235 Broadway, P.O. Box 67

Orangeville, Ontario, L9W 2Z5

Telephone (519) 941-1760

Fax (519) 941-3688

Web Site www.wardlaw.on.ca

E-Mail [email protected]

Church Constitutions

and Incorporation

Charitable Foundations

Legal Risk Management

Denominational Issues

Gift Planning

National and

International Structures

Church Discipline

Sexual Abuse Policies

Copyright and Licencing

Charitable Registrations

Employment Issues

Litigation Counsel

Trade-Mark Protection

Insurance Issues

Church Development

Domain Name and Internet Issues

The material contained in the seminar is provided for information purposes only on the understanding that neither the firm of Wardlaw, Mullin, Carter, Thwaites & Ward nor any of the lawyers or professionals presenting at the seminar are rendering legal advice or establishing a solicitor/client relationship. None of the information provided in this seminar should be relied upon for legal decision making without first consulting with your legal counsel and obtaining a written opinion concerning the specifics of a particular situation.

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* Church & the Law is a T.M. of Wardlaw, Mullin, Carter, Thwaites & Ward

2000 ANNUAL CHURCH & THE LAW SEMINAR

A. CASELAW UPDATE

1. VANCOUVER SOCIETY OF IMMIGRANT AND VISIBLE MINORITY WOMEN v. M.N.R. [1996] No. 290, [1999] S.C.C. File #25359

• Case was heard by the Supreme Court of Canada in February, 1998, and a decision was rendered on January 29th, 1999

  
  
  

• The Appellant lost the appeal to become a registered charity by a four\three split of the Supreme Court but the Court broadened the scope of "advancement of education" as a head of charity

  
  
  

• The decision emphasises the importance of lawyers' carefully drafting the charitable objects clause of a charity

2. WOOLNER V. CANADA [1997] T.C.J. No. 1395 DRS 99-06550

2000 ANNUAL CHURCH & THE LAW SEMINAR

"What's in a Name?"

Protecting the Name, Goodwill and

Reputation of Your Ministry

[NOTE: A more complete discussion of this topic can be found in a paper entitled

"Avoiding Wasting Assets: Trade-Mark Protection for Charities" available on

the internet at www.wardlaw.on.ca]

1. The Basic Nature Of A Trade-Mark.

• a trade-mark is a specific mark used for the purpose of distinguishing services or products from those of others and has application to charities as well as businesses;

• a trade-mark represents the goodwill of a charity;

• trade-marks are recognized and protected at common law but receive additional protection by registration under the Trade-marks Act.

2. What Do Trade-Marks Consist Of?

a Charity division, i.e., "ABC Children's Clubs", a division of ABC Relief Agency of Canada

a logo, i.e.,

4. Section 9 Official Mark v. Regular Trade-Mark Application.

• if charity has a limited budget, choose a Section 9 Official Mark first;

• but also need to obtain a trade-mark registration for complete protection:

• the protection of a Section 9 Official Mark is a creation of statute law and is therefore subject to statutory change in the future

• internet domain name protection
• not retroactively effective, i.e., no earlier date of first usage
• ability to claim statutory damages
• ability to directly license trade-mark

1. A Domain Name Is The Numeric Electronic Address Used To Locate A Computer On The Internet, Otherwise known as a URL.

2. There Are Two Parts To A Domain Name.

- top level, i.e., generic designation i.e., .com, .org and .net, or regional designation of .ca or .us;

- second level identifies the organization, ie, "microsoft.com".

3. There Are A Limited Number Of Internet Domain Names Available Since There Can Only Be One Owner Of A Domain Name World Wide.

4. A Charity Should Obtain An Internet Domain Name As Soon As Possible Utilizing As Many Of Its Key Trade-Marks As Possible.

5. If Internet Domain Name Is Not Available In One Form, i.e., "letsgive.org", Then There May Be Other Alternatives Available, i.e., "letsgive.com", "letsgive.net"

6. Consider Obtaining More Than One Domain Name to Avoid Possible Confusion Resulting From Similar Domain Names, ie., ".org", ".com", ".net", ".ca" and ".us".

7. Before Obtaining An Internet Domain Name A Trade-Mark Search Should Be Done in Canada or the U.S.

8. Conflicts Occur Between Domain Names and Trade-Marks.

• trade-marks are national in scope, whereas domain names are international;

• trade-marks in most countries are based upon "first to use", whereas domain names are acquired on a "first to file" basis;

• trade-marks are restricted to a specific list of wares and services, whereas domain names have no restrictions concerning their application; and

• trade-mark law is based upon multiple people using the same mark simultaneously, whereas there is only one owner of a particular domain name on a worldwide basis.

9. Internet Domain Names Are Regulated By The ICAAN Domain Name Dispute Policy Effective As Of January 1^st, 2000, As Well As By Trade-Mark Infringement Rules.

10. Need To Protect And Insulate Internet Domain Name By Obtaining A Trade-Mark Registration In Canada And In The U.S.

11. A Challenge May Be Made To An Existing Domain Name By Obtaining A Trade-Mark Registration With A Date Of First Usage Prior To The Activation Date Of The Existing Domain Name.

1. When Is Trade-Mark Licensing Relevant?

2000 ANNUAL CHURCH & THE LAW SEMINAR

Avoiding Ministry Mine Fields: A View From The Trenches

As A Former CFO And As An Accountant

Wednesday, February 2^nd, 2000

by Ken Dick, C.A.

2624 Dunwin Drive

Suite 6

Mississauga, Ontario

L5L 3T5

Telephone: (905) 820-6492 Fax: (905) 607-1074

E-Mail: [email protected]

1. THE BOARD

"The Good, The Bad and The Ugly" - What is Yours Like?

2. ACCOUNTABILITY AND TRANSPARENCY

Do your supporters have complete confidence in your organization?

3. STAFF

Does your organization believe in "doing unto others as you would have them do unto you?"

4. TRAVEL

The personal cost of performing ministry - can it be justified?

5. SPIRITUAL STEADFASTNESS

The dangers of becoming too focussed on reaching our goals at any price

1. INTRODUCTION

2. LIABILITY OF CHARITIES FOR SEXUAL ABUSE -

PRE-SUPREME COURT OF CANADA

Grounds for Liability - Negligence

- Fiduciary Duty

- Vicarious Liability

3. LIABILITY - POST-SUPREME COURT OF CANADA

Children's Foundation and Boy's and Girl's Club Cases

Social Net Justice

What is the Test?

Charities - No Exemption

Impact on Operations

4. LEGAL RISK MANAGEMENT

Hiring and Supervision

Children's Policies

Counselling

Insurance

- Claims Made/Occurrences

- Excluded Risk

- Punitive Damages

- Retentions

"Lobby"

- Exemption - Charities

- Limits - Dollars

- Limitation Periods

5.CONCLUSIONS

2000 ANNUAL CHURCH & THE LAW SEMINAR

The Future of Religious Freedom in Canada -

Where We've Been and Where We're Going

Wednesday, February 2^nd, 2000

Danielle Shaw-Buchholz, LL.B., LL.M. ©

Associate Legal Advisor

The Salvation Army Canada and Bermuda Territory

2 Overlea Boulevard

Toronto, Ontario, M4H 1P4

Telephone: (416) 422-6225 Fax: (416) 422-6241

E-mail: [email protected]

OVERVIEW OF TOPICS TO BE DISCUSSED

1. Introduction

2. Sources of Protection of Freedom of Religion in Canada

A. The Canadian Charter of Rights and Freedoms and the Definition of Freedom of Religion

Section 2(a) of the Canadian Charter of Rights and Freedoms states: Everyone has the following fundamental freedoms … freedom of conscience and religion.

Freedom of conscience and religion is not defined in the Charter and it has been left to judges to determine what the term means. Freedom of religion has been defined as follows:

i) Positive definition of freedom of religion

The essence of the right to freedom of religion is the right to adhere to such beliefs as a person chooses, the right to declare those beliefs openly and without fear of hindrance or reprisal and the right to manifest belief through worship, practice, teaching and dissemination. (R. v. Big M Drug Mart Limited, [1985] 1 S.C.R. 295 at 353)

Freedom of religion goes beyond the ability to hold certain beliefs without coercion and restraint and entails more than the ability to profess beliefs openly … [I]t also includes the right to observe the essential practices demanded by the tenets of one's religion. (R. v. Videoflicks (1984), 48 O.R. (2d) 395 at 420)

Thus, our courts have recognized that both religious beliefs, and the conduct that flows from them are constitutionally protected.

ii) Negative definition of freedom of religion

Freedom from coercion or restraint; freedom from state intervention. Also understood as "freedom from religion".

The emphasis is not on what the believer may do, but on what the state may not do.

While the state is not obligated to do anything to foster religious freedom, it cannot do anything to limit it.

Mandatory religious education in publicly funded schools infringes freedom of conscience and religion, as does the requirement to undergo medical treatment that contravenes one's religious beliefs.

Failing to provide public funding for faith-based education does not infringe one's freedom of conscience and religion, as the state is not required to do anything to foster the expression and manifestation of religious belief.

B. Human Rights Legislation and the Definition of Discrimination

Provides protection within the private sector, while the Charter limits what government may do.

Prohibits discrimination in the context of employment, and in the provision of goods, services and accommodation.

Discrimination is defined as "a distinction, exclusion or preference based on a prohibited ground."

Protection from discrimination is not absolute. Most human rights statutes permit faith-based organizations or special interest groups to discriminate on certain grounds, where they serve members of their own communities.

3. Freedom of Religion in Public Education - Impact of the Charter

… with the exception of the state-financed schools of those constitutionally protected Roman Catholics, our public educational system is a spiritual wasteland, devastated by the courts and the educational establishment. (Margaret Ogilvie, "Overcoming 'The Culture of Disbelief'", (1995) The Law Society of Upper Canada, Gazette No. XXIX, No. 2, 105-121 at p.109.)

C. Where We've Been

Until the late 1980's religious opening exercises and religious education were mandatory in Ontario public schools.

i) Zylberberg v. Sudbury Board of Education (Director) (1988)

single faith religious observances and prayers were prohibited in Ontario public schools

ii) Canadian Civil Liberties Association v. Ontario (Minister of Education) (1990)

indoctrinational religious education and education that gave primacy to one religion were prohibited in Ontario public schools

The Ontario Court of Appeal held that forcing non-Christian students to participate in Christian religious education and exercises denied their freedom of conscience and religion, contrary to the Charter.

The existence of an exemption provision was not sufficient to overcome the denial of freedom of religion.

D. Where We Are Now

i) Ontario Government Policy

a) Policy/Programme Memorandum 108

multi-faith religious observances are permitted provided prayers are read but not recited and the readings reflect the religious and non-religious traditions of students within the classroom

b) Policy/Programme Memorandum 112

single faith religious instruction and single faith clubs are prohibited during the school day, including the lunch hour, even if provided on a voluntary or opt-in basis. Courses in World Religions, referred to as "Education About Religion" are permitted in secondary schools.

ii) Secularism in Public Education

Ontario public schools must be "secular."

Rather than opening the door to a broader range of religious expression within the public school system, the court decisions and the above policies have limited religious expression in the public school system, rather than fostering it.

iii) Requests for Public Funding for Faith-Based Education

a) Adler v. Ontario (Attorney General) (1995)

Charter challenge to Ontario government's refusal to fund independent, faith-based schools

Supreme Court of Canada held that while the province is not obligated to fund independent, faith-based schools, it may do so if it so chooses. However, if the province wishes to fund some faith-based schools, it must fund all faith-based schools on an equitable basis.

b) Bal v. Ontario (Attorney General) (1997)

Charter challenge to Policy/Programme Memorandum 112 and the Ontario government's refusal to permit alternative, faith-based education programs to operate within the public school system

The parents argued that the secular education system was not neutral vis-à-vis religion, but undermined religious devotion in their children's lives and limited religious expression within the public school system during the school day.

The Ontario Court of Appeal rejected the argument that a secular public education system infringes the freedom of conscience and religion, freedom of expression and equality rights of people of faith, stating: "Secularism is not coercive, it is neutral."

The Ontario Court of Appeal upheld Policy/Programme Memorandum 112.

E. Where We're Going

i) Secularism in Public Education

Mandated by the Supreme Court of Canada ruling in R. v. Big M Drug Mart, which was applied in Zylberberg and Canadian Civil Liberties Association.

The Supreme Court of Canada held that in a post-Charter era, the state cannot give preference to any one religion at the expense of those of another religion.

Freedom of religion has become freedom from religion, with the result that no one is entirely free to express his or her religious beliefs within the public school system.

Our courts have not clearly defined the term "secular" with the result that no one really knows what it means or how secular a public school must be.

ii) Chamberlain v. Board of Trustees of School District #36 (Surrey) (1998)

Restrictive definition of "secular", which threatens to limit opportunities for people of faith to express their religious beliefs within the public education system.

Section 76 of the B.C. School Act states "All schools shall be conducted on strictly secular principles."

Secular was defined "excluding religion or religious belief", "precluding a decision significantly influenced by religious belief", and precluding religious influences while requiring issues of morality to be addressed.

The court effectively advocates a strict separation between faith and the rest of life.

The court's definition of secular suggests that people of faith who have faith-based or conscientious objections to a secular curriculum cannot express their objections on religious grounds, as this would contravene the requirement that all schools be conducted on "strictly secular principles."

Charter values are the highest values that we hold as a nation.

iii) United Nations Human Rights Committee Ruling (1999)

Ontario is in violation of its international human rights obligations for refusing to extend public funding to non-Roman Catholic faith-based schools.

Foreign Affairs Minister Lloyd Axworthy has urged the province to remedy the situation.

The province refuses to extend public funding to independent, faith-based schools saying this will fragment the public education system.

The province also maintains that the Canadian Civil Liberties Association (a.k.a. Elgin County) decision prohibits single faith religious instruction in the public school system during the school day.

The U. N. decision, as well as the Supreme Court of Canada decision in Adler v. Ontario (Attorney General) are positive signs that the integration of religion and education are not impossible, and that there is nothing to prevent the province from extending public funding to faith-based schools.

People of faith must resist the notion that faith and public life should be separated, and avoid feeding into a secularist mentality.

4. Freedom of Religion in Employment - Impact of Human Rights Legislation

Relatively few cases have been decided in this area.

The case law remains reasonably consistent.

Human rights legislation provides access to a complaint mechanism in the event that an employee feels he or she has been discriminated against.

F. Direct and Indirect Discrimination Defined

i) Direct Discrimination

A distinction, exclusion or preference with respect to an identifiable group, such as a job posting indicating that only Christians need apply or that Muslims need not apply.

In order to justify this type of discrimination, the employer must be able to show that the possession of certain characteristics is an essential or bona fide job requirement.

ii) Indirect Discrimination

Also referred to as "constructive" or "adverse effect" discrimination.

Occurs when an employer adopts a rule of general application that has a particularly negative impact on certain groups of people.

For example, a requirement that all employees work Saturdays will have a particularly negative impact on Saturday observing religious believers.

Human rights tribunals have consistently held that when employers are guilty of adverse effect discrimination, they have a duty to accommodate the religious needs of employees.

Accommodation may take the form of modified work schedules, exemption from duties that conflict with an employee's religious beliefs, etc.

G. Where We've Been

i) Protection of the Employee - Prohibition Against Discrimination and The Duty to Accommodate

Most discrimination cases involve indirect or "adverse effect" discrimination, resulting from a rule of general application that has a particularly negative impact on some employees.

a) Retail Employees

There are several reported cases involving Saturday observing religious believers who were required to work on Saturdays, as well as a few cases involving religious believers who were required to work on religious holidays.

There is at least one reported case of a Sunday observing religious believer who was terminated for refusing to work on Sundays.

In the vast majority of these cases, courts and human rights tribunals have held that the employer has a duty to accommodate the religious needs of the employee, by exempting him or her from the requirement to work on the Sabbath or on other religious holidays.

b) Health Care Workers

In 1992, a B.C. woman successfully claimed that she had been discriminated against when she was terminated for refusing to authorize public funding for an abortion.

A human rights complaint was recently settled on behalf of several Markham nurses who were forced to participate in late-term abortions contrary to their religious beliefs. The hospital agreed to modify its policy and accommodate the religious beliefs of its employees by exempting those who had conscientious objections from the requirement to participate in abortions.

ii) Protection of the Employer - Bona Fide Occupational Requirements

a) Vriend v. Alberta (1998)

The Supreme Court of Canada held that the province of Alberta discriminated against gay men and lesbians by failing to protect them from discrimination on the basis of sexual orientation.

The Supreme Court of Canada refused to exempt faith-based organizations from its ruling but recognized that Alberta human rights legislation permits employers to discriminate on the basis of religion or sexual orientation where they can establish a "bona fide occupational requirement."

b) Schroen v. Steinbach Bible College (1999)

A Board of Adjudication found that Steinbach Bible College was justified in terminating an employee upon learning she was not a Mennonite.

Steinbach Bible College believed adherence to a Mennonite or Anabaptist faith, as well as participation in a Mennonite faith community were necessary qualifications for the job.

Given the special nature of the College, the Board of Adjudication found the College was justified in terminating Ms. Schroen.

H. Where We're Going

i) Protection of Employees

Increased pressure is likely to result from changing attitudes toward Sunday shopping, euthanasia, assisted suicide, abortion.

People of faith must realize that complaint mechanisms do exist and be willing to come forward if they are being discriminated against.

ii) Protection of Employers

Employers may find it increasingly difficult to "discriminate" on the basis of religion or lifestyle.

Employers will need to understand their obligations under human rights legislation and seek to fulfil them.

a) Trinity Western University v. B.C. College of Teachers (1998)

A good example of where we might be going.

Currently under appeal to the Supreme Court of Canada.

The BBCT alleged TWU discriminated against gays and lesbians and taught discriminatory attitudes toward them by prohibiting homosexual conduct.

The B.C. College of Teachers refused to accredit TWU's teacher education program, claiming it would be contrary to public policy to allow TWU graduates to teach in the public education system.

TWU appealed the BCCT decision and won in both the B.C. Supreme Court and the B.C. Court of Appeal.

OVERVIEW OF TOPICS TO BE DISCUSSED

A. Introduction

B. Commentary

(1) Territorial Jurisdiction; "Whose Laws Decide?"

(2) Intellectual Property Laws

(3) Domain Name Difficulties

(4) Civil Actions on the Internet

(5) Criminal Actions on the Internet

C. Conclusion

(a) more and more churches are turning to the internet as a way of reaching potential donors;

• global and local outreach greatly expands donor base;

• costs to donors and churches limited;

• expanding range of techniques available to garner donations and goodwill;

• passive solicitation;

• active solicitation - eg., spamming;

• link's to storefronts;

• permission marketing;

• commercial / charitable partnership;

(b) Despite popular belief to the contrary, the Internet is not lawless. It is governed by all of the same laws which affect us in our daily lives.

• Maintaining a web site can expose a church to a variety of criminal and civil sanctions if it is not careful.

• The following are a number of areas of concern for church web site owners:

1. Territorial Jurisdiction; "Whose Laws Decide?"

• The Internet is international in nature;

• What a church posts on its web site can be viewed anywhere in the world;

• What a church posts on its web site may expose it to the laws of potentially any other jurisdiction anywhere else in the world; and

- eg. Charitable Fund-Raising Act of Alberta

• Issue of which jurisdiction is applicable is relevant at present - the high degree of uncertainty in determining the applicable jurisdiction should lead to wariness for charity web site owners.

• commercial transactions;

• civil and criminal liability;

2. Intellectual Property Laws

• All intellectual property laws are applicable to the Internet including copyright and trade-mark law;

• Unauthorized use of material created by someone else, may expose a church to an action for copyright infringement.

Copyright

• ensure you own your website;

• obtain necessary assignments, licenses for content;

• obtain assignments of purchasing website;

• obtain waiver of moral rights from artists, creators of website;

• use of website may lead to copyright infringement;

• framing

• hyperlinking

• vicarious infringement

• damages and civil/criminal actions;

• defence to copyright infringement;

Trade-mark

• domain name confusion;

• posting trade-marks or website;

• hyper-linking;

• meta-tags;

• dilution (in cause of action);

• passing off;

• Obtaining necessary releases and licenses important for web site owners to reduce the chances of litigation.

3. Domain Name Difficulties

• Area of contention and uncertainty at present;

• If the domain name is the trade-mark of another then a church or charity may expose itself to an action for trade-mark infringement;

• At the same time, taking appropriate steps to secure its domain name is highly recommended to churches and charities.

• If a church fails to act, it may find itself having to purchase its domain name from someone who had the prescience to register it first;

Privacy Issues

• growing concern on the Internet;

• legislation:

• federal

• provincial

• international

• sanctions for inappropriate collection of personal information;

• common law torts relating to privacy

• misappropriate of personality;

• false association;

• unreasonable intrusion into person's private affairs.

4. Civil Actions on the Internet

• Include defamation (libel and slander), interference with economic interests, passing-off, trade-secrets and breach of confidence, and negligence;

• Defamation can occur easily on the Internet. E-mails can not be considered as privileged or private communication. Bulletin Boards and Chat Rooms allow the disenchanted to defame others;

• Church web site owners should carefully review anything posted to their sites, or they may find themselves publishing defamatory material;

• Use of a web site to criticize the business practices, wares or services of others can lead to actions for interference with economic interests if such use leads to contracts being breached;

• Passing-off can occur if a web site is used to promote goods or services in the name of another, or if the web site is designed to prosper from the goodwill of another organization or individual;

• Trade-secrets can be passed easily over the Internet, and breaches of confidence can easily occur through inappropriate use of e-mail, or improper security measures;

• Negligence can include statements posted on a web site which are relied upon by others to their detriment, in situations where it would be expected that such reliance would occur or failing to update information pooled on a website;

• Some recommendations to reduce problems:

1. Vicarious liability of employers for actions of employees - limit employee access to the web site;

2. Limit access to the web site to invited guests;

3. Regularly monitor what is posted on your web site;

4. Use security measures; and

5. Use disclaimers;

5. Criminal Actions on the Internet

• Criminal law is applicable to the Internet;

• Issues of jurisdiction important for criminal law - area of uncertainty;

• Includes illegal speech, criminal libel and gaming;

• Illegal speech involves s.319 of the Criminal Code;

• Illegal speech includes: "Every one who, by communicating statements in any public place, incites hatred against any identifiable group where such incitement is likely to lead to a breach of the peace…" and "every one who, by communicating statements other than in private conversation, wilfully promotes hatred against any identifiable group…" is guilty of an offense;

• Criminal libel is defined as "…a matter published, without lawful justification or excuse, that is likely to injure the reputation of any person by exposing him to hatred, contempt or ridicule, or that is designed to insult the person or, or concerning whom it is published…";

• Gaming and betting is regulated through numerous applicable sections in the Criminal Code;

• Generally, gaming is prohibited unless regulated by a provincial government, while section 207(4) (c) basically requires that any lottery scheme using a computer be operated by a provincial government;

• Issues of jurisdiction significant when dealing with gaming;

• Michigan statement on jurisdiction over Internet - indicates that Michigan will try individuals under Michigan law is offer gambling over the Internet to Michigan residents; and

• The same recommendations as outlined in the section dealing with civil law issues apply with respect to criminal law issues.

• Some easy rules of thumb:

1. Firstly, don't use what is isn't yours, or attempt to gain benefit from the work of others without first obtaining their permission;

2. Secondly, ensure that you use your web site in a civil manner, always with an eye to how others will receive what you have to say;

3. Remember to maintain control over how your web site is being operated;

4. Ensure that only a limited and trusted number of employees have access to what is placed on your web site;

5. Maintain confidentiality of information obtained and used; and

6. Operate your web site with an eye to the effect that it will have throughout the world, and not just in Canada or the United States.

DISCLAIMER: This summary of Legal Issues in Fundraising on the Internet is distributed with the understanding that it does not constitute legal advice or establishing the solicitor/client relationship by way of any information contained herein. The contents are intended for general information purposes only and under no circumstances can be relied upon for legal decision making without first consulting with a lawyer and obtaining a written opinion concerning the specifics of your particular situation.

235 Broadway, P.O. Box 67, Orangeville, Ontario, L9W 2Z5

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

E-Mail: [email protected]

Web Site: www.wardlaw.on.ca

1. INTRODUCTION

2. CLERGY HOUSING DEDUCTION -

SECTION 8(1)(c) INCOME TAX ACT

3. IT - 141 - PRE-FEBRUARY, 1999

Revenue Canada's Approach - Revisiting Clergy Housing Deduction.

4. IT - 141 - POST-JUSTICE BOWMAN'S DECISION

The Criteria - "Religious Order"

5. FINANCIAL RESTRICTIONS ON DEDUCTION

Maximum - Dollars

Offset Against Ministry Income

6. IMPLICATIONS ON "EMPLOYER-EMPLOYEE" RELATIONS

Contracts - To Use or Not?

Terms of Relationship

7. RISK MANAGEMENT - DEFINING YOUR FUTURE

Employee Policies

- Contracts and Appointments

- Benefits

- Compensation Grids and Controls - Accounting

- Faith

- Discipline

Corporate Organization - Review, Implementation and Governance

Revenue Canada - Defining the Relationship

2000 ANNUAL CHURCH & THE LAW SEMINAR

Donor Restricted Charitable Funds:

"The Good, The Bad and The Ugly"

[NOTE: A more complete discussion of this topic can be found in a paper entitled

"Donor Restricted Charitable Gifts: A Practical Overview" available on

the internet at www.wardlaw.on.ca]

&

A. ("SETTING THE STAGE") - PRELIMINARY CONSIDERATIONS

1. Donor restricted charitable gifts that are improperly established or incorrectly managed can cause the loss of substantial gifts to a charity and possible personal liability to its directors from:

• challenges by the donor • challenges by beneficiaries of the donor

• challenges by the family of the donor • challenges by the PGT of Ontario

2. Donor restricted charitable gifts include endowment funds, building funds, conditional gifts, restricted funds and trust deeds

3. Donor restricted charitable gifts affect almost every charity at some time, ie., with regards to

• testamentary gifts • endowment funds

• public fundraising programs • transfer of funds between charities

4. There is a lot of confusion about Donor Restricted Funds, such as:

• is a donor restriction binding against a charity?
• what is the difference between unrestricted and restricted funds?

• what is the difference between unrestricted funds and donor advised funds?

• can the donor or a charity unilaterally change a restriction without consent or authorization?

• what should a charity do when it can no longer comply with a donor restriction?

• can family members enforce an estate gift that is subject to a restriction or have the gift declared void?

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

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

• trust and estate law • income tax law

• rules of equity • contract law

• corporate law • association law

• fiduciary obligations

7. A donor restricted charitable gift is a "charitable purpose trust" constituting a type of "charity within a charity" whereby a charity holds funds for a specific charitable purpose

8. Even with a charitable corporation that may not hold its general funds in trust, restricted funds like an endowment fund, will be held as charitable purpose trust funds by the charity

9. The nature of a charitable purpose trust has unique characteristics that include that are different from other trusts:

• the purpose trust does not require a beneficiary

• the purpose trust is not void for uncertainty of objects

• the purpose trust is exempt from the requirement that must vest in a beneficiary

• the purpose trust is exempt from the rule against perpetual trusts

• a court can exercise a scheme making power to overcome impractical or impossible objects with the purpose trust

B. ("IDENTIFYING THE CHARACTERS") - THE DIFFERENCE BETWEEN UNRESTRICTED AND DONOR RESTRICTED CHARITABLE GIFTS

1. Unrestricted charitable gift:

• an unrestricted charitable gift is a gift given for the general charitable purpose of a charity that is not subject to any restrictions or limitations imposed by the donor

• an unrestricted gift can be used by the board of the charity in its discretion to pursue any of its general charitable purposes

• the board may designate the gift to be used for a specific purpose and may then subsequently designate the gift for another specific purpose without being in violation of the terms of the gift, ie., board designated monies for a building fund

2. Donor restricted charitable gift:

• a donor restricted charity gift is a gift for a charitable purpose that is subject to certain restrictions, conditions or limitations imposed by the donor

• all restrictions must be complied with except where varied by a court, failing which the board of directors could be found in breach of trust

• it is important to identify a donor restricted charitable gift and comply with it

C. ("THE GOOD") - TYPES OF DONOR RESTRICTED CHARITABLE GIFTS

1. Special purpose charitable trusts:

• the nature of a special purpose charitable trust:

- a gift held by a charity in trust for a specific charitable purpose

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

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

• what are the requirements for the creation of a special purpose charitable trust?

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

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

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

- Christian Brothers decision suggests that there must be a "true" charitable purpose trust and that such trust requires the tradition and characteristics of a trade-mark

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

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

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

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

- the Christian Brothers Decision will also not preclude donors from applying under Section 6 (1) of the Charities Accounting Act to seek an order for a public inquiry in the fundraising practices

• endowment funds:

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

- endowment funds can be established by the donor, by the charity, or by a combination of the charity and the donor

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

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

- need to ensure the there is full disclosure to the donor of special terms or restrictions that apply in a public endowment fund campaign

• donor restricted funds:

- funds are expended over a period of time for a specific charitable purpose

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

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

• restricted charitable trust property:

- charitable trusts are often contained in deeds, normally old church deeds

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

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

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

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

• implied special purpose charitable trust funds:

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

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

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

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

2. Donor Advised Funds and Precatory Trusts:

• a donor advised fund is normally a long term gift or an endowment that requires the ongoing input of the donor on key decisions but not a legal obligation

• if the donor retains too much control over a donor advised fund, there is the possibility that no "real" gift was ever given precluding a charitable receipt
• a precatory trust is one where the donor indicates a request that creates a moral obligation upon the charity but is not legally binding (see earlier comment)

3. Conditional Gifts:

• a condition in a conditional gift does not create a legal obligation to do something but rather establishes certain legal consequences if the condition is not fulfilled

• it is possible to include both a conditional gift and a special purpose charitable trust in the same gift, ie. an endowment fund that is conditional upon matching funds being raised

• a conditional gift involves an absolute transfer of property subject to the power to defeat the gift if the condition is not fulfilled

• with a condition precedent, if the condition fails, then there is no gift

• with a condition subsequent, there is an absolute gift but the gift is subject to being defeated if a future event occurs

• if a condition fails, then either a charitable receipt should not be issued or if it has been issued, Revenue Canada should be advised so that the value of the receipted gift can be brought back into the income of the donor

• a court application to vary the terms of an impossible or impractical restricted gift is not available if there is a conditional gift

• a charity and its legal counsel need to be careful to determine the legal consequences of a conditional gift before accepting it

• a conditional gift may be available where a charity gives property to another charity subject to a condition subsequent to avoid the risks associated in making an unauthorized investment with another charity

1. Failure of a conditional gift:

• a failure of a conditional gift will occur when either a condition precedent is not fulfilled or a condition subsequent occurs in the future

• on the failure of a condition, the gift reverts back to the donor or to another beneficiary if there is a "gift over" provision

• a cy-près court application is not available to vary the terms of a conditional gift

2. Failure of a special purpose charitable trust

• a failure of a special purpose charitable trust occurs where the restriction is breached or cannot be complied with because it is either impossible or impractical

• a charity cannot remedy the failure on inability to comply with a special purpose charitable trust on its own initiative

• the donor is also not able to remedy the failure or inability to comply on his or her own

• instead court relief must be obtained through a cy-près court application

3. The court cy-près scheme making power to remedy a failure of a restriction:

• cy-près means "as near as possible"

• the court may be able to exercise its cy-près authority (ie., "as near as possible") when a restriction is either impossible or impractical

• there must be a general charitable intention for a cy-près order when there is an initial failure of the restriction

• cy-près will not be available

- if there is a gift over to another charity

- if there is a conditional gift with restriction to the donor

- if there is no impossibility or impracticality of the restriction

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

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

• where the court cannot exercise its cy-près power to modify the restriction or then the gift will revert to the donor

4. General Liberal Interpretation of the Court:

• there is a general liberal court interpretation available as part of an inherent court jurisdiction to interpret the terms of gifts in a liberal and lenient manner

• the court might be able to "interpret" a vague restriction where a cy-près power is not otherwise available

5. The Court Administrative scheme making power:

• the court also has the power to permit deviation from restrictive administrative terms

• the court's relief can sometimes frustrate the original intent of the donor

6. When can a charity vary a restricted gift?

• generally, court approval is required to vary the terms of a donor restricted charitable gift by means of a cy-près court application

• it is possible, though, for a donor to unilaterally vary the restrictions of a gift without court approval if all of the following criteria are first met

- the restriction must be impossible or impractical

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

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

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

E. (THE "UGLY") DUTIES ASSOCIATED WITH DONOR

RESTRICTED CHARITABLE GIFTS

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

• failure to comply with donor restrictions constitutes a breach of trust

• must not disregard restrictions in utilizing a restricted gift as part of the general funds of the charity

• must not divert funds to another restricted charitable purpose

• must not encroach on the capital of an endowment that is to be held in perpetuity

• must not unilaterally alter the terms of the charitable trust without court authorization

• must not hold funds in perpetuity if the gift requires that the funds be expended

• must not receive gifts intended to be given to another charity

• must not borrow from donor restricted funds

• must not apply surplus funds resulting from public fundraising campaign to another charitable purposes unless there is a clear "gift over" or there is court authorization

• must not accept a restricted gift that is outside the charitable purposes of the charity

2. Duty to invest:

• must look at the applicable constating documents of the charity or the document creating the restricted gifts to determine what investment power applies to those funds

• the Trustee Act will apply unless otherwise stated in constating documents

• need to comply with new prudent investor rule in amendments to the Trustee Act under Bill 25 after July 1^st, 1999

• investment powers for a donor restricted gift may be different from investment powers for other funds of the charity

3. Duty to protect and conserve trust property:

• must ensure that charitable trust property is not improperly alienated

• the transfer of donor restricted charitable trust property to another charity will require a deed of trust and possibly court authorization

• need to determine which charitable assets may be subject to seizure in accordance with the Christian Brothers decision

4. Duty to apply for a scheme:

• need to apply for court authorization for

- cy-près application

- administrative scheme

- liberal interpretation

5. Duty to keep accounts:

• trust funds must be physically segregated at common-law

• proposed Regulations under the Charities Accounting Act of Ontario may permit certain "pooling" of trust funds

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

• liability at common law for breach of trust

• liability for third party claims by donors and residual beneficiaries

• liability under the Charities Accounting Act

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

• determine if there is a non binding precatory trust instead of a special purpose charitable trust

• advise board members of the breach of trust

• replace misapplied trust funds to the restricted fund if possible

• if there is a breach of trust and there is a loss of property, the directors can no longer apply for technical relief from breach of trust under Section 35 of the Ontario Trustee Act

• however, may still be able to apply for relief pursuant to a cy-près court application

• advise former board members if the loss resulted from a decision of an earlier board of directors, since those board members may also be personally liable

• advise board members to obtain independent legal advice instead of relying upon the advice of the lawyer for the charity

1. Government involvement in enforcing donor restrictions:

• the Crown has an inherent parens patriae jurisdiction over charitable property

• the Attorney General in Ontario through the Public Guardian and Trustee is responsible for protecting charitable property in Ontario

• Section 4(d) for the Charities Accounting Act of Ontario provides the PGT with the authority to intervene and seek court enforcement of donor restrictions

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

• generally donors lose control over charitable property once it is donated

• some measure of control can be maintained through contract or endowment agreements

• donors and interested individuals can apply under Section 6(1) of the Charities Accounting Act in relation to improper fundraising activities and its impact on charitable property and Section 10 (1) in relation to potential breach of trust involving restricted gifts

• donor and residual beneficiaries can also request the P.G.T. to enforce donor restrictions under Section 4 (d) of the Charities Accounting Act

G. ("BACK TO THE GOOD") AVOIDING PITFALLS INVOLVING

DONOR RESTRICTED CHARITABLE GIFTS

1. The need to be pro-active to avoid problems:

• the charity needs to be well informed about potential problems involving donor restricted charitable gifts and communicate the potential for problems with board members and staff

• the professionals advising the charity should not remain passive in advising the charity and its board of directors

• instead, professionals need to advise charities on a pro-active basis about potential problems involving donor restricted charitable gifts before they occur and encourage the charity to review its management of donor restricted gifts

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

• are the restricted gifts special charitable purpose trusts in the first place?

• is the gift a conditional gift or a special purpose charitable trust?

• what are the legal consequences associated with the specific type of restricted gift?

• are restrictions within the objects of the charity?

• are the restrictions impractical or impossible and therefore should not be accepted?

• has an inventory been done of past and current restricted charitable funds to determine if there have been any noncompliance with donor restrictions?

• donor restricted charitable gifts must be used only in accordance with the terms of the applicable restrictions

• a charity must never borrow against donor restricted charitable gifts

• if restrictions are impossible or impractical, then the charity must apply to the court for a cy-près order to use the affected funds in a different manner

• donor restricted trust funds should be placed in segregated accounts until relieving Regulations under the Charities Accounting Act are adopted

• carefully review investment restrictions that apply to special purpose trust funds

• deposit donor restricted charitable gifts into the bank account of the charity and not into the bank account of another charity unless specifically authorized by the donor

• ensure that public fundraising program includes a statement creating a "gift over" of any surplus to be used for the general charitable objects of the charity

• ensure that endowment gifts involve a gift over for both capital and income

• the transfer of donor restricted charitable trust funds between charities generally requires a Deed of Trust under the Trustee Act to change trustees and may also require court authorization in some situations

• carefully review past and present trust deeds of land to determine if there has been a breach of trust and whether proceeds from earlier sale are still impressed with the terms of trust

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

235 Broadway, P.O. Box 67,

Orangeville, Ontario, L9W 2Z5

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

E-Mail: [email protected]

Web Site: www.wardlaw.on.ca

2000 ANNUAL CHURCH & THE LAW SEMINAR

The Impact of New Charity Regulations and the New Charity Property Programme Initiatives by the Public Guardian and Trustee

Tuesday, February 2^nd, 2000

by Ken Goodman

Public Guardian and Trustee of Ontario

800-595 Bay Street

Toronto, Ontario

M5G 2M6

Telephone: (416) 314-2800 Fax: (416) 314-2716

E-Mail: [email protected]

Web Site: www.attorneygeneral.jus.gov.on.ca

The government has streamlined the incorporation process for charities, and created improved methods for dealing with complaints against charities. These changes support the charitable sector, protect the public and reduce red tape.

A Guide to Information for Charities

This Bulletin provides a guide to some basic information available to peple who use, run or donate to charities.

The Public Guardian and Trustee

In Ontario, the Public Guardian and Trustee is responsible for the use of charitable property.

The Public Guardian and Trustee works with charities to help them deal with the problems (i.e., improper investments, improper use of donated property) they encounter. The Public Guardian and Trustee can also inquire into complaints about charities and can protect the public's interest in how charities raise and use their money.

If necessary, the Public Guardian and Trustee can apply to court to prevent those who run a charity from using the assets of the charity improperly.

How to get more information on charities

The Public Guardian and Trustee and the Companies Branch of the Ministry of Consumer and Commercial Relations have published the Not-For-Profit Incorporator's Handbook. This provides useful information to people running not-for-profit corporations, including charities.

The Public Guardian and Trustee has also published a number of information bulletins for people who use, run or donate to charities. The bulletins available are:

Bulletin #2 -Incorporating a Charity Using PreApproved Objects

Bulletin #3 - Duties, Responsibilities and Powers of Directors and Trustees of Charities

Bulletin #4 - Complaining About Charities

Bulletin #5 - Concerned about the Legitimacy of Charities, Non-Profit Organizations and draising

You can buy the handbook at the Companies Branch or at the Ontario Government Bookstore. All of the bulletins and the Not-For-Profit Incorporator's Handbook will be available on the Public Guardian and Trustee Internet site.

Bulletin #2 Incorporating a Charity Using Pre-Approved Objects - is also distributed by Companies Branch.

Please note that the handbook and the charities bulleting are intended to provide basic information on charities. They are not intended to give legal advice. For legal advice, charities should consult their legal advisor.

Useful Addresses

Companies Branch

Ministry of Consumer and Commercial Relations
393 University Avenue, Suite 200
Toronto, ON M5G 2M2
Tel : (416) 314-8880 or in Ontario
toll free at 1-800-361-3223

Office of the Public Guardian and Trustee
Charitable Property Program
595 Bay Street, Suite 800
Toronto, ON M5G 2M6
Tel: (416) 326-1963 or in Ontario
toll free at 1-800-366-0335

Internet: www.attorneygeneral.jus.gov.on.ca

This information is provided as a public service, but we cannot guarantee that the information is current or accurate. Readers should verify the information before acting on it.