose charitable trust by using terminology such as "in trust"

- need to review existing endowment agreements and will clauses to ensure that they correctly establish an endowment as a special purpose charitable trust

- need to ensure the there is full disclosure to the donor of any special terms or restrictions that apply in fundraising for a public endowment fund, ie, matching funds

• donor restricted funds:


- capital and income are expended over a period of time for a specific charitable purpose

- these can be time restrictions, i.e., restrictions that require expenditure over a specific period of time or delayed until a future time, ie. a ten year gift under the Income Tax Act

- these can be purpose or use restrictions, i.e., a building fund raised for the purpose of constructing a new building

• restricted charitable trust property:


- charitable trusts are often contained in deeds, normally older deeds for church properties

- restrictions may include matters of doctrine, usage, or even religious practices

- a trust in a deed means that the land must be used in compliance with the terms of trust in perpetuity unless varied by a court order

- need to be careful in distinguishing between a charitable trust deed and a conditional deed because a conditional deed may eventually have the land revert to the donor unlike a deed with a charitable trust

- if there is a charitable trust and the property is sold then the proceeds from the sale may remain subject to the terms of the trust and may require court approval to modify them

• implied special purpose charitable trust funds:


- occurs where the intention of the donor to restrict a charitable gift is not clearly stated but can be implied from the applicable circumstances

- Christian Brothers decision has held that the donor's intention must be clearly stated as a "true trust" (see earlier comments) thereby precluding the possibility of an implied special purpose charitable trust

- British case authority suggests, though, that there can be implied special purpose charitable trust funds created in certain circumstances

- examples of possible implied special purpose trust fund would occur where there is correspondence from a donor to a charity, gifts to parallel foundation with a similar name, to an operating charity, or the charitable objects of a charity are such that they would preclude a transfer of funds to a charity with radically different charitable objects
 

2. Donor Advised Funds and Precatory Trusts:

• a precatory trust is one where the donor indicates a request that creates a moral obligation upon the charity but is not legally binding
• a donor advised fund is normally a long term gift or an endowment that requires the ongoing input of the donor on key decisions, such as the distribution of income, but does not impose any legal obligation on the charity to comply with the donor's wishes
• if the donor retains too much control over a donor advised fund, there is the possibility that no "real" gift was ever given meaning that a charitable receipt should not have been issued


3. Conditional Gifts:

• a condition in a conditional gift does not create a legal obligation to do something but rather establishes certain legal consequences if the condition is not fulfilled
• it is possible to include both a conditional gift and a special purpose charitable trust in the same gift, ie. an endowment fund that is conditional upon matching funds being raised
• a conditional gift involves an absolute transfer of property subject to the power to defeat the gift if the condition is not fulfilled
• with a condition precedent, if the condition fails, then there is no gift
• with a condition subsequent, there is an absolute gift but the gift is subject to being defeated if a future event occurs
• if a condition fails, then either a charitable receipt should not be issued or if it has been issued, Revenue Canada should be advised so that the value of the receipted gift can be brought back into the income of the donor
• a cy-pres court application to vary the terms of an impossible or impractical restricted gift is not available if there is a conditional gift
• a charity and its legal counsel need to be careful to determine the legal consequences of a conditional gift before accepting it
• a conditional gift may be available where a charity gives property to another charity subject to a condition subsequent to avoid the risks associated in making an unauthorized investment with another charity

 

 

4. Determinable gifts:

• a determinable gift consists of a gift of a limited interest which may eventually come


to an end on the happening of a future event, ie, the seed of its own destruction

• determinable gifts involve the use of terminology such as "while", "during", "so long as" or "until" as opposed to "on the condition that"

 




E. FAILURE OF DONOR RESTRICTIONS





1. Failure of a conditional gift:

• a failure of a conditional gift will occur when either a condition precedent is not fulfilled or a condition subsequent occurs in the future
• on the failure of a condition, the gift reverts back to the donor or to another beneficiary if there is a "gift over" provision
• a cy-pres court application is not available to vary the terms of a conditional gift

 

 

2. Failure of a special purpose charitable trust

• a failure of a special purpose charitable trust occurs where the restriction is breached or cannot be complied with because it is either impossible or impractical
• a charity cannot remedy the failure on inability to comply with a special purpose charitable trust on its own initiative
• the donor is also not able to remedy the failure or inability to comply on his or her own
• instead court relief must be obtained through a cy-pres court application

 

 

3. The Court Cy-pres scheme making power to remedy a failure of a restriction:

• cy-pres means "as near as possible"
• the court may be able to exercise its cy-pres authority when a restriction is either impossible or impractical
• there must be a general charitable intention for a cy-pres order when there is an initial failure of the restriction
• cy-pres will not be available


- if there is a gift over

- if there is a conditional gift

- if there is no impossibility or impracticality of the restriction

- if there is no general charitable intent when there is an initial failure

- if the gift involves a capital endowment to be held in perpetuity
 

4. General Liberal Interpretation of the Court:

• there is a general liberal court interpretation available as part of an inherent court jurisdiction to interpret the terms of gifts in a liberal and lenient manner
• the court might be able to "interpret" a vague restriction where a cy-pres power is not otherwise available

 

 

5. The Court Administrative scheme making power:

• the court also has the power to permit deviation from overly restrictive administrative terms
• the court's relief can sometimes frustrate the original intent of the donor, i.e., the example of the Barnes Foundation in the United States where the Barns Foundation was prohibited from charging an admission for entry into its museum and therefore subsequently sought and obtained court relief to circumvent this restriction

 

 

6. When can a charity vary a restricted gift?

• generally, court approval is required to vary the terms of a donor restricted charitable gift by means of a cy-pres court application
• it is possible, though, for a donor to unilaterally vary the restrictions of a gift without court approval if all of the following criteria are first met


- the restriction must be impossible or impractical

- there must be an initial failure of the restriction and the restriction must be specific with no general charitable intent

- there must also not have been any anonymous contributions that have been added from the public

• it is prudent to obtain a court order seeking directions to ensure that all of these terms are met to allow the donor to vary the terms of the restriction, ie, for the court to confirm that it cannot exercise its cy-pres authority

 




F. DUTIES ASSOCIATED WITH DONOR RESTRICTED

CHARITABLE GIFTS


 




1. Duty to comply with the terms of donor restrictions:

• failure to comply with donor restrictions constitutes a breach of trust
• must not disregard restrictions to utilize a restricted gift as part of the general fund of the charity
• must not divert funds to another specific charitable purpose
• must not encroach on the capital of an endowment that is to be held in perpetuity
• must not unilaterally alter the terms of the charitable trust without court authorization
• must not hold funds in perpetuity if the gift requires that the funds are to be expended
• must not receive gifts intended to be given to another charity
• must not borrow from donor restricted funds
• must not apply surplus funds resulting from public fundraising campaign to another charitable purposes unless there is a clear "gift over" or there is court authorization
• must not accept a restricted gift that is outside the charitable purposes of the charity

 

 

2. Duty to invest:

• must look at the applicable constating documents of the charity or the document creating the restricted gifts to determine what investment power applies to those funds
• the Trustee Act will apply unless otherwise stated in constating documents
• need to comply with new prudent investor rule in amendments to the Trustee Act under Bill 25 after July 1^st, 1999
• investment powers for a donor restricted gift may be different from investment powers for other funds of the charity


3. Duty to protect and conserve trust property:

• must ensure that charitable trust property is not improperly alienated
• the transfer of donor restricted charitable trust property to another charity will require a deed of trust and possibly court authorization
• need to determine which charitable assets may be subject to seizure in accordance with the Christian Brothers decision


4. Duty to apply for a scheme:

• need to apply for court authorization for


- cy-pres application

- administrative scheme

- liberal interpretation
 

5. Duty to keep accounts:

• trust funds must be physically segregated at common-law
• proposed Regulations under Bill 79 of the Charities Accounting Act of Ontario may permit certain "pooling" of trust funds

 

 

6. What are the Consequences of Breach of Trust Involving Donor Restricted Funds

• liability at common law for breach of trust
• liability for third party claims by donors and residual beneficiaries
• liability under the Charities Accounting Act


7. What to do if there is a Breach of Trust:

• determine if there is a non binding precatory trust instead of a special purpose charitable trust
• advise board members of the breach of trust
• replace misapplied trust funds to the restricted fund if possible
• if there is a breach of trust and there is a loss of property, the directors can no longer apply for technical relief from breach of trust under Section 35 of the Ontario Trustee Act
• however, may still be able to apply for relief pursuant to a cy-pres court application
• advise former board members if the loss resulted from a decision of an earlier board of directors, since those board members may also be personally liable
• advise board members to obtain independent legal advice instead of relying upon the advice of the lawyer for the charity

 




G. ENFORCING DONOR RESTRICTIONS





1. Government involvement in enforcing donor restrictions:

• the Crown has an inherent parens patriae jurisdiction over charitable property
• the Attorney General in Ontario through the Public Guardian and Trustee is responsible for protecting charitable property in Ontario
• Section 4(d) for the Charities Accounting Act of Ontario provides the PGT with the authority to intervene and seek court enforcement of donor restrictions

 

 

2. Enforcement of restrictions by donors, residual beneficiaries and other interested individuals:

• donors generally lose control over charitable property once it is donated
• some measure of control can be maintained through contract or endowment agreements
• donors and interested individuals can apply under Section 6(1) of the Charities Accounting Act in relation to improper fundraising activities and its impact on charitable property and Section 10 (1) in relation to potential breach of trust involving restricted gifts
• donor and residual beneficiaries can also request the P.G.T. to enforce donor restrictions under Section 4 (d) of the Charities Accounting Act

 




H. AVOIDING PITFALLS INVOLVING DONOR

RESTRICTED CHARITABLE GIFTS


 




1. The need to be pro-active:

• the charity needs to be well informed about potential problems involving donor restricted charitable gifts and communicate the potential for problems with board members and staff
• the professionals advising the charity should not remain passive in advising the charity and its board of directors
• instead, professionals need to advise charities on a pro-active basis about potential problems involving donor restricted charitable gifts before they occur and encourage the charity to review its management of donor restricted gifts


2. Questions and guidelines to avoid problems involving donor restricted charitable gifts:

• are the restricted gifts special charitable purpose trusts in the first place?
• is the gift a conditional gift or a special purpose charitable trust?
• what are the legal consequences associated with the specific type of restricted gift?
• are restrictions within the objects of the charity?
• are the restrictions impractical or impossible and therefore should not be accepted?
• has an inventory been done of past and current restricted charitable funds to determine if there have been any noncompliance with donor restrictions?
• donor restricted charitable gifts must be used only in accordance with the terms of the applicable restrictions
• a charity must never borrow against donor restricted charitable gifts
• if restrictions are impossible or impractical, then the charity must apply to the court for a cy-pres order to use the affected funds in a different manner
• donor restricted trust funds should be placed in segregated accounts until relieving Regulations under the Charities Accounting Act are adopted
• carefully review investment restrictions that apply to special purpose trust funds
• deposit donor restricted charitable gifts into the bank account of the charity and not into the bank account of another charity unless specifically authorized by the donor
• ensure that public fundraising program includes a statement creating a "gift over" of any surplus to be used for the general charitable objects of the charity
• ensure that endowment gifts involve a gift over for both capital and income
• the transfer of donor restricted charitable trust funds between charities generally requires a Deed of Trust under the Trustee Act to change trustees and may also require court authorization in some situations
• carefully review past and present trust deeds of land to determine if there has been a breach of trust and whether proceeds from earlier sale are still impressed with the terms of trust

 

 
 
 
 
 

DISCLAIMER: This summary of "Donor Restricted Charitable Funds: Tips, Traps and the Fundamentals" is distributed with the understanding that it does not constitute legal advice or establish the solicitor/client relationship by way of any information contained herein. The contents are intended for general information purposes only and under no circumstances can be relied upon for legal decision making without first consulting with a lawyer and obtaining a written opinion concerning the specifics of your particular situation.
 

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Wardlaw, Mullin, Carter , Thwaites & Ward

Barristers & Solicitors

"Established in 1896"

235 Broadway, P.O. Box 67,

Orangeville, Ontario, L9W 2Z5

Telephone:(519) 941-1760 Fax:(519) 941-3688

E-Mail: tcarter@wardlaw.on.ca

Web Site: www.wardlaw.on.ca

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