CANADIAN BAR ASSOCIATION OF ONTARIO

October 27, 2000

By Terrance S. Carter, B.A., LL.B.8

TABLE OF CONTENTS

The following article is a revision and expansion of an earlier article that was first presented at an April 1998 Canadian Bar Association of Ontario program entitled Charities and Not-For-Profit Law, and subsequently published in Estates, Trusts and Pensions Journal, Vol. 18, No. 2, December 1998. Since the time that the original article was written, the Ontario Court (General Division) decision in Christian Brothers of Ireland in Canada (Re), released on February 27, 1998,¹ has been reversed by the Ontario Court of Appeal in a decision released on April 10, 2000.² The revisions in this article reflect the impact of the Ontario Court of Appeal's reversal of the lower court's decision, as well as the recent decision by the British Columbia Supreme Court, released on August 11, 2000,³ (collectively referred to as the Christian Brothers Decisions.)

In addition, the following sections dealing with the specifics of, and interrelationship between the Christian Brothers Decisions have also been significantly rewritten:

• Does a Charitable Purpose Trust have Application to Charitable Corporations? (see p. 9)
• What is the Nature of a Special Purpose Charitable Trust? (see p. 15)
• The Requirements for the Creation of a Special Purpose Charitable Trust? (see p. 24 )
• How are Restricted Charitable Trust Properties Created? (see p. 34)
• What is the Nature of Implied Special Purpose Charitable Trust Funds? ( see p. 37)
• Can a Donor Restricted Charitable Gift be Unilaterally Varied? (see p. 53)
• Duty to Comply with Donor Restrictions. (see p. 59)

The article has also been expanded to include additional sections on the following separate topics related to donor restricted gifts:

• Are Special Purpose Charitable Trusts Recognized in Canadian Law? (see p. 16)
• Gifts Subject to Donor Directions under the Charities Accounting Act. (see p. 48)
• Ten Year Gifts under the Income Tax Act. (see p. 50)
• What are the Legal Consequences of Failing to Comply with Donor Restrictions? (see p. 63)
• Selected Tax Considerations Involving Donor Restricted Charitable Gifts. (see p. 68)
• Exigibility of Special Purpose Charitable Trusts (see p. 87)
• How Should Donor Restricted Gifts be Managed once Received? (see p. 92)
• How Can Donor Restricted Charitable Gifts be Avoided in the First Instance. (see p. 96)
• Preventative Steps to Reduce Liability Involving Donor Restricted Charitable Gifts. (see p. 97)

Since the earlier version of this article was first published more than two and a half years ago, there has been considerable public recognition of the importance of donor restricted charitable gifts. This increased recognition has occurred because of a realization that with the new generation of philanthropists, there is emerging a different approach to charitable giving which recognizes the importance of accommodating the donor's wishes as well as the expectations of the charity, instead of the donor being required to focus only upon the needs of the charity. As stated by a senior fundraiser at a recent seminar for fundraisers:

This "donor centred" approach to philanthropy is in part a reflection of the "baby boomer" generation's need to dominate and control all aspects of their lives, even in relation to their charitable giving. As the boomers reach their forties and fifties, they are no longer prepared to part with their wealth by leaving it in the sole control of the charity. Instead, they are insisting upon the ability to exercise some measure of control over the gifts that they give. In a recent issue of Time Magazine on the topic of "The New Philanthropy", the following observation was made:

As a result of the greater demand by donors to exercise control over their gifts, there is an increasing obligation placed upon charities and their legal counsel to ensure that restrictions imposed by donors are respected, while at the same time ensuring that the charity is able to comply with those restrictions, and making sure that they do not unnecessarily expose the charity and its board of directors to legal liability. To this end, the revised article provides greater focus on situations in which charities and their boards of directors may be exposed to liability, and what practical steps can be taken to avoid such risks.

2. Setting the Stage

The following scenario provides an illustration of a typical situation where a lawyer may be called upon to advise a client concerning donor restricted charitable gifts:

Assume for a moment that you are asked, as legal counsel for a financially troubled charity which operates a youth centre for street kids, to advise on the legal implications of the charity ceasing to operate. The board is contemplating a possible amalgamation with another charity or, alternatively, dissolving the charity and transferring its remaining assets to another charity that has similar charitable objectives. In reviewing a copy of the current financial statement for the charity, you notice that there is a reference in the statement to the "Simpson Endowment Fund". As part of your due diligence in advising the charity, you ask for details of the fund.

You are advised that the fund was established ten years ago when Mr. Simpson passed away. He left $50,000 to the charity to be used to build a gym as an addition to the youth centre. Unfortunately, the gym addition was never built because the $50,000 gift from the Simpson estate was insufficient to ensure the completion of the project and other moneys could not be raised from supporters. When you asked why the current balance in the "Simpson Endowment Fund" is now only $20,000 instead of the original $50,000 together with accrued interest, you are advised that, on occasion over the last ten years, the board has had to use some of the fund to balance the operating budget of the youth centre.

At a board meeting that you are asked to attend, one of the new members of the board who was not aware of the history of the fund asks you whether or not the fund has been properly dealt with and, if not, what the legal implications are to the charity and its board of directors, and what should be done to rectify any irregularities that may have occurred...

The above hypothetical fact situation is not uncommon for many lawyers who are asked to advise charities. The following pages constitute an overview of the more important issues that arise in dealing with charitable gifts that are subject to donor restrictions, whether those restrictions are in the form of an endowment, a conditional gift or a restricted purpose trust fund. The difficulty in attempting such a task, though, is that every issue raised in this grey area of the law leads to a myriad of related matters which must be considered. It is therefore easy to become confused by the numerous questions that should be addressed.

In addition, the legal and equitable principles that arise are often complex and murky, involving complicated concepts of trust law, corporate law, law of associations, contract law and, more currently, income tax law. Although there are numerous text books and articles dealing with many of the individual legal issues involving donor restricted charitable gifts, there does not appear to be any published materials that synthesize into one source all of the various legal issues involved in donor restricted charitable gifts.

This article is not meant to be a comprehensive analysis of the law in this area. Instead, it is intended to provide a practical overview of the relevant issues for lawyers, executive directors, fund-raisers and interested members of boards of directors of charities. In this regard, the article can most effectively be used as an initial reference tool or guide, similar to a rough set of "Coles Notes",that can be referred to before proceeding with the more thorough research required to provide a competent legal opinion for a client.

To make the article as practical as possible, it has been structured with numerous headings, many of which are phrased as a series of questions. This structure reflects the reality faced by legal practitioners who must not only determine what the answers are, but must often also come up with the correct questions that must be asked, in order to provide pro-active legal advice for charitable clients.⁶

The overview starts with a review of the preliminary legal considerations that affect donor restricted charitable gifts. It then explains the different types of donor restrictions and their legal consequences, what happens if a donor restriction cannot be complied with, what are the legal duties that are associated with donor restricted gifts, what should be done if there is failure to comply with donor restrictions, what are some of the tax considerations involving donor restricted charitable gifts, as well as issues involving exigibility of special purpose charitable trusts. Finally, the article provides an overview of the legal issues involved in managing donor restricted charitable gifts, and how to reduce liability exposure associated with such gifts.

3. Preliminary Legal Considerations

In order to proceed with a review of the practical considerations involving donor restricted charitable gifts, it is first necessary to understand what constitutes a "charitable gift". For ease of use, reference is made to Black's Law Dictionary for a standard definition of what is a gift in law:

The other fundamental consideration in understanding donor restricted charitable gifts involves an appreciation of the special nature of a charitable purpose and its impact on different forms of donor restricted charitable gifts. A selected discussion of the characteristics and key issues involving charitable purposes is set out below for ease of reference.

A "charitable purpose" is generally used in the context of a charitable purpose trust but has application to other legal forms of charities as well. The Restatement of Trusts⁸ defines a charitable purpose trust as follows:

The Ontario Law Reform Commission, Report on the Law of Charities⁹ summarizes the basic nature of a charitable purpose trust as follows:

Compared to other forms of trusts, a charitable purpose trust has certain beneficial attributes which are unique to it. Those attributes are summarized as follows:¹⁰

The issues involved in determining whether a charitable purpose trust has application to a charitable corporation is a highly confused and unsatisfactory area of the law.¹³ The main aspect of this question is whether a charitable corporation holds its assets "in trust" for its charitable purposes. The difficulty is that the case law has been divergent on this issue.¹⁴ As well, this issue has been further confused in Ontario as a result of section 1(2) of the Charities Accounting Act,¹⁵ which states that a charitable corporation is a trustee of its property for purposes of that Act.

American legal authorities have commented upon this grey area of the law as follows:¹⁶

Generally speaking, the attributes of a charitable purpose trust will have application to a charitable corporation when the corporation holds property in accordance with a special purpose charitable trust, discussed further below. The same attributes will also apply, but in a different sense, with regard to unrestricted charitable property of a charitable corporation.

From the Christian Brothers Decisions, it is clear that a charitable corporation does not hold its unrestricted assets "in trust" for its charitable purposes. Instead, it owns such assets beneficially to be used in accordance with its corporate objects. This was noted by Justice Blair in Christian Brothers Gen. Div. as follows:

This position was confirmed by the Ontario Court of Appeal in the Christian Brothers Ont. C.A.¹⁹ The British Columbia Supreme Court also came to the same conclusion involving the assets of the Christian Brothers located in that province.²⁰ As such, it is now generally accepted that unrestricted property of a charitable corporation is not to be construed as trust property held by a charitable corporation for its charitable purposes.

From a practical context, this means that a charity may use an unrestricted gift to the full extent of its charitable objects based upon its corporate authority as a legal entity without having to interpose a charitable purpose trust to establish either the legal authority or the parameters within which the gift can be used. Since the nature of a charitable corporation as a separate legal entity both empowers the charity to carry out its charitable purposes and also allows it to protect the charitable purpose by virtue of the doctrine of ultra vires (i.e., that the corporation cannot operate outside of its corporate objects), it would serve no useful purpose at law to require that a charitable corporation hold its property in trust for its general charitable purposes. A charitable corporation, both according to corporate law, as well as in accordance with the equitable jurisdiction of the Courts over charitable property, is obligated to ensure that an unrestricted gift to the charity is only used within the parameters of the corporate objects of the charity:

A charitable unincorporated association, on the other hand, has on its face more in common with a charitable purpose trust, although they are not exactly the same. Since a charitable unincorporated association is not a separate legal entity, its property, by necessity, must be held in trust by trustees. However, the fact that property is held by the trustees of an unincorporated charitable association is due to its inability to own property itself, rather than because an unincorporated association is holding its unrestricted property in trust for its charitable purposes. Having said that, the property that is held in trust for an unincorporated charitable association is by virtue of the trust relationship, a charitable purpose trust. It is interesting, therefore, that a charity organized as a charitable unincorporated association would generally have its property held as a charitable purpose trust, but if it becomes incorporated, it no longer does. This is an interesting dichotomy that does not yet appear to have been addressed by the courts.

With regards to a charitable corporation, even though the corporation can own its general property without the imposition of a trust, once a donor imposes restrictions on a gift whereby the charity is unable to use the gift for the full range of its charitable objects, then the gift will be held as a separate special purpose charitable trust with all aspects of a charitable purpose trust having application to the donor restricted gift. It in essence becomes a charity within a charity. This unique nature of a special purpose charitable trust is discussed further under the section of this article entitled "Are Special Purpose Charitable Trusts Recognized in Canadian Law?" at p. 16.

To the extent that special purpose charitable trusts and other types of donor restricted charitable gifts are dealt with in a similar manner by a charity no matter how the charity is organized, whether it be in the form of a charitable corporation, an unincorporated charitable association, or a charitable purpose trust, references in the balance of this article to "charity" are intended to include all legal forms through which charities operate. In this regard, Waters makes the following observations:

4. What is the Difference Between Unrestricted and Donor Restricted

An unrestricted charitable gift is a gift at law to be applied towards a charitable purpose, (whether the charitable purpose is in the form of a charitable purpose trust, a charitable corporation, or a charitable unincorporated association), that is not subject to any restrictions imposed either directly or indirectly by the donor, other than the legal requirement that the gift be used for the charitable purpose of the recipient charity. As a result, the board of a charity is at liberty to apply an unrestricted gift to its charitable purposes as stated in its constating documents without restrictions, limitations, conditions, terms of reference, directions, or other restricting factors imposed by the donor that would fetter or limit the discretion of the board in applying the gift in whatever manner it deemed to be most appropriate to achieve its charitable purpose.

This means that, provided the board of a charity does not exceed its charitable purposes, whether through breach of a fiduciary duty with regard to the general trustee-like obligations in dealing with its charitable property or embarking on ultra vires activities that are beyond the corporate objects of a charitable corporation, the charity may use the gift in its absolute discretion. This may involve disbursing all or a portion of the gift, or investing the gift either over the short term or in perpetuity and using the income to pursue any one of the authorized charitable purposes within the constating documents of the charity. In addition, if the board of a charity decides to designate unrestricted charitable gifts for a specific charitable purpose, there is nothing to stop the board from subsequently undesignating the funds and applying the funds to another charitable purpose within its charitable objects.

Unrestricted charitable gifts form a broader category of gifts than do donor restricted charitable gifts, since unrestricted charitable gifts include all sources of monies gifted to a charity that are not subject to donor restrictions. The following are some examples of unrestricted charitable gifts:

With all of the above funds, and in particular in relation to board designated funds, it is open to the board to vary, change, or terminate the restrictions or purposes for which those funds have been applied in any other manner that the board thinks is best to achieve the charitable purposes of the charity, without the board being in breach of trust.

Blacks Law Dictionary defines the term "restrict" or "restriction" to mean:

For purposes of comparing donor restricted and unrestricted charitable gifts, "donor restricted charitable gift" in this article means a gift at law to a charitable purpose that is subject to restrictions, limitations, conditions, terms of reference, directions, or other restricting factors imposed by the donor that would constrain or limit a charity concerning how the gift can be used. As a result, the board of a charity that receives a donor restricted charitable gift needs to be careful to identify the nature of the donor restriction and to recognize the legal consequences of the specific type of restriction that has been imposed by the donor, as well as the importance of complying with the restrictions in question.

Too frequently, charities fail to either identify or adequately understand the nature of the donor restriction that has been imposed. This, in turn, exposes charities and their boards of directors to unnecessary and potentially serious liability.

The different forms of legal restrictions that donors may impose often have distinctive legal consequences associated with them. As a result, it is important to understand both the various forms that donor restrictions may take and the legal consequences that flow from each type of donor restriction.

5. What are the General Forms of Donor Restricted Charitable Gifts?

A special purpose charitable trust is a gift held by a charity in trust for a specific charitable purpose that falls within the parameters of the general charitable purpose of the charity as set out in its constating documents. For a charitable corporation, its board would be acting ultra vires if the board were to authorize the corporation to hold property as a special purpose charitable trust where the special charitable purpose was outside the scope of its corporate objects:

In this regard, while unrestricted charitable gifts are beneficially owned by a charity for its general charitable purposes, gifts that are contributed to a special purpose charitable trust are held by the charity in trust for the stated special purpose charitable trust and are not owned beneficially by the charity. The charity is, in effect, managing a separate and specific charitable purpose trust within the confines of its own general charitable purpose, i.e. a charity within a charity, except that a special purpose charitable trust is not required to be registered by Canada Custom and Revenue Agency ("CCRA") as a separate charitable organization or charitable foundation.

To the extent that a gift constitutes a separate charitable purpose trust, the charity can only use the gift to accomplish the specific charitable purpose established by the donor and for no other purpose.

Special purpose charitable trusts are commonly referred to as "donor restricted trust funds", "charitable trust property", "special purpose funds", "endowment funds" and "restricted funds". The general terminology that will be used in this paper is "special purpose charitable trusts", although reference is made to other terminology where the context warrants.

There is a long line of case law, as well as commentaries, that recognize the existence of a special purpose charitable trust as being distinct from the general charitable purpose of the charity which administers it. In this regard, Tudor on Charities,²⁸ which was quoted with approval by the Court of Appeal in Christian Brothers Ont. C.A., makes the following statement about special purpose charitable trusts in comparison to unrestricted gifts received beneficially by a charity without the imposition of a trust:

In the Christian Brothers B.C.S.C. decision, the facts of which are described below at p. 19, Justice Levine concluded, after reviewing extensive supporting case law, that:

Justice Levine relied upon a number of cases in support of this conclusion, including Re Ulverston & District New Hospital Building Fund,³² Attorney-General for Queensland v. Cathedral Church of Brisbane,³³ in Re Young Women's Christian Association Extension Campaign Fund,³⁴ Re Church Army,³⁵ Re Lucas,³⁶ Re Finger's Will Trust.³⁷ After reviewing these authorities, but without dealing with the separate issue of what impact a special purpose charitable trust has on the issue of exigibility of the assets, which is discussed later in this article at p. 87, Justice Levine concluded that special purpose charitable trusts are in fact recognized in Canadian law:

Although not referred to in the decision by Justice Levine, support for this conclusion can be found in the decision of Re Bucks Constabulary Widows' and Orphans' Fund Friendly Society,³⁹ in which the court commented as follows:

It is also interesting to note that the Ontario Legislature has acknowledged that funds can be held for a specific charitable purpose separate from the general charitable funds of a charity as a result of the recent amendments to the Charities Accounting Act of Ontario,⁴¹ set out below, that authorize regulations to be adopted permitting the co-mingling of various funds held for different special purposes:

The position that special purpose charitable trusts may no longer be recognized in Canadian law arises from comments made by Justice Feldman in Christian Brothers Ont. C.A. In order to understand those comments, it is first necessary to understand the facts behind the Christian Brothers case and the series of decisions that have been rendered to date. It should be pointed out that leave to appeal the Ontario Court of Appeal decision to the Supreme Court of Canada is currently being sought, and therefore the comments that follow concerning the Christian Brothers Decisions are subject to the overriding comments of the Supreme Court of Canada, assuming that leave to appeal is granted.

The background facts involving the Christian Brothers case have been well summarized in the decision of Justice Levine in Christian Brothers B.C.S.C., the highlights of which are set out below:⁴²

• The Christian Brothers is a worldwide Catholic teaching order which has had a presence in North America since 1876 when the Christian Brothers came to Newfoundland to teach Catholic youth.

• In 1898, the Christian Brothers opened the Mount Cashel School, an orphanage for boys in St. John's, Newfoundland.

• In 1922, the Christian Brothers opened and operated Vancouver College in Vancouver, British Columbia.

• In 1960, the Christian Brothers agreed to establish and operate St. Thomas More Collegiate in Burnaby, B.C.

• In 1962, the Christian Brothers were incorporated by a Special Act of Parliament.

• In 1989, the Newfoundland Government appointed a Royal Commission to enquire into allegations made by boys who were residents at the Mount Cashel Orphanage that they had been sexually, physically and emotionally abused by members of the Christian Brothers. The findings of the Commission resulted in criminal charges and numerous civil actions for damages for abuse.

• By July 1999, the aggregate amount claimed from the Christian Brothers was approximately $67,000,000.

• By 1996, the Christian Brothers realized that the claims for damages far exceeded their general corporate assets that amount to no more than $4,000,000. They therefore made application to be wound up under the Winding-Up and Restructuring Act.⁴³ The Christian Brothers was subsequently ordered to be wound-up and a liquidator was appointed.

• In July of 1997, the liquidator asked the winding-up court for advice and direction on legal questions relating to whether charities or their assets were immune from liability or were exigible to satisfy tort claims. The winding-up court directed that those questions be heard by a judge of that court.

• In November 1997, Justice Blair ordered that the nature and scope of any trusts involving property located in British Columbia would be dealt with by the courts in British Columbia.

• The resulting B.C. decision of Justice Levine in Christian Brothers B.C.S.C. held that the two schools located in British Columbia were held by the Christian Brothers as special purpose charitable trusts.

• In relation to the issue of exigibility of special purpose charitable trusts, discussed in more detail later at p. 87 of this article, Justice Blair in Christian Brothers Gen. Div. held that the general corporate property of a charity is not immune from exigibility by tort creditors. However, property held as a special purpose charitable trust by a charity would not be available to compensate tort creditors of the charity unless the claims arose from a wrong perpetrated within the framework of the particular special purpose charitable trust in question.

• In Christian Brothers Ont. C.A., Justice Feldman agreed with Justice Blair that there is no general doctrine of charitable immunity applicable in Canada. However, Justice Feldman held that once Justice Blair had determined that there was no doctrine of charitable immunity in Canada, it then became redundant for the court to analyze whether special purpose charitable trusts of a charity were exigible to pay the claims of tort creditors. As a result, the Ontario Court of Appeal held that all assets of a charity, whether they are owned beneficially or they are held pursuant to a special purpose charitable trust, are available to satisfy claims by tort victims upon the winding-up of the charity.⁴⁴

Even though the Ontario Court of Appeal held that special purpose charitable trusts are not immune from claims by tort victims, Justice Feldman went to considerable lengths to confirm that charities can still hold specific property pursuant to a special purpose charitable trust and that a charity and its directors must hold and deal with such assets as charitable trust property, including the obligation to seek judicial variation of a special purpose trust through a cy-près court order where the applicable charitable purpose has become impossible or impracticable. In this regard, Justice Feldman stated the following:

Having recognized special purpose charitable trusts, Justice Feldman had to distinguish between property held as a charitable purpose trust and property held pursuant to a private trust where the trust property is protected from claims against the trustee personally in order for the assets of a special purpose charitable trust to be seized by tort claimants of the charity. In order to do this, Justice Feldman went through a process of removing so many attributes of a special purpose charitable trust that it ends up being a trust in name only and imposes, at most, "trustee-like"obligations upon a charity concerning how it uses such "trust"property. This judicial erosion of the special purpose charitable trust as a legal trust is evident by the following statements by Justice Feldman concerning the effect of a special purpose trust:

What is evident from the decision of Justice Feldman of the Court of Appeal is that in deciding, as a matter of policy, to make the property of a special purpose charitable trust exigible to tort creditors of the charity, Justice Feldman ignores the fact that a special purpose charitable trust is in fact a true trust at law, instead of the charity holding property in trust for itself in a trustee-like capacity.

If the beneficiary of a special purpose charitable trust were the charity itself, it would be understandable why the Court of Appeal would find that the property of a special purpose charitable trust would be available to satisfy the claims of tort creditors of the charity. However, fundamental to the concept of a special purpose charitable trust is that the usual requirements that there be an identifiable beneficiary of a trust is not applicable to a charitable purpose trust. This is one of the basic attributes of what constitutes a charitable purpose trust. A charitable purpose trust is recognized as benefiting the public-at-large instead of only a single beneficiary and the purpose is enforceable by the courts as a complete trust in the same way as any private trust is. Since Justice Feldman recognizes the case authority that special purpose charitable trusts can be held distinct from the general corporate property of a charitable corporation, and since the public-at-large is the beneficiary of such trusts, it then follows that a special purpose charitable trust is as much a trust at law as a private trust with all of the attributes associated with a trust, including protection of trust property from creditors of the trustee personally.

The impact of Justice Feldman's decision on the separate issue of exigibility of special purpose charitable trusts is discussed later in this article at p. 87.

Both traditionally and in practice, a special purpose charitable trust is considered to have been established when the donor has expressed an intention that the property being given to the charity is to be held for a specific charitable purpose, such as when money has been raised for an endowment program or through a public fund-raising appeal for a specific project. However, the opposing approaches taken in the Christian Brothers Gen. Div. decision of Justice Blair and the Christian Brothers B.C.S.C. decision of Justice Levine have raised a number of important issues concerning what type of evidence will be required to establish that the donor had the necessary intent to create a special purpose charitable trust. Justice Blair held that there is a higher, more formal standard that is required, whereas Justice Levine determined that the applicable requirements are less formal and can involve consideration of all relevant circumstances involved in making the gift.

These differences in approach will not likely be resolved until the matter is decided by the Supreme Court of Canada, if leave to appeal is granted. Pending clarification of the issue, the following observations can be made on the differences in approach taken in the two decisions.

In determining what is required to establish the intention of a donor to create a special purpose charitable trust, Justice Blair in Christian Brothers Gen. Div. distinguished between what he considered to be a "true"[whatever that means] charitable purpose trust, and gifts or bequests that are simply "earmarked"for some specific charitable purpose and are not in fact trusts at all. Justice Blair stated that before there can be a "true"charitable purpose trust, the trust must first be established in accordance with the general formal requirements of trust law:

In addition to requiring the formalities of trust law, Justice Blair confirmed that all gifts received by a charity are presumed to have been received by it beneficially for its general charitable purposes, unless there is evidence that gives rise to the creation of a special purpose charitable trust, i.e., where it was created in accordance with the formalities referred to above:

Given the formalities that Justice Blair requires for the creation of a special purpose charitable trust and the fact that the law generally presumes gifts received by a charitable corporation to have been received beneficially and not held in trust, Justice Blair describes gifts where donors have not formally expressed an intention sufficient to create a special purpose charitable trust to be a "precatory trust"only, i.e., only a suggested designation by the donor and not a "true"special purpose trust. Justice Blair mentions, as an example of a gift that in his opinion might be a "precatory trust"gift, contributions that are raised through a public fund-raising campaign for a specific building project of a charity:

If this position were to prevail, it would be open for a charity to argue that a gift that a donor had thought was a restricted gift in the form of a binding special purpose charitable trust was really only a precatory trust that amounted at most to a moral obligation upon the charity, but was not the imposition of a legal requirement. This would create a great deal of uncertainty for charities in general and for donors in particular.

However, the approach taken by Justice Levine in Christian Brothers B.C.S.C. ignores the formalities required by Justice Blair, and instead adopts a more traditional approach concerning what is required to create a special purpose charitable trust. After citing Waters concerning the need for "certainty of intention"as one of the three requirements for a special purpose charitable trust, Justice Levine states that the required intention to create a charitable purpose trust is not dependent upon the utilization of technical words such as "in trust,"or otherwise, but rather requires that the court look at all of the relevant circumstances to determine the real intention of the donor. In this regard, Justice Levine quotes with approval the following statement from Waters:

In finding that the schools located in British Columbia were held as special purpose charitable trusts by the Christian Brothers, Justine Levine had to deal with the fact that there was no clear statement of intention to this effect. In support of the finding that there was sufficient evidence to establish a special purpose charitable trust, Justice Levine relied upon the following statement from Smith v. Kerr:⁵²

Justice Levine went on to make the following observations concerning what is required to establish satisfactory evidence of an intent by a donor to create a special purpose charitable trust:

The approach taken by Justice Levine is a less radical departure than that of Justice Blair, as it is a return to the more settled approach in determining what is required to create a special purpose charitable trust. However, even if the position taken by Justice Blair were to be followed in the future and a donor restricted gift lacked the formalities to be considered a special purpose charitable gift, the charity would still be subject to the statutory jurisdiction of the Public Guardian and Trustee of Ontario in being able to seek an order to enforce a "donor direction"under s.4(d) of the Charities Accounting Act. A further discussion concerning the effect of this provision of the Charities Accounting Act is set out later in this article at p. 65.

From a practical standpoint, though, Justice Blair's decision would mean that any donors who have assumed that their restricted gifts are enforceable against the charity would be surprised to find that if they had not clearly established their gift as a formal "true"special purpose trust, it might be arguable that the receipting charity would be able to apply the gift for any of its general charitable purposes, as opposed to only utilizing the gift in accordance with the restrictions that the donor had intended.

Although this may be good news for those charities that feel unduly constrained by restrictions imposed by donors, there would also be a corresponding erosion of confidence by donors who, in the past, have assumed that their gifts constituted binding donor restricted special purpose charitable trusts that could not be altered by either the current or future boards of a charity. This confidence was predicated on the willingness of the courts, particularly in England, to find an implied special purpose charitable trust even where the donor's intention was not patently obvious. This judicial willingness is discussed later in this article at p. 37. However, Justice Blair's decision, if followed, would indicate a leaning by the courts against finding an implied special purpose charitable trust. If this is the trend that is followed, it could discourage donors from making restricted charitable gifts and in turn could be problematic for charities, such as community foundations, which rely heavily upon and encourage donor restricted charitable gifts, particularly in the form of endowment funds.

Since it is not known whether the Supreme Court of Canada will clarify the dichotomy in approaches taken by Justice Blair and Justice Levine, it would be prudent, at least for the time being, for charities, donors, and their legal counsel to be careful in ensuring that the formalities required for the creation of a trust are clearly articulated in the document creating a restricted gift, whether it be through an inter vivos endowment agreement or by means of a testamentary gift. Specifically, it would be important to clearly categorize the gift as being a special purpose charitable trust by naming the charity as the trustee, describing the property that constitutes the gift to be held in trust by using the words "in trust,"and explaining the specific charitable purpose for which the property is to be used. Failure to do so by lawyers who are instructed to establish restricted gifts or endowments may become the basis of a claim in negligence for not ensuring that the intent of the donor had been adequately expressed to create a binding special purpose charitable trust capable of effectively restricting the charity in the future.

In relation to existing endowment agreements, the wording should also be carefully reviewed and a legal opinion sought to determine whether or not the wording was sufficient to create a special purpose charitable trust in light of Justice Blair's decision in the Christian Brothers Gen. Div. In addition, the wording of standard disposition clauses that are suggested by charities to estate practitioners for use in creating donor restricted charitable gifts in wills by donors should also be reviewed.

Since it is not known whether the approach of Justice Blair or the approach of Justice Levine will prevail in the future, the balance of this article has been prepared to reflect both the cautious approach that should be adopted in the event that Justice Blair's reasoning is followed, while at the same time recognizing that case law supports the broader interpretation reflected in Justice Levine's reasoning of looking at all of the relevant circumstances, instead of only what is in writing, in determining the intention of the donor.

An endowment fund is generally considered to be a special purpose charitable trust through which the donor requires that the capital of the gift be held in perpetuity. Since one of the advantages of a charitable purpose trust is the exemption from the rule against indestructible trusts, a charity is able to accept gifts where the capital is held in trust on a perpetual basis. This method of charitable funding is not available to a non-profit organization, since a non-profit organization does not constitute a charitable purpose trust at law.

The capital in an endowment fund is to be invested in accordance with either the investment terms contained in the document creating the endowment fund or in accordance with the investment powers of the charity set out in its constating documents. Whether or not a portion of the income that is earned from an investment will be capitalized and reinvested will depend upon either the terms in the endowment agreement or the investment policy established by the board of the charity in accordance with its investment powers. Unless the terms of the endowment require that all of the earned income is to be disbursed, it is normal that the board will provide that a portion of the income is to be reinvested so that the capital of the endowment fund will at least keep up with inflation and will preferably increase on a net basis over the years.

How the income earned on an endowment fund is applied depends upon whether the donor has expressed a specific direction concerning disbursement of income in the endowment agreement or alternatively whether the board has established terms of reference concerning how endowment income is to be applied. In either scenario, the board must ensure that the income is applied only towards the charitable purposes of the charity. To the extent that the donor has not established restrictions concerning how the income from the endowment fund is to be used, the board of a charity will be at liberty to apply the income to any of its charitable purposes, as determined by the board from time to time.

There are three ways in which endowment funds can be created. They can be created by the board, created by the donor, or created by a combination of the board and the donor.

When the endowment fund is initiated by the donor, it will normally involve the donor leaving money through a testamentary gift in perpetuity or alternatively creating an endowment fund by means of an endowment agreement. If an endowment agreement is utilized, whether it be one supplied by the charity or one drafted by the donor through his or her legal counsel, issues such as investment and management of the endowment fund, the name of the endowment fund, as well as disbursement of the income for the endowment fund will normally be addressed.

In situations where the board of a charity has taken steps to create the endowment fund, it will usually involve the board announcing that a named endowment fund has been established and inviting donors to contribute towards it. The board in this situation will establish the terms of reference for the endowment fund, i.e., how the income will be disbursed and how the capital fund will be invested. If it is a board initiated endowment fund, it will normally have a descriptive name associated with it, such as "The Education Fund,"or "The Millennium Fund,"so that prospective donors can identify it when making a contribution towards the endowment fund in question.

The third type of endowment fund is where the board invites donors to establish individual endowment funds with the charity. This allows the donor to, within the parameters of the charitable purposes of the charity, personally structure the endowment fund. This type of endowment fund is often encountered with community foundations and may involve the donor being able to name the endowment fund and permit family members and friends to make additional contributions of capital to it from time to time.

To the extent that the board of a charity contributes any of its unrestricted charitable funds to an endowment fund, those contributions can be re-designated by the board at any time towards any of its other charitable purposes. However, any monies that are contributed by donors to either a board initiated endowment fund or a fund that is initiated by the donor in accordance with the formal requirements of a special purpose trust cannot be varied by either the board or the donor without court approval. This issue is discussed in more detail later in this paper.

Unlike endowment funds, donor restricted use funds do not require that the capital of a gift be held in trust. Instead, the capital, as well as earned income will be expended over a period of time rather than being held in perpetuity and may be applied in accordance with certain specific charitable purpose restrictions. Unlike endowment funds where the restriction on the use of capital will continue in perpetuity, a donor restricted use fund involves restrictions that eventually will be fulfilled, thereby bringing the fund to an end.

Some restrictions that are imposed by donors involve either a delay in when a gift can be used, i.e., until a specified date, or a requirement that the gift be expended over a specific number of years. In either situation, the time restriction will eventually expire when the capital and any accrued income have been fully expended.

Donors may also impose purpose restrictions concerning how a gift will be applied to further a particular capital purpose, such as a building program; or an operational purpose, such as pursuing a relief effort in a foreign country. In either situation, it is essential that the purpose restrictions established are within the parameters of the charitable purpose set out in the charity's constating documents. If this is not the case, then the board of the charity will either be in breach of trust if it is a charitable trust, or liable for having authorized ultra vires activities outside of the corporate authority of the charity if it is a corporate charity.

In addition, donors may establish purpose restrictions concerning the manner in which the charitable objects of a charity are to be carried out. For instance, donors may establish restrictions that do not limit what the charity can do, but rather who it is that is entitled to benefit from the activities of the charity. In such a situation, it is important that the board of a charity ensure that the restrictions are not void as being repugnant or contrary to public policy, such as restrictions that are discriminatory.⁵⁵

As with endowment funds, donor restricted use funds can be established at the initiation of the donor either through an inter-vivos or testamentary gift that includes a time or a purpose restriction. Alternatively, the board of a charity can take the initiative in establishing a restricted use fund by inviting donations from supporters or from the public for a specific purpose. Provided that the wording used to establish the donor restricted use fund meets the formal requirements of a trust, the monies received will generally constitute donor restricted charitable purpose trust funds to be used in furthering a specific charitable purpose, such as a building program for a new church or a new wing for a hospital.

Restricted charitable trust property is a term used to describe real estate that is acquired subject to certain terms of trust contained in the deed for the property. Religious charities often receive or acquire property through deeds that set out specific terms of trust which will continue in perpetuity, even if the land and buildings are sold, by impressing the sale proceeds with the same terms of trust. As a result, it is essential that the board of a charity determines whether or not any of its real property either now or in the past is subject to restricted charitable trusts and, if so, to ensure that the property either was or is currently being used in accordance with the applicable restrictions.

Generally, restrictions normally found in deeds containing restricted charitable trusts tend to be of a religious nature, and fall into one of three categories:

• restrictions pertaining to religious doctrine, i.e., requiring that the property be used only for individuals who subscribe to a particular religious doctrine;

• restrictions pertaining to use, i.e., limiting the property to a particular use, such as use for a church, cemetery or seminary; and

• restrictions limiting the property to those who follow a particular religious practice, similar to requiring that the property only be used by members of a church who adhere to the practice of "strict communion,"i.e., where the sacrament of communion can only be received by baptized members of a particular denomination.

What is not often understood by a charity, either in receiving a deed to property from a vendor that is made subject to a special purpose trust or in unilaterally imposing a trust at the time that it takes title to the property, is that the trust that is created is a trust in perpetuity which will have permanent implications similar to an endowment fund or to any other special purpose trust fund. Since the charity will not have the ability to unilaterally vary the terms of trust without court authorization, a charity needs to be both aware of the terms of trust and to ensure that it can either comply with the restrictions or otherwise seek court authorization to vary it. The legal principles upon which the court will vary the terms of a charitable trust are discussed in more detail later in this article.

Restricted charitable trust properties are almost invariably created by the inclusion of a specific trust clause in a deed for land. This can occur when a grantor donates property to a charity and intends the property to be used only for a particular purpose. In such a scenario, the grantor may include a reversionary clause in the deed stipulating that the property is to revert back to the grantor in the event that the terms of trust are not complied with. When this occurs, it is important to review the specific wording in the deed to determine whether or not a condition subsequent has been created as opposed to a special purpose charitable trust, since different legal implications flow from the distinction. The differences between a conditional gift and a special purpose charitable trust are discussed later in the article.

In the other scenario in which a trust clause is included in a deed, the charity itself imposes the terms of trust stating that the property being acquired can be used only for a specific purpose or purposes.⁵⁶ The terms of trust would need to be consistent with the charitable objects of the charity. If not, it would be unlikely that the restricted charitable trust in the deed would be a valid and enforceable special purpose charitable trust.

A more problematic situation is where monies are given specifically for the construction of a building on a particular piece of land for a particular purpose. The issue that arises is whether the application of the special purpose charitable trust fund to construct a building has the effect of imposing a special purpose charitable trust upon the land itself. This issue was dealt with in the Australian case of Attorney-General for Queensland v. Cathedral Church of Brisbane⁵⁷ in which monies were raised through a public fundraising appeal by the Cathedral Church of Brisbane to construct a hospital on lands that the church owned. Although the High Court of Australia had no difficulty in finding that the funds given constituted a special purpose charitable trust, the court rejected the notion that by accepting public funds for the stated purpose of constructing a hospital, the church had implicitly declared a trust to use the land in question for such purpose:

An interesting aspect of this decision is the implicit recognition that once funds given for a special purpose charitable trust have been applied to their intended purpose, such as the construction of a building or a portion of a building, i.e., a wing of a hospital, not only is the land in question not made subject to a special purpose charitable trust, but the special purpose charitable trust of the original gift comes to an end. This means that, contrary to the suggestion by Justice Feldman in Christian Brothers Ont. C.A., once the subject matter of a special purpose charitable trust has been applied in accordance with the term of the donor's restriction, i.e., to renovate or enlarge a building, then the trust will be considered to be at an end and the building that has been improved by such funds will continue as the beneficial property of the charity without restrictions. This approach was reflected in the High Court of Australia decision in Attorney-General of Queensland v. Cathedral Church of Brisbane:

Where land that is subject to a charitable trust is transferred, the proceeds of the sale will remain subject to the terms of trust.⁶⁰ Alternatively, if the property is being sold to a successor (for example, where an unincorporated church incorporates and transfers all of its property to an incorporated church entity), the transferee charitable corporation will take the property subject to the same terms of trust as were set out in the original deed, whether or not the current deed makes reference to those terms of trust.

The word "implied"in an implied special purpose charitable trust fund refers to what is required at law to evidence that the donor in fact intended to create a charitable trust. If the document accompanying a charitable gift clearly states that the gift is to be held in trust and the basic three certainties of a trust are met, the donor will clearly have created an express special purpose charitable trust fund. On the other hand, if the circumstances surrounding the gift or the general language in the document accompanying the gift is sufficient to establish that the donor intended the gift to be held in accordance with a special purpose charitable trust, then the donor would be considered to have established a trust by implied intent.⁶¹

As indicated earlier in this article, Justice Blair in Christian Brothers Gen. Div. stated that a special purpose charitable trust must be formally established in writing with a settlor, trustee, identifiable trust property and trust objects, preferably utilizing specific terminology that the gift is being given "in trust." However, there are numerous reported cases, as indicated earlier, particularly from England, where the courts have been prepared to consider extrinsic evidence concerning whether the donor intended to create a special purpose charitable trust and, if so, what the nature of the restrictions that would apply were:

In dealing with this issue at the trial level, the Supreme Court of British Columbia in Christian Brothers B.C.S.C. recognized that there was no written declaration of trust by which the two schools in British Columbia had been stated as being held in trust by the Christian Brothers:

After thoroughly reviewing all of the circumstances, in lieu of a formal declaration of trust, Justice Levine concluded that there was sufficient evidence to conclude that there was an implied special purpose trust fund.

Instances where an implied special purpose charitable trust fund might be found, presuming that the reasoning of Justice Levine in Christian Brothers B.C.S.C. prevails over that of Justice Blair in Christian Brothers Gen. Div., would include the following:

• A public fundraising campaign for a specific purpose, whether it be a capital endowment fund or a building project.⁶⁵

• A donor who gives money to a charity with no accompanying written documentation setting out his or her intentions. However, in discussions with the development officer for the charity and in preliminary correspondence between the donor and the development officer, there is clear reference made that the gift is to be held in perpetuity as an endowment fund for a particular purpose, i.e., to fund a professorship at a university.

• Most donors making a gift to a parallel foundation, such as a hospital foundation, assume that the gift will be used to benefit the parallel operating charity, particularly when the names of the parallel foundation and the parallel operating charity are virtually identical, i.e., the "ABC Hospital"and the "ABC Hospital Foundation." However, some foundations have charitable objects that permit the board of directors of the foundation to use the monies received by the foundation for purposes other than benefiting the parallel operating charity. Notwithstanding the doctrine of constructive notice,⁶⁶ (which states that third parties dealing with a corporation are deemed to have constructive notice of the registered public documents of the corporation), if the corporate authority of a foundation to give monies to charities other than the parallel operating charity has not been effectively communicated to donors of a foundation, particularly where the foundation has the same name as the parallel operating charity, and the public fund-raising campaign makes reference to the need to support the parallel operating charity, donors who make gifts to the foundation might allege breach of an implied special purpose trust fund under s.6 or s.10 of the Charities Accounting Act,⁶⁷ if the monies are disbursed to charities other than the parallel operating charity.

• Even though the courts in both Christian Brothers Gen. Div. and Christian Brothers Ont. C.A. held that unrestricted charitable gifts are owned beneficially by a charitable corporation and not held in trust for its charitable purposes, such property may still only be used in accordance with the corporate objects of the charitable corporation, in compliance with the doctrine of ultra vires. Otherwise, the board members of a charity could be found personally liable for losses which arise out of ultra vires actions they authorized. As such, there are similarities between an implied special purpose trust fund and an unrestricted gift to a charity. In both situations, there is an implied restriction on what the charity can do with the gift that has been received, with corresponding personal liability consequences to the board members if they fail to comply. With an implied special purpose charitable trust fund, the trust restrictions are gleaned from circumstantial evidence; with an unrestricted charitable gift, the restrictions are found in the charitable objects themselves. In accordance with the doctrine of constructive notice,⁶⁸ a donor is entitled to presume that the charitable objects of a charitable corporation are in fact those that are set out in its letters patent.

The basic characteristic of donor advised funds and precatory trusts, in contrast to other forms of donor restricted charitable gifts such as special purpose charitable trusts or conditional gifts, is that they do not have any enforceable restrictions associated with them. With both donor advised funds and precatory trust funds, the donor expresses his or her preference, desire or request that something be done with the gift, but such expressions are made as a "suggested direction,"not as a legal obligation upon the charity. This notwithstanding, there is normally considerable moral persuasion placed upon a charity receiving such a form of gift.

In Christian Brothers Gen. Div., Justice Blair stated that a precatory trust was not a trust at all but only a non-binding request by the donor to the charity. For ease of reference, the relevant quotation from the decision dealing with precatory trusts is repeated here:

Since a precatory trust is a misleading term in that it is not in fact a trust, it is more useful to describe such a gift as an unrestricted gift that is accompanied by a non-binding designation. For ease of reference, such gifts may be referred to simply as "designated gifts." Designated gifts are often encountered with religious charities where donors wish to support a specific missionary that is employed by a missionary organization. In Interpretation Bulletin IT-110R3, CCRA permits a donor to make a gift subject to a general designation or direction -- i.e., requiring that a gift be used in a particular program operated by the charity -- provided that the decisions regarding the utilization of the donation within the program rests with the board of the charity. As a result, the designation by a donor that a gift is to be used to support missionaries in general would be acceptable to CCRA, but the further designation that the gift must be used to support a particular missionary would not be acceptable to CCRA, or binding on the charity.

A donor could, however, indicate as a non-binding designation accompanying the gift that, where possible, the donation be used to support a particular missionary. Such form of designation would constitute a designated gift or precatory trust because it would not be binding on the charity.

A donor advised fund is a form of designated giving whereby the donor makes a gift to a charity and then periodically makes non-binding recommendations on the distribution of assets from the fund to other charities or for certain charitable activities. Donor advised funds are widely used in the United States where they are referred to as "advise-and-consult funds", "donor-designated funds,""donor-directed funds,""gift funds,""advisory funds,"or simply "accounts"or "funds"within community trust or foundations.⁷¹ The difference between a donor advised fund and a designated gift or precatory trust is that with designated gifts, the donor's intentions, although not binding, are stated only once at the time that the gift is made, whereas with donor advised funds, the donor has input into the distribution of the funds on an ongoing basis.

The primary concern with donor advised funds is that if too much control is retained by the donor, it will no longer be considered a gift at law and cannot be receipted under the Income Tax Act. As a result, charities that utilize donor advised funds must be careful to warn donors that input by the donor is of an advisory nature only. The documentation creating a donor advised fund must clearly state that it is the charity that administers the fund, reserving the right not to follow the donor's suggestions or advice concerning the distribution or application of the funds. A more thorough discussion of the income tax consequences involved with donor advised funds is discussed later in this article at p. 68.

The advantage of donor advised funds is that such funds allow the donor to receive an immediate tax deduction for a charitable gift while deferring the ultimate disbursement of the gift for future charitable projects. It is similar to having an informal private foundation within the parameters of an established and well-organized charity that has the benefit of proper administration and guidance from its board of directors. Given the restrictions that are being encountered with regard to gifts to private foundations as a result of the 1998 amendments to the Income Tax Act,⁷² the option of using donor advised funds may become more attractive for many charities and foundations, particularly for community foundations.

The distinction between a conditional gift and a special purpose charitable trust is not easy to identify, particularly since a conditional gift can also be a special purpose charitable trust. Part of the distinction relates to the ownership of the gift and the other part relates to the wording accompanying the gift.

A conditional gift involves the charity becoming the beneficial owner of the gift, either after the condition has been fulfilled or until a condition subsequent fails or occurs, as the case may be. With a special purpose charitable trust, on the other hand, the charity never becomes the beneficial owner of the gift. Instead, the charity holds title to the gift in trust, subject to certain terms and restrictions. It is possible for a conditional gift to also be a special purpose charitable trust if the gift involves both a condition and a donor requirement that the gift be used for a particular purpose. For example, the donor says "I give one million dollars as a perpetual endowment for cancer research, on the condition that the charity opens a cancer research facility in Calgary by the year 2000."

With a conditional gift, the operative wording involves a transfer of beneficial ownership of the gift, subject to an independent clause of defeasance commencing with words such as "but if,""provided that,"or "on condition that." It is not sufficient, however, to look only at a particular phrase or word to determine if a gift is conditional; it is important to look at the whole wording of the document by which the gift is given.⁷³

A condition which is repugnant to the nature of the gift granted, such as a condition that totally restrains the alienation of the gift by requiring, for instance, that rents of the property never be raised, will be void. Similarly, an illegal condition, such as a condition requiring a breach of the law or a discriminatory action, will also be void.⁷⁴

The general rule that a charitable purpose is exempt from the rule against remoteness of vesting, i.e., the "modern rule against perpetuity,"does not apply to a conditional gift:

A condition attached to a gift will be a condition precedent when the condition must be fulfilled before the gift takes effect.⁷⁶ In this sense, a condition precedent is properly construed as a condition of acquisition. A condition precedent may be express, for example, that a testamentary gift of $100,000 be used for a pediatric ward of a hospital on the condition that the board of the hospital commences construction of the pediatric ward by a specific date. A condition precedent may also be implied, as is often the case with a matching gift, i.e., a gift of $100,000, provided that the charity is able to raise an equal amount of money within a stated period of time.

If the condition precedent is not fulfilled within the specified time period, the gift fails to take effect. A conditional gift will also fail if the condition precedent violates the rule against perpetuity in accordance with the applicable "wait and see"principle in reformed jurisdictions like Ontario.⁷⁷

In the event that a condition precedent fails, the transfer of the beneficial ownership of the gift to the charity will not occur, and ownership of the gift will remain with the donor. Since a gift subject to a condition precedent is not a gift at law until after the condition is fulfilled, it would be improper for a charity to issue a charitable receipt for income tax purposes for the gift before the condition precedent has been fulfilled.

A condition subsequent is a condition which operates to bring to a close or defeat a gift which has already taken effect, i.e., the condition subsequent will divest a gift that is already complete.⁷⁸ In this sense, a condition subsequent is properly construed as a condition of divestiture. Examples of charitable gifts subject to a condition subsequent include a gift to a charity on the condition that it care for impoverished children from a particular church parish and a gift of a building on the condition that it be used to operate a church of a particular denomination.⁷⁹

If the condition subsequent fails and the gift contains a right of reversion back to the donor, the reversion to the donor will be operative only if the failure of the condition occurred within the relevant perpetuity period and if the gift did not contain a gift over to another charity. On the other hand, if there is neither a reversionary right in favour of the donor or a gift over, the failure of the condition subsequent will leave the initial interest of the charity as an absolute interest that is no longer subject to any conditions or other donor restrictions.⁸⁰

If a condition subsequent fails and the gift reverts back to the donor, the donor will have received a double benefit: an initial charitable receipt from the charity at the time the gift was made, coupled with the return of the gift or as much of it as remains. To avoid a double benefit in such a situation, it would be incumbent upon the charity to advise CCRA that the original gift is being returned to the donor in accordance with the failure of a condition subsequent so that CCRA can ensure that the returned gift is reported as taxable income by the donor.

Since a condition subsequent may result in a subsequent tax liability if the original gift is returned, it would be prudent for the charity to recommend that the donor intending to give a gift which is subject to a condition subsequent obtain independent legal advice before making the gift to ensure that the potential tax implications of the gift have been fully evaluated. At the same time, the board of a charity will obviously have to determine whether it is prudent for the charity to accept a gift subject to a condition subsequent, since the gift may eventually have to be returned to the donor. If the charity accepts a gift subject to a condition subsequent, it will have to hold the capital or property as a donor restricted charitable gift in a designated trust account and reflect it as such in its financial statement. This is in recognition of the fact that the gift may eventually have to be paid back to the donor or, if there is a gift over designated by the donor, to another charity.

A technical variation on a gift that is subject to a condition subsequent is a determinable gift. The distinction between a condition subsequent and a determinable gift is a fine point of law. With a condition subsequent, the gift is absolute, but is subject to being defeated if the condition is not fulfilled. With a determinable gift, the gift consists of a limited interest which will eventually come to an end, such as, "I give the income from my commercial building so long as I own the building and the charity uses the property income to run a youth centre." In this regard, a determinable interest "bears a seed of its own destruction and is said to determine automatically, whereas a conditional interest is complete but with an independent clause added which may operate to defeat it.⁸¹

The language used is a helpful indicator -- although not a perfect one -- to identify whether a gift is a determinable gift or a gift subject to a condition subsequent. Certain words like "while,""during,""so long as,"or "until"are generally identified with a determinable interest, whereas terms such as "on condition that,""provided that"and "but if"will normally trigger a condition subsequent. An example of a gift that the courts in England have interpreted to be a determinable gift is a gift to a church so long as the minister teaches a particular doctrine.⁸²

When a determinable gift comes to an end, the capital will normally revert to the donor unless there is a gift over to another charity. As with a gift subject to a condition subsequent which is fulfilled, the charity should advise CCRA of the taxable benefit to the donor where a determinable gift comes to an end and some or all of the original capital is returned to the donor.

As indicated earlier, if the more formal approach to establishing a special purpose charitable trust articulated by Justice Blair in Christian Brothers Gen. Div. prevails over the more traditional approach of Justice Levine in Christian Brothers B.C.S.C. in considering all relevant circumstances in determining the donor's intent, then there may be fewer enforceable special purpose charitable trusts than many charities and donors may have assumed. However, even if this were to occur, charities and their board of directors would be acting at their peril if they decided that they could ignore the wishes of the donor if circumstances warranted it. This is because s.4(d) of the Charities Accounting Act of Ontario provides a mechanism by which the Public Guardian and Trustee of Ontario can seek a court order requiring a charity to comply with the directions of a donor.

The relevant portions of s.4 of the Charities Accounting Act are set out below as follows:

[Emphasis added]

The effect of s.4(d) of the Charities Accounting Act means that the Public Guardian and Trustee of Ontario can seek a court order to enforce a direction imposed by a donor without being required to establish that a special purpose charitable trust had been created. All that is required is that a "direction"by the donor be shown. This is a much lower threshold for either a disgruntled donor or the Public Guardian and Trustee of Ontario to meet but still achieves the same end result as if a special purpose charitable trust had been created by the donor and had been breached by the charity. In either situation, a court would be able to order the charity to comply with the terms of the direction established by the donor.

Ironically, if the violation was categorized by the courts as being a violation of s.4(d) of the Charities Accounting Act, then in addition to the directors of a charity being found in breach of trust, the directors could also be exposed to a court imposed penalty and even face imprisonment in accordance with the provisions of s.4(k) of the said Charities Accounting Act.

Another form of donor restricted charitable gift involves gifts that qualify for an exemption from the eighty percent (80%) disbursement quota imposed upon registered charities under the Income Tax Act. Subsection 149.1(1) of the Income Tax Act requires that a registered charity must expend eighty percent (80%) of its receipted income from the previous taxation year, subject to certain exemptions, one of which are gifts subject to a restriction that the property of the gift or property substituted therefor, cannot be expended for a period of at least ten years. The key elements of what constitutes a ten year gift under the Income Tax Act are that it must be a gift:

The specific wording of ss.149.1(1) is set out below as follows:

A more complete discussion of the income tax consequences involving ten year gifts is included later in this article at p. 68. What is germane at this point is that a ten year gift can be established by means of either a "trust"or a "WP TypographicSymbols">Adirection." This means that the issues involving what constitutes a special purpose charitable trust would have application to ten year gifts that are created by means of a trust. Similarly, the issues involving gifts subject to a direction under the Charities Accounting Act would have application to ten year gifts that are created by a direction as opposed to a trust.

In this regard, if the wording of a gift or the surrounding circumstances are not sufficient to establish the gift as a special purpose charitable trust, but rather only constitutes a direction, even though the expenditure of capital before ten years might not constitute a breach of trust in violation of a special purpose charitable trust, it would not be in violation of the Income Tax Act but, and as indicated above, would allow the Public Guardian and Trustee of Ontario to apply for a court order to force the charity to comply with the terms of the direction to hold the capital for at least ten years.

What should also be noted concerning ten year gifts, is that while there is a minimum number of years that the capital of a ten year gift must be held, there is no limitation on the length of time that the capital can be held. As such, an endowment fund where the capital is to be held in perpetuity not only constitutes a special purpose charitable trust but would also constitute a ten year gift under the Income Tax Act for taxation purposes.

Donor restricted charitable gifts will fail when either a restricted term in a special purpose charitable trust becomes impossible or impractical, a condition precedent or subsequent is unfulfilled or a limited interest in a determinable gift comes to an end. Depending upon the nature of the donor restricted charitable gift, different consequences will result, bringing with them the option of different levels of court involvement in dealing with the failure of the restrictions.

As indicated above, when a gift that is given to a charity is subject to a condition precedent and the condition is unfulfilled, then the gift fails to take effect; but when a gift subject to a condition subsequent is given to a charity and the condition is unfulfilled, the gift will revert to the donor (subject to the possibility that the donor included a gift over to another charity which was to take effect if the condition failed).

Where the donor has clearly stated that the gift is to fail if the condition is unfulfilled, it will not be possible, on the failure of the condition, to use the general scheme-making power of the court, such as a cy-près application as described below. Cy-près applications are only available for unconditional gifts. These would include absolute gifts which were never subject to conditions, as well as those gifts that were subject to a condition of acquisition, i.e., a condition precedent, which has been fulfilled.⁸³

The general inability of the court to intervene and extend the donor's initial charitable intent is a major drawback in having donors utilize conditional gifts. It is therefore important for a charity that accepts or encourages conditional gifts to ensure that the donor is aware of the general inability of the court to grant relief if a failure of the condition occurs as well as the importance of including a gift over to another charity in that eventuality.

Other than a failure of a donor restriction involving a condition precedent or a condition subsequent (which does not occur often), the general rule is that where a gift to a charity would otherwise fail due to vagueness, impossibility, impracticality or general uncertainty, the court is able to exercise an inherent jurisdiction to interpret the gift in a liberal and lenient manner. In Weir v. Crum-Brown,⁸⁴ the court held that "there is no better rule than that a benignant construction will be placed upon charitable bequests".

In its Report on the Law of Charities,⁸⁵ the Ontario Law Reform Commission explained that the courts have exercised a liberal interpretation in a variety of cases, including where the donor has stated his or her intention ambiguously by incorrectly naming or misdescribing a recipient charity⁸⁶ or overlooking the fact that a named recipient charity had been amalgamated with another charity between the time that the will was drafted and the time of the donor's death.⁸⁷ In these cases, the courts have taken a generous view of the donor's words to "look for the true intention and, where possible, salvage the gift."⁸⁸

A special purpose charitable trust will fail where the donor's restriction is either impossible or impractical to comply with or where the means of carrying out the special purpose charitable trust can no longer be realistically accomplished. In those situations, the charity must seek the assistance of the court in exercising its general scheme-making power through either a cy-près court application or the imposition of an administrative scheme, both of which are discussed in more detail below.

Notwithstanding well-established law to the contrary, the boards of many charities believe that a charity somehow has an inherent right to unilaterally vary the terms of a donor restriction or to liberally interpret what the applicable restriction means. Alternatively, many charities that receive a testamentary gift that is subject to restrictions believe that the executor of the estate also has an inherent ability to unilaterally vary or liberally interpret the donor's restrictions. Neither of these assumptions, though, are correct. Only the courts can vary the terms of a restricted special purpose charitable trust based upon the court's inherent scheme-making power:

This means that to vary a donor restricted charitable gift, an application must be made for a cy-près order, as discussed in more detail in the next section of this article. Any attempt to unilaterally vary a donor restricted charitable gift based upon the consent of only the donor, with the charity acting on its own, without first obtaining the necessary court approval, would likely constitute a breach of trust and must therefore be carefully avoided notwithstanding the time and expense of making the necessary court application.

There are two situations, however, in which court approval to vary a donor restricted charitable gift may not be necessary. The first situation is where a cy-près court application is not successful and the gift reverts back to the donor in circumstances where there is no gift over to another charity. The second situation results in the same effect, but is due to the failure of either a condition precedent or a condition subsequent where there is a reversion back to the donor. In both situations, the donor would be able to unilaterally re-issue the gift to the intended charity once the donor had received the gift back and at that point establish either new restrictions or re-issue the gift without any restrictions being imposed.

Cy-près is a shortened form of the phrase "cy-près comme possible," which in Norman French means "as near as possible."⁹⁰

The cy-près doctrine is generally stated as follows:⁹¹

Whether the court will be able to exercise a cy-près scheme will depend upon whether the failure is an initial failure or a subsequent failure. With an initial failure, the court will be able to intervene and apply the charitable property cy-près only if it can find a general charitable intention of the donor. This becomes particularly problematic in relation to public fund-raising campaigns. If a surplus results from a public fund-raising campaign for a particular charitable purpose and the charity is unable to use the monies for its publicly stated purpose, the court will be able to apply the remaining surplus to another charitable purpose only if it can find that the donors, many of whom may be anonymous, had a general charitable intention and did not limit their gifts to the specific project for which the fund-raising campaign was directed. The primary problem involved with public surpluses resulting from public fund-raising campaigns is therefore determining whether or not a general charitable intent can be found.⁹²

To avoid the complexities and costs of making a cy-près court application and the possibility that the court may not find a general charitable intention in relation to a surplus for a public fund-raising campaign, a charity should clearly state that any surpluses resulting from a public fund-raising campaign for a particular project will be used to further the general charitable purposes of the charity in question.

In the event of a subsequent failure of a special purpose charitable trust, the court will apply the cy-près doctrine where it can be shown that there is a supervening impracticality or impossibility, without finding a general charitable intent. This is, of course, subject to the requirement that the gift not contain a provision for a gift over by the donor.⁹³

Some examples of both initial and subsequent failures which can result in the application of the cy-près doctrine involving special purpose charitable trusts are set out below:

• insufficiency of subject matter, i.e., where the amount of the gift is too small to accomplish the intended purpose;⁹⁴
• where there is no suitable site available to carry out a designated building program;
• the gift is made to a non-existent charity;
• the gift is made to a mis-described charity;
• the gift is made to a charity which has ceased to operate;
• the gift is made to a charity which has amalgamated with another charity, unless the letters patent of the amalgamated charity specify how the funds from the predecessor charity are to be applied;
• the gift is made to a charity which has changed its charitable objects between the time that the will was made and the date of death;
• the trust property is unsuitable for the designated charitable purpose;
• the gift is surplus to the needs of the charitable purpose designated;
• the gift is refused by the charity;
• the charity is dissolved; or
• there is a surplus of capital or income remaining after the charitable purpose has been carried out.⁹⁵

There are a number of situations in which a court cy-près scheme will not be available to assist a charity upon a failure of a donor restricted charitable gift:

• Conditional gifts: A cy-près scheme will not be available if the gift fails because a condition precedent or a condition subsequent has not been fulfilled.
• Lack of an impracticality or impossibility: A cy-près scheme will not be available unless the court is satisfied that the restrictions in question are either impractical or impossible to be carried out.
• Legislative intervention: The ability of the court to apply a cy-près scheme is subject to the overriding right of the legislature to impose by legislation whatever terms and conditions it considers appropriate in relation to a particular charitable purpose.⁹⁶
• Capital endowments: A capital endowment involving a capital amount that is held in trust by the charity with only the income being available for a particular purpose, such as a scholarship fund, cannot be made the subject-matter of a cy-près application. The primary reason is that the charity is holding the property in trust and has only a beneficial interest in the income from the endowment fund.⁹⁷ Even if the charity were considered to have title to the capital (which it does not), the present scope of what the courts regard as an impossibility or impracticality does not encompass a situation where the charity is seeking to apply the capital towards a different or more effective application.⁹⁸

The other reason why a cy-près scheme is not available for a capital endowment fund is that the donor has clearly indicated an intention that the capital not be disbursed but instead be held in perpetuity. As such, the indefinite duration of a capital endowment fund "takes precedent over the cause of advancing a charity effectively."⁹⁹

Closely related to a cy-près power, the court may also exercise a scheme-making power where adherence to the administrative terms of a trust would disrupt the specific purpose of the charitable trust.

The normal situation where the court will permit deviation from administrative terms is where a change in circumstances makes adherence to the original administrative terms impossible or impractical. A recent application of the administrative scheme-making power of the court involved the Barnes Foundation in Pennsylvania where the donor, Dr. Albert Barnes, included in the declaration of trust creating the foundation provisions which severely limited the investment policy of the foundation's endowment funds and strictly forbade charging entrance fees to his impressionist painting collection, the construction of new buildings for the collection and the sale or loan of any of the paintings under any circumstances short of physical deterioration. Due to the inability of the trustees to administer effectively and protect the paintings, the court allowed a variation of the administrative terms of trust to permit the collection of entrance fees and the loaning of pictures to other museums, so that sufficient money could be earned to properly care for and maintain the collection.¹⁰⁰

It is interesting to contrast the negative reaction in the United States over a relatively minor variation in the administrative terms of trust involving the Barnes Foundation with the Canadian public's general lack of concern in the wholesale imposition of different charitable purposes involving the McMichael Collection in Ontario.¹⁰¹ Canadians as a whole appear to be much more comfortable with the authority of both the legislature and the courts to interfere in special purpose charitable trusts. However, it is interesting to note that although the Government of Ontario was successful in dismissing the legal action commenced by the McMichaels alleging breach of contract, the Government of Ontario on its own has recently decided to reinstate the original terms of the gift from the McMichaels pursuant to an Act entitled the McMichael Canadian Art Collection Act 2000.¹⁰²

The duties of directors or trustees of a charity are generally similar to those of ordinary trustees. The difference flows from the fact that in the case of an ordinary trust, there are beneficiaries to enforce those duties, while in the case of a charitable trust, there is a charitable purpose to be complied with instead of beneficiaries to be accountable to. What follows is a brief explanation of some of the duties of directors and trustees of a charity as they relate to the protection and management of special purpose charitable trust funds and property.

The main duty of directors or trustees of a charity is to carry out the charitable purpose of a charity in accordance with the charitable objects set out in the constating documents in relation to unrestricted charitable property and in accordance with the applicable restrictions to special purpose charitable trust funds.¹⁰³

Examples of situations where the courts have found that a breach of trust by directors or trustees has occurred for failure to observe the terms of special purpose charitable trust are summarized below as follows:¹⁰⁴

The directors or trustees of a charity have a duty to ensure that donor restricted charitable gifts which need not be immediately expended are properly invested. In the event that the terms of a donor restricted gift are silent about investment powers, the investment powers contained in the constating documents for the charity or, alternatively, those contained the Trustee Act¹⁰⁵ will apply.

Alternatively, if the document by which the donor restricted charitable gift is created sets out a specific investment power, it is the duty of the directors or trustees of the charity to ensure that the donor restricted charitable gift is invested in accordance with that power, as opposed to relying on the general investment powers of the charity set out in its constating documents. Failure to do so would constitute a breach of trust and would expose the directors to personal liability for any loss suffered from the investment in question.¹⁰⁶

Directors or trustees of a charity are under the usual duty to protect and conserve the trust property under their administration. Since this includes a duty to ensure that charitable trust property is not improperly alienated,¹⁰⁷ it is incumbent upon directors or trustees to determine what legal steps must be taken when a special purpose charitable trust is being transferred to another charity. In some situations, this may require a consent order under s.13 of the Charities Accounting Act,¹⁰⁸ to authorize a change in trustees in accordance with the authority given to the court under s.14 of the Trustee Act, as well as a deed of trust to document a change of trustees under s.3 of the Trustee Act.

Part of the duty of directors or trustees of a charity to protect special purpose charitable trust funds is to protect those funds from seizure by creditors of the charity. As a result of the decision by Justice Feldman in Christian Brothers Ont. C.A. that the property of special purpose charitable trusts are exigible to claims by tort creditors in the same manner as the general corporate property of a charity, it is incumbent upon directors or trustees of a charity, and their legal counsel to become pro-active in determining what steps, if any, can be taken to insulate and protect special purpose charitable trusts from seizure by tort creditors of the charity. A more detailed discussion of this issue is included later in this article at p. 91.

If the directors or trustees of a charity determine that the charitable purposes or restrictions of a special purpose charitable trust cannot be effectively accomplished without departing from the terms of trust, they are under a duty to secure its effective use by seeking a court order to impose either a cy-près or administrative scheme to accomplish the charitable purposes or effectively comply with the applicable restrictions.¹⁰⁹

All directors or trustees of a charity are under an obligation to keep proper books of accounts with respect to the affairs of the charity, including donor restricted charitable trust funds.¹¹⁰ In relation to special purpose charitable trust funds, the board of a charity is obligated to track those funds by segregated trust fund accounting and to report those funds separately on the financial statements of the charity. Pending the adoption of regulations made pursuant to s.5.1 of the Charities Accounting Act,¹¹¹ each special purpose trust fund is technically to be kept in a separate trust account, i.e., a separate bank account, instead of being pooled together with other trust funds, although very few charities actually comply with this common law requirement.

In situations where there is a failure to comply with a donor restriction, an issue that should be raised but often is not, is what are the legal consequences that may flow from a charity failing to comply with donor restrictions, whether the restriction be in the form of a special purpose charitable trust, a conditional gift, or a gift subject to a direction. The following is provided as an overview of the issues on this topic.

Where a donor restriction is in the form of a special purpose charitable trust and the charity fails to comply with its terms, then all of the directors or trustees of the charity would be in breach of trust and would be jointly and severally liable for the full amount of any loss suffered by the charity as a result of the failure to comply with the terms of trust.¹¹² What the directors or trustees of a charity often do not understand is that joint and several liability means that each member of the board of directors or trustees will be personally responsible and liable for the full amount of the loss, although the trustees or board members who are required to pay for the loss personally could look for indemnification from the other board members or trustees.

In the event that the failure to comply with the donor restriction involves applying the gift for a purpose that is outside of the authorized corporate objects of a charitable corporation, then the board members of the charity could be held personally liable on a joint and several basis for any resulting loss by virtue of having directly or indirectly approved an unauthorized activity of the charity outside of its corporate powers.¹¹³

In the event that the failure to comply with a donor restriction involves a breach of a special purpose charitable trust, then the charity and its directors would be responsible not only to repay the principle amount of the misdirected fund, but also to pay the interest that would have accrued on the amount of the principle from the date of breach of trust up to the present.

One of the legal consequences that could result from a breach of trust involving a special purpose charitable trust is the possibility of civil action by donors for the return of donated property. There could also be civil action by third party residual beneficiaries of a testamentary restricted gift based upon a claim that the testamentary charitable purpose trust was no longer being complied with or, alternatively, was impossible or impractical to comply with. If the court was not able to exercise its cy-près scheme making power to vary the terms of the testamentary charitable purpose trust, then the gift would revert back to the estate, entitling the residual beneficiaries to the capital of the restricted gift together with accrued interest from the date of death.

The Charities Accounting Act of Ontario contains a number of statutory remedies in the event that a charity fails to comply with a donor restricted gift. These consequences are discussed in more detail later at pp. 48 and 83 of this article, but have been summarized for ease of reference below as follows:

• Section 3 allows the Public Guardian and Trustee of Ontario to require a charity to submit its accounts for formal passing before a judge.
• Section 4(d) permits the Public Guardian and Trustee to obtain a court order to enforce directions established by a donor in making a charitable gift.
• Section 6(1) permits any member of the public to make a complaint in writing to a judge of the Ontario Court (General Division), which in turn could result in a court order that the Public Guardian and Trustee conduct a public inquiry under the Public Inquiries Act.¹¹⁴
• Section 10 permits two or more people alleging a breach of trust involving a charitable purpose trust to such an order as the court "deems in the circumstances to be just,"including requiring an investigation by the Public Guardian and Trustee.

In the event that there were repeated failures to comply with donor directions, particularly as they relate to ten year gifts under ss.149.1(1) of the Income Tax Act, it is possible that the charitable status of the charity as a registered charity under the Income Tax Act could be put in jeopardy.

Although rarely a concern, in the event that the directors of a charity failed to comply with donor restrictions and did so with an intent to defraud, then the directors would be exposed to a charge under s.336 of the Criminal Code.¹¹⁵ The applicable wording of s.336 of the Criminal Code is as follows:

The two key elements of the offence for criminal breach of trust are the following:

• There must be a "conversion"of charitable property by a trustee in contravention of the trust for a use that is not authorized by that trust; and
• the misapplication of charitable property must be done with an "intent to defraud..

In the event that a failure to comply with a donor restriction is found, it would be prudent for the charity and its board of directors to adopt one or more of the following steps:

• Legal counsel for the charity should be retained to provide a legal opinion concerning whether the restriction constitutes a special purpose charitable trust. If not, then it is unlikely that there would be a breach of trust. However, there may still be liability exposure as a result of the charity failing to comply with the "direction"by a donor contrary to s.4(d) of the Charities Accounting Act.
• If the gift involves a special purpose charitable trust and a breach of trust of its terms has occurred, then all board members of the charity should be informed, in recognition that all directors would be jointly and severally liable for any loss that may result.
• If donor restricted charitable funds have been misdirected, misapplied or depleted, those funds must be replaced as soon as possible, together with accrued interest.
• If a loss has occurred that cannot be replenished, consideration should be given to obtaining a consent order under s.13 of the Charities Accounting Act pursuant to the court's authority to provide relief against a technical breach of trust under s.35 of the Trustee Act. (Note that the Government of Ontario has excluded the availability of the relieving provision of s.35 for a technical breach of trust involving investments as a result of the recent amendments to the Trustee Act in Bill 25.)¹¹⁶
• When donor restricted charitable funds can no longer be used for their intended purpose, either because they are impractical or impossible, the board should seek to have the fund applied cy-près by obtaining a consent order, if possible, under s.13 of the Charities Accounting Act.¹¹⁷
• If the donor restricted funds have been depleted and board members face the possibility of joint and several liability to replenish the depleted funds, notification should be given to all former members who were on the board at the time of the initial misapplication of the donor restricted funds, or who were on the board at any subsequent time during which the funds continued to be misapplied.
• Where board members are facing potential personal liability, legal counsel for the charity should advise each member of the board to obtain independent legal advice, since the solicitor for the charity would be in a conflict of interest in advising board members concerning their personal exposure to liability and what steps they may need to take.

Although it is beyond the scope of this article to provide a detailed or thorough discussion of the tax considerations involving donor restricted charitable gifts, it is important to note some of the more important income tax considerations affecting donor restricted charitable gifts. What follows is intended to be a brief overview of selected tax consideration in this regard.

As indicated earlier at p. 50 of this article, the purpose of a ten year gift is to provide an exemption from the 80% disbursement quota under the Income Tax Act for gifts to a registered charity that are held for a period of at least ten years. To determine what constitutes a ten year gift and what is required to properly document it, it is necessary to carefully review the definition of a ten year gift under the Income Tax Act. For ease of reference, the relevant provisions of ss.149.1(1) of the Income Tax Act is set out below:

The reference to ss.110.1(2) and 118.1(2) above means that the ability to utilize a ten year gift only applies to gifts where a receipt issued by the charity to either an individual or a corporation. The ten year gift exception would not exempt a gift made from one charity to another charity. Such exemption, however, would be available by designating the gift as a "specified gift"under ss.149.1(1) of the Income Tax Act.

The key elements of a ten year gift under the Income Tax Act require that there must be a gift that is;

The fact that a ten year gift can include a donor directed gift as well as a donor restricted charitable trust means that many restricted gifts that do not meet the requirements to create a special purpose charitable trust may still constitute ten year gifts where the requirements to document a ten year gift under the Income Tax Act have been met.

The documentation required to evidence a ten year gift must include the following:

• the document must be executed by the donor for each gift that is made;
• the document must clearly identify the donee charity, including its official name and registration number;
• the document must indicate the amount of the gift;
• the document must set out the date the gift is made;
• the document must set out the name and address of the donor; and
• the document must set out the serial number of the official receipt issued to the donor for the gift.¹¹⁸

The document should then be attached to the charity's duplicate copy of the receipt and retained with its other books and records.

The requirement that the ten year gift must be by a trust or direction that is "executed by the donor"poses a practical problem where there is a public fund-raising event, such as a dinner or auction where the net proceeds from the event are added to the endowment fund or other type of ten year gift. It is not realistic to expect that each person attending the dinner would be prepared to sign a direction or declaration of trust. However, possibly the promotion materials for the event could set out the terms required to establish a ten year gift under the Income Tax Act along with a reply card to buy tickets that includes a statement that the completion and signing of the reply card is deemed to be the execution of a ten year gift document. Since this is the author's suggestion only, it would be prudent to first obtain the approval of CCRA before adopting this practice.

A primary factor to remember when dealing with the expenditure of income from ten year gifts is that the 4.5% disbursement quota imposed on private and public foundations each year also applies to a ten year gift. In this regard, unless the foundation has other monies that it can expend to meet the 4.5% disbursement quota calculated on ten year gifts that it holds, it is essential that the document creating the ten year gift permit the expenditure of income earned on the ten year gift during the ten years and that the income earned each year is at least 4.5% of the original amount of the gift and any resulting capital gains.

In a situation where there was insufficient income earned to meet the 4.5% quota, the definition of a ten year gift under ss.149.1(1) would not permit a partial disbursement of any of the capital to meet the 4.5% disbursement quota. The capital must remain intact, even if the 4.5% disbursement quota cannot be met. In a situation where insufficient income is earned on a ten year gift, a foundation would be put in the impossible situation of either being unable to meet the 4.5% disbursement quota, or if it did try to meet it by disbursing a portion of the original gift or any resulting capital gains, then such disbursement would prove to be futile, since the amount of the gift or any resulting capital gain expended would be added onto the disbursement quota for the charity for that year. This result is further discussed below at p. 72.

As a result, before a foundation accepts a ten year gift, it is essential for the board of directors of the foundation be satisfied that a 4.5% income return on the ten year gift is achievable. If this is not the case, or if the board of the foundation is expecting to be able to expend a portion of the capital of the ten year gift to meet the 4.5% disbursement quota, then it should not agree to accept a ten year gift notwithstanding that the terms of the ten year gift may contemplate that a portion of the gift or resulting capital gain can be expended to meet the 4.5% disbursement quota.

This raises the question whether the document creating the ten year gift can authorize the expenditure of any resulting capital gain from the gift by defining "income"earned on the ten year gift that can be expended to include resulting capital gains. In this regard, Carl Juneau, Director of Policy and Communications for the Charities' Directorate of CCRA, has stated that capital gains earned from a gift will be considered to be a portion of the "property given, or property substituted therefor"under ss.149.1(1) of the Income Tax Act and that therefore, no capital gain earned on the ten year gift can be disbursed during these ten years. This position was set out in a letter from Carl Juneau addressed to the author dated September 21, 2000, an excerpt of which is set out below:

As a result, it is important for charities that currently have ten year gift documentation which permit the disbursement of resulting capital gains, not to exercise that option. Otherwise, the charity would be in violation of the definition of a ten year gift under ss.149.1(1) of the Income Tax Act.

In the event that the capital of a ten year gift, i.e., "property given, or property substituted therefor"under ss.149.1(1) of the Income Tax Act, including any resulting capital gains (referred to as "Capital"), is expended within the mandatory ten year minimum period, there are certain consequences that would result:

• Since the trust or donor direction creating the ten year gift would require that the Capital be held for at least ten years, then the expenditure of any portion of the Capital would constitute a breach of trust where the ten year gift was created by a trust, or would be a violation of a direction if the gift was created by a donor direction. With regards to the latter, s.4(d) of the Charities Accounting Act would allow the Public Guardian and Trustee of Ontario to seek a court order to force the charity and its directors to comply with the donor's direction.

• The portion of the Capital expended prior to ten years would be added to the disbursement quota of the charity for the year in which the Capital was expended in accordance with the definition of the "disbursement quota"under ss.149.1(1) of the Income Tax Act. This, in effect, would mean that the amount of the Capital expended would be added to, and disbursed as part of the disbursement quota in the same year, resulting in a neutral impact upon the disbursement quota of the charity for that year.

• The more difficult question is whether the full amount of the ten year gift collapses where only a portion of the Capital is expended in any one year. This would not appear to be the case in accordance with the wording of ss.149.1(1), in that the amount that is added to the disbursement quota is based upon the actual amount that is expended in a particular year. As such, if only ten percent of a ten year gift were disbursed in a year prior to the expiry of the ten years, it would appear that only the ten percent actually expended would be added to the disbursement quota, as opposed to including the full amount of the original ten year gift.

• Based upon the above, some charities have considered gradually disbursing a ten year gift over a number of years assuming that in doing so there would be no negative impact upon meeting its disbursement quota each year. However, a gradual disbursement of a ten year gift might be seen by CCRA as an intentional misuse of the ten year gift. This in turn might result in either deregistration of the charity or, alternatively, disallowance of the ten year gift in the original year in which it was claimed for the full amount of the gift that had been exempted. This is an issue that needs to be canvassed further with CCRA.

The ten year gift exemption requires only that the trust or direction creating the ten year gift specify that the capital is to be held for a period of "not less than ten years." This means that a gift which is subject to a trust or direction that it be held for a longer period of time, including a trust or direction that the capital be held in perpetuity as an endowment, would also qualify as a ten year gift.

It would therefore be open for a donor to create a ten year gift to specify the donor's directions concerning the expenditure of the gift after the minimum ten year period. Silence by the donor or his or her legal counsel to articulate the donor's directions in this regard would mean that the charity would be at liberty to use the ten year gift or income in any manner that the charity wanted to, in accordance with its charitable objects once the ten years had expired, even if that were not the intention of the donor.

On the other hand, just because a gift is categorized as a ten year gift in the charity's T3010 Annual Charity Information Return does not necessarily mean that the Capital of the ten year gift can be expended after ten years. That issue is determined by the wording of the document creating the ten year gift. As such, it is important for a charity and its board of directors to ensure that the wording creating a ten year gift is carefully reviewed to determine if there are any restrictions that continue after the expiry of the ten year minimum period, such as a restriction that the capital be held as an endowment fund in perpetuity.

Although many charities customarily co-mingle their various restricted funds in one single account for investment purposes, and even though such practice may be permitted under pending regulations expected under the Charities Accounting Act, it would be prudent for a charity to maintain each ten year gift in a separate account. Although administratively awkward, this approach would avoid potential problems with ten year gifts, including the following:

• Since the Capital (as defined earlier) of a ten year gift cannot be expended for a minimum of ten years, and since CCRA takes the position that any capital gains accruing on the original gift or "property substituted therefor"are part of the original property that must be held for ten years, it is essential that the charity be able to clearly identify what the original property of the ten year gift was, what property was substituted for it and what capital gains have accrued on the said property. This can be best facilitated by tracking each ten year gift in a separate account.
• Maintaining a separate account for each ten year gift would help to ensure that the expenditure of Capital during the mandatory minimum ten year period did not occur in an attempt to meet the 4.5% disbursement quota required for foundations.
• Since each ten year gift may be subject to different terms and conditions imposed by the donor, i.e., the length of time that the gift is to be held or what investment powers are to apply, the utilization of separate accounts for each ten year gift would help track when the Capital can be expended in accordance with the specific terms of the trust or donor direction and what type of investments the said Capital can be put into without breaching the investment powers provided for in the document creating the ten year gift that may be different from the investment powers of the charity itself.

As indicated earlier in this article at p. 45, the transfer of title of a gift subject to a condition precedent does not occur until after the condition precedent is met. As such, the charity cannot issue a tax receipt until after the condition precedent is fulfilled and the transfer of the gift is complete.

What is more problematic is when a gift is subject to a condition subsequent. If a charity has issued a tax receipt for a gift subject to a condition subsequent and there is a subsequent reversion of the gift back to the donor, it would be important for the charity to advise CCRA so that it can ensure that the donor reported as income the amount of the receipted gift in the year in which the reversion of the gift to the donor occurred.

CCRA may go further and take the position that a gift subject to a condition subsequent which includes a reversion of the gift back to the donor does not entitle the charity to issue a tax receipt in the first place because there was never an absolute transfer of title of the gift to the charity. As such, where a charity is presented with a gift subject to a condition subsequent, it would be important to obtain an opinion from CCRA to determine whether or not a charitable receipt can be issued for the gift in the circumstances. It may be that if the wording of the condition subsequent results in the gift becoming vested in another charity, CCRA may view it as a valid gift at law since no portion of the gift could revert back to the donor. However, because of the uncertainty on this issue, it would be prudent to first obtain an opinion from CCRA before the charity issues a tax receipt to the donor involving any type of gift involving a condition subsequent.

The focus of this article has been to identify, categorize and comment upon the various means by which donors can exercise control over charitable gifts. Implicit in this discussion is that the gift being given is a gift at law for which a charitable tax receipt can be issued to the donor.

However, there is an important caveat to this presumption. If there is too much control exercised by a donor over a gift, then such excessive control may preclude there being a gift at law. This issue is very much a grey area under the Income Tax Act since there is nothing specifically included in the legislation, or any publications by CCRA about when too much donor control will defeat a gift. Although CCRA is studying this issue and may publish a policy statement on the matter in the future, it is not known when the policy statement will be available or what position CCRA will take on the issue.

However, in an extreme situation of a donor reserving absolute control over the management, investment and disbursement of a gift, it would not be difficult to conclude that a gift had never been made in the first place, and therefore no charitable receipt could be issued. As the amount of control exercised by the donor diminishes, the likelihood of the gift being defeated because of excessive control by the donor also diminishes. To determine where the dividing line is on this issue, it is necessary to review what constitutes a gift at law. In this regard, Waters summarizes the common law concerning when a gift will have been made as follows:

The requirement that the donor must "absolutely part with his own interest"would generally mean that the donor's reservation of a right to control the management, investment or disbursement of a gift may constitute the donor maintaining a type of "interest"in the property that has been given. Whether or not donor advised funds, as discussed early in this article at p. 41, particularly those that are administered by community foundations, may directly or indirectly involve excessive control by the donor very much depends upon the circumstances. As such, it would be prudent for a charity that encourages the gifting of donor restricted gifts, including donor advised funds, to carefully review the documentation by which the gift is given, as well as the circumstances under which the gift is obtained from the donor, to determine whether or not the amount of control being exercised by the donor is such that it constitutes the reservation by the donor of a material interest in the gift that would preclude there being a gift at law.

Some examples of instances where the amount of control being retained by a donor may be excessive and may necessitate an opinion from CCRA before a charitable receipt is issued would include the following:

• A donor advised fund where the promotional materials for the fund or other written or verbal statements about the fund give the impression that the donor's direction concerning the disbursement of the fund will be followed by the charity.
• A donor retaining the right to direct how the gift is to be invested.
• A donor requiring that the gift must be invested in only one type of investment, thereby precluding the board of directors of a charity from being able to exercise its fiduciary obligations to prudently invest the gift as a charitable fund.
• A donor reserving the right to approve recipients of a scholarship or those individuals who can qualify for a scholarship.
• The donor reserving the right to appoint or nominate persons to the board of directors of the charity, or requiring that the approval of the donor first be obtained before a person can be nominated to the board.
• The donor reserving the right to approve or remove a CEO or other senior management of the charity, or imposing a condition that the CEO or other senior management must be either retained or removed.

Since there is little guidance available from CCRA on this issue, it is helpful to refer to the United States to see how the issue has been dealt with in that jurisdiction. In this regard, the courts in the United States have determined that a charitable gift is not made unless and until:

The matter of excess donor control is an issue under the U.S. Internal Revenue Code in determining whether a donor advised fund established by a donor will be treated as a component of a community trust with entitlement to more favourable tax treatment for the donor, or will be treated as a private trust with less favourable tax treatment. For a donor advised fund to be considered a component part of a community trust under the U.S. Internal Revenue Code, the fund:

The prohibition against "material restrictions"referred to above was imposed to prevent a donor from so encumbering or restricting a donor advised fund that the community foundation would not be able to freely distribute the donated assets and income from it in furtherance of its charitable purpose.¹²⁴

In accordance with the applicable Regulations under the Internal Revenue Code, the determination of whether particular restrictions or conditions placed by a donor on a gift are "material"must be determined from a review of all of the facts and circumstances involving the gift. Under Reg. 1.507-2(a)(8)(i), some of the more significant facts and circumstances that would need to be considered in making such a determination are:

• whether the community foundation is the owner in fee of the assets received;
• whether the assets are to be held and administered by the community foundation in a manner consistent with its exempt purposes;
• whether the governing body of the foundation has the ultimate authority and control over the assets and the income derived from them; and
• whether, and to what extent, the governing body of the foundation is organized and operated in a manner so as to be independent from the donor.¹²⁵

In addition to these criteria, the Regulations provide that a "material restriction"may exist even if the documentation creating the gift does not explicitly state that the donor has reserved the right to direct future distribution of income or capital. Reg. 1.507-2(a)(8)(iv)(A)(2) states that the Internal Revenue Service will carefully scrutinize situations where there is an indirect reservation of a right to direct a distribution by a recipient foundation after a gift has been made. The reservation of such a right will be considered to exist where the only criteria considered by the foundation in making the distribution of income or capital from a donor's fund is advice offered by the donor. This is determined by looking at the applicable circumstances, including the presence of some or all of the following factors:

• the community foundation's solicitations (written or oral) state or imply that the donor's advice will be followed, or the donor's pattern of conduct creates such an expectation;
• the advice of a donor is limited to distributions of amounts from his or her fund, and the community foundation has not 1) made an independent investigation to evaluate whether the donor's advice is consistent with charitable needs most deserving of support by the foundation or 2) promolgated guidelines enumerating specific charitable needs that it will serve (or, if such guidelines exist, they are inconsistent with the donor's advice);
• the community foundation solicits only the donor's advice as to distributions from the donor's fund and no procedure is provided for considering advice from other persons; or
• the community foundation follows the advice of all donors concerning their funds substantially all of the time.¹²⁶

If the above U.S. Regulations were in effect in Canada, many donor advised funds in this jurisdiction would have difficulty meeting these requirements. Although the Regulations do not have application in Canada, it would be prudent for charities that encourage the gifting of donor advised funds to review the U.S. Regulations concerning what constitutes an acceptable level of donor control in structuring a donor advised fund program that could withstand the scrutiny of CCRA if they were to be subsequently scrutinized.

As the issue of excessive donor control will likely become a matter of greater regulation by CCRA, it would be worthwhile for charities to take preventative steps now to ensure that donor restricted gifts do not result in donors retaining too much control over the gifts they have given. Some considerations in this regard would include the following:

• Although restrictions concerning use restrictions, time restrictions or program restrictions will not likely be challenged by CCRA, gifts which allow the donor to dictate how a gift is to be managed or invested after it has been received by a charity could be perceived as a donor retaining an inappropriate level of "control and dominion"over the gift.
• Where there are restrictions over the ongoing administration, investment or distribution of a fund, it is essential that the restrictions do not, either directly or indirectly, prevent the charity and its board of directors from freely employing the gift or the income derived therefrom in furtherance of the charitable purposes of the charity.
• In circumstances where the extent of donor control might be questionable by CCRA in the future, it would be prudent that the donor be encouraged to retain independent legal counsel to advise on the possibility of a reassessment by CCRA on the issue of whether the donation was a gift at law for which a charitable receipt could be issued.

Fundamental to an understanding of the tax consequences involving donor restricted charitable gifts is a recognition of what a "gift"is at law. In this regard, it is worth repeating the definition of a "gift"from Black's Law Dictionary referred to earlier in this article:

Paragraph 3(d) of Interpretation Bulletin 110R3 setting out the requirements for a gift, emphasize that there can be no benefit received by the donor in making a gift.

In practice, the most common type of donor benefit occurs where the donor's name is recognized in some way by the charity. This normally involves the donor's name being shown in conjunction with some aspect of the charity's operation, such as naming a scholarship fund, a memorial fund, or naming a part of a building. Such type of benefit back to the donor will not normally be considered to be of a material nature that would otherwise preclude a gift from being a gift at law for which a charitable receipt could not be issued.

On the other hand, if the name recognition either directly or indirectly provides a commercial benefit to the donor, i.e., by naming the building of a charity after the name of a business donor or prominently displaying the name of the business with that of the charity in advertising,¹²⁸ then such payment will likely be perceived as a type of "sponsorship"arrangement for which a charitable receipt cannot be issued. However, a business donor would be able to write the payment off as a business expense in lieu of being able to claim a tax credit for a charitable receipt that normally would be received from the charity, and as such the benefit to the donor business would be the same. G.S.T., though, would need to be charged by the charity on the amount of the sponsorship payment.

There are other types of gifts involving benefits back to the donor that should be carefully scrutinized by charities in reviewing their fundraising programs. What is evident though, from even a brief review of donor restrictions involving name recognition is that there are limitations on the extent of benefits that a donor can receive from a gift; otherwise no gift will have been made and the charity will be unable to issue a charitable receipt.¹²⁹

Since a charitable purpose does not have beneficiaries who can initiate legal action to enforce donor restrictions and since many donor restricted gifts continue in perpetuity, it is essential in establishing confidence in the process of charitable giving to know that there is either some authority that is responsible to enforce donor restrictions or there is a mechanism that interested individuals can initiate on their own to enforce the terms of the restriction.

As there are no identifiable beneficiaries that can enforce a charitable purpose, the courts have recognized over the centuries that the Crown has an inherent parens patriae responsibility over charitable activities to represent and protect the interest of charities.¹³⁰ This responsibility is exercised in Ontario by the Attorney General of Ontario through the Office of the Public Guardian and Trustee. This common law jurisdiction of the Crown has been supplemented by statute through the Charities Accounting Act, which provides the Public Guardian and Trustees Office with the ability to seek an order under s.4 of that Act if he or she is of the opinion that there has been a misapplication or misappropriation of any charitable funds, an improper or unauthorized investment of any monies, or failure to apply charitable property as directed by the donor. In addition, s.3 of the Charities Accounting Act allows the Public Guardian and Trustee to require a judicial passing of the accounts of a charity.

Generally speaking, once a donor has given a gift to a charity, the donor no longer has any interest in that property unless the gift is a conditional gift with a right of reversion to the donor or, on a cy-près application, the court is not prepared to apply the funds cy-près and the gift is returned to the donor. With the exception of these rare instances where a charitable gift reverts to the donor, the donor loses all control over the gift once it is given to a charity.

The ability of donors to enforce restrictions has been debated at some length in the United States, particularly when there has been a variation from the original intent of benefactors of large foundations, such as has occurred with the Barnes Foundation, the Carnegy Foundation, and the Ford Foundation.¹³¹

In a decision of the Connecticut Supreme Court,¹³² it was held that donors may not bring legal action against charities compelling them to honour conditions or limitations placed on charitable gifts. The decision was a result of recent legislation in the State of Connecticut that gives sole responsibility to the State Attorney General for ensuring that charities honor the terms or conditions involving gifts. Under legislation in that state and in other states, in accordance with the Uniform Management of Institutional Funds Act, if a charitable purpose fails, then the state Attorney General may sue to compel compliance with the charitable purpose, but donors have no legal right to bring such action on their own.

In Ontario, the Court of Appeal decision involving the McMichael Collection¹³³ dealt primarily with the interpretation of special legislation involving the creation and management of the McMichael Collection and, as such, the decision does not have broad application to most donor restricted gifts. However, the nature of the complaint by the McMichaels was that the Province of Ontario failed to honour the terms of a contractual agreement that had been signed with them when the gift of their collection and property was given to the Province in the 1960's. The case, although not decided in favour of the McMichaels, may very well provide impetus for other donors to argue breach of contract against a charity as an alternative to breach of trust, depending upon the wording of the particular donor agreement accompanying the gift.¹³⁴

What is interesting in relation to the McMichael case, is that although the McMichaels lost before the courts, they were successful in lobbying the Provincial Government to introduce legislation that reinstated the terms of the original agreement when the gift was first made.¹³⁵ While the Provincial Government won at court based upon its prerogative to override private interests, the inequities resulting from the government failing to comply with a contractual arrangement evidentially carried the day. In commenting upon the introduction of remedial legislation, Robert McMichael was recently quoted as saying:

Unlike in the United States, donors in Ontario do have a number of statutory opportunities to initiate a judicial review in the event that the donor or interested individuals are of the opinion that there has been a misapplication of special purpose charitable trust funds or other failures to comply with donor restricted charitable gifts. In this regard, s.6(1) of the Charities Accounting Act states that:

Applications under s.6(1) can be brought ex parte by a complainant, i.e., without notice to the charity or anyone else, with the court being able to order the Public Guardian and Trustee to conduct a public inquiry under the Public Inquiries Act.¹³⁷

In addition, s.10(1) of the Charities Accounting Act permits two or more individuals to make a court application where there is an alleged mismanagement or breach of trust involving charitable property:

A donor may also complain to the Public Guardian and Trustee that a "direction"imposed by the donor on a gift is not being complied with by the charity. This in turn could result in an application by the Public Guardian and Trustee to obtain a court order requiring the charity to comply with the terms of the donor direction in accordance with s.4(d) of the Charities Accounting Act.

As a result, donors, family members of donors, and even unrelated members of the public have a number of effective statutory provisions under the Charities Accounting Act to require a charity to account before a court in relation to how a charity has dealt with all aspects of charitable property that it has received, including donor restricted charitable gifts. Board members of a charity should therefore be wary of the rights that donors and the public have in this regard, since they may be called to account, possibly in response to a court application.

The decision of Justice Feldman in Christian Brothers Ont. C.A. concerning the exigibility of special purpose charitable trusts is arguably one of the most important cases in Canada involving charities in recent memory. Even if leave to appeal to the Supreme Court of Canada is granted, it may be a number of years before a final decision by the Supreme Court of Canada is rendered on this issue. In the meantime, the decision of Justice Feldman in Christian Brothers Ont. C.A. will create serious problems for charities in protecting their special purpose charitable trusts from tort creditors of the charity. The decision may also have serious impact upon the ability of charities to raise monies from donors, particularly monies for endowment funds in situations where donors expect that their gifts will be protected from creditors of the recipient charity.

As explained earlier in this article, Justice Blair in the Christian Brothers Gen. Div. decision held that although the general corporate property of a charity is not immune from exigibility by tort creditors, property that is held as a special purpose charitable trust would not be available to compensate creditors of a charity unless the claim of the tort creditor arose from a wrong perpetuated within the framework of the particular special purpose charitable trust in question.

In the Ontario Court of Appeal decision, Justice Feldman agreed with Justice Blair that there was no general doctrine of charitable immunity applicable in Canada. However, Justice Feldman stated that once Justice Blair had determined that there was no doctrine of charitable immunity, it then became redundant for Justice Blair to analyse whether the special purpose charitable trusts of a charity were exigible to pay the claims of tort creditors. Justice Feldman concluded that:

For a thorough analysis and discussion of the Christian Brothers Ont. C.A. decision, reference should be made to the paper by David Stevens on this issue.¹³⁸ What follows is only a brief commentary concerning some aspects of the Ontario Court of Appeal decision:

• there are claims by tort victims against the charity;
• the general assets of the charity are insufficient to satisfy the resulting judgments;
• the charity is no longer operating; and
• the charity has been wound up pursuant to a winding-up order under the Winding-Up and Restructuring Act.

The Christian Brothers Ont. C.A. decision will likely negatively impact the operations of charities across Canada in at least six crucial ways:

• First, tort victims will now be encouraged to pursue claims against charities, particularly larger charities, knowing that there may be "deep pockets"that were previously untouchable but can now be readily accessed.
• Second, property and/or funds held as special purpose charitable trusts, particularly endowment funds, that many charities depend upon for their continued existence, will now be susceptible to claims by tort victims. This in turn may prejudice the ability of some charities to continue operating and could result in either the bankruptcy or distribution of some charities that are particularly vulnerable, such as religious denominations, local churches and educational institutions.
• Third, the ability of donors to create enforceable special purpose trusts will be thwarted where claims by tort creditors cause those special purpose charitable trusts to be applied in ways totally different from that which was originally contemplated by the donors. Such result ignores the overriding jurisdiction and mandate of the court to apply a special purpose charitable trust cy-près where the original charitable purpose has become either impossible or impracticable.
• Fourth, donors will be reluctant to give large gifts directly to charities, such as endowment funds, that otherwise had been thought to be protected from creditors as special purpose charitable trusts when no assurance can be given to donors that the special purpose charitable trusts will be immune from present or future creditors of the charity.
• Fifth, international charities may be reluctant to set up operations in Canada for fear that they might arguably be exposing their global assets to claims by tort creditors in Canada.
• Sixth, lawyers might be found liable if they fail to advise clients, either charities 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 as much as possible.

The combined overall "chill effect"that will likely result from the negative impact of Christian Brothers Ont. C.A. may very well prejudice the financial stability of a large segment of the charitable sector in Canada and could even affect its long-term viability. This in turn may require that various levels of government may need to fill the void that could result in the loss of social services presently being provided by charities that could be seriously impacted by the decision.

Since it is uncertain whether anything effective can be done to "credit-proof"existing special purpose charitable trusts, the task for lawyers in advising charities and donors will be focussed on how to structure future special purpose charitable gifts so that they will not become exigible by tort creditors of the charity. Some strategies that legal counsel may want to consider in advising charities and donors on this issue include the following:

• creating a special purpose charitable trust by the donor giving the intended gift to an arms-length parallel foundation established to advance only the purposes of the intended charity;
• creating a special purpose charitable trust by the donor giving the intended gift to a community foundation or trust company to be held in trust for the benefit of a specific named charity; or
• structuring a donation as a conditional gift with a condition subsequent to become operational upon the winding-up, dissolution or bankruptcy of the charity, accompanied by a "gift over"to another charity that had similar charitable purposes, or alternatively, providing that the gift revert back to the donor.

All of these options and, in particular, the utilization of conditional gifts, would require addressing a number of important legal issues, including determining the income tax consequences to the donor in making the gift, some of which have been addressed earlier in this article and elsewhere.¹⁴¹

Often, a charity will run into difficulties in dealing with donor restricted charitable gifts due to either a lack of understanding of the legal consequences involved with such gifts or a failure by the charity to implement appropriate policies to effectively manage donor restricted charitable gifts once received. In this regard, the following is provided as a brief summary of some of the practical considerations that should be considered by a charity, its board of directors, management and fundraisers in effectively managing donor restricted charitable gifts that are received:

Since the legal consequences in dealing with donor restricted charitable gifts are very serious, it is important for a charity to retain the assistance of legal counsel in drafting guidelines to identify the legal distinctions in relation to gifts received. In this regard, the guidelines should provide examples of gifts that are subject to terms, restrictions, or conditions that will need to be scrutinized to determine whether or not they may constitute donor restricted charitable trusts, as well as providing examples of gifts that are clearly unrestricted.

In the event that there were any questions concerning the nature of the gift, then the instrument creating the gift should be forwarded to legal counsel for the charity so that an appropriate legal opinion could be obtained. If a determination is made that the gift constitutes a donor restricted charitable gift, then such gift would need to be identified as such and subsequently treated as a special purpose charitable trust.

Whenever a gift is received that is identified as a donor restricted charitable gift, it is important that the management of the charity carefully review the terms of the donor restrictions to ensure that the following questions are addressed:

Once a decision is made to accept a donor restricted charitable gift, then the charity and its management must be careful to ensure that the funds in question are properly managed as charitable trust funds on an ongoing basis. Appropriate management in this regard would involve looking at the following considerations:¹⁴²

Since donor restricted charitable gifts involve considerable legal responsibility and exposure to liability, an important question that a charity should ask is what can be done on a practical basis to encourage donors to give unrestricted gifts instead of restricted charitable gifts. This is not to suggest that there is not a place for donor restricted gifts. However, a program of good legal risk management in avoiding breach of trust should involve taking pro-active steps to avoid situations that might otherwise give rise to a breach of trust before it occurs instead of trying to remedy the problem after the fact.

Some practical suggestions in this regard are outlined below as follows:

Since it is not realistic to expect that all gifts that a charity will receive will be of an unrestricted nature, it is important for a charity to also take pro-active steps to develop and implement a policy to reduce the risks associated with receiving donor restricted charitable gifts, in recognition that such gifts are likely to be given at some time in the future. Considerations in this regard are as follows:

As is evident from the number of considerations that have been outlined in this article, the issues involving donor restricted charitable gifts are many and complex. This article has touched on only some of the more important matters that must be addressed. Any lawyer who is called upon to provide a legal opinion in this grey area of the law should conduct his or her own research and not rely solely on the comments contained in this article. In this regard, a bibliography of some helpful texts, articles and cases that the author found of assistance is included at the end of this article.

Notwithstanding the complexities of the issues, given the increased demand on fundraising for charities and the associated need for innovative and sophisticated donor gifts, there is little doubt that the importance of addressing and understanding the issues involved with donor restricted charitable gifts will become more, not less, important to the future operations of charities. It is therefore incumbent upon lawyers who practise in this area of the law, as well as chief executive officers and interested directors, to ensure that they take the time to become familiar with this interesting, but often convoluted, area of the law.

SELECTED BIBLIOGRAPHY ON

American Law Institute, Restatement (Second) of Trusts (Washington, D.C. 1959).

Youdan, Timothy G., "Investments Made by Trustees"Canadian Bar Association of Ontario, Charities and Not-For-Profit Law (April 24, 1998).

Royal Trust Co. v. Stewart (1958), 13 D.L.R. (2d) 654 (B.C.S.C.).