Canada: The Canada Not-For-Profit Corporations Act And Quebec Trust Law: A New Opportunity For Quebec Donors

Introduction

It has been increasingly recognised by commentators that the next generation of philanthropists have a different approach to giving than did past generations.¹ Donors today have increased expectations on the use of their donations and an increased desire to participate in how their funds are spent. Charities are responding to this change in donors' behaviour by permitting donors to restrict the use of their funds or to participate in the decision making process as to how funds are spent. Charities also know that involved donors typically give more than uninvolved donors.²

To permit such participation or to impose such restrictions, several legal vehicles are available to donors. One of those vehicles is the charitable purpose trust. A charitable purpose trust has been described in the Restatement of Trusts³ as follows:

A charitable purpose trust is a fiduciary relationship with respect to property arising as a result of a manifestation of an intention to create it, and subjecting the person by whom the property is held to equitable duties to deal with the property for a charitable purpose.

In essence, a charitable purpose trust is a trust that is administered by its trustee for the furtherance of a charitable purpose. When a donor makes a gift to a charity using a purpose trust, he or she creates a separate trust that must be administered in accordance with the law of trusts, which includes the prohibition from using the funds given for a purpose other than the purposes set out in the trust deed.

In addition, the Canada Revenue Agency (the "CRA") takes the position that if the trustee is already a registered charity, then a charitable purpose trust is not required to be registered separately by the CRA as a registered charity, thus avoiding registration delays.⁴

General Prohibition Against Corporate Trustees in Quebec and Exceptions

With the adoption of the Civil Code of Québec (the "CCQ") in 1994, Quebec introduced the social trust, which is essentially a purpose trust. Article 1270 CCQ provides that a social trust is a trust constituted for a purpose of general interest such as a cultural, educational, philanthropic, religious or scientific purpose.⁵ It is prohibited by article 1270 CCQ from having the making of profit or the operation of a business as its main object. The Quebec social trust provides a complete code for the operation of such a trust and would be a convenient, as well as, an efficient vehicle for donors to use. Unfortunately, the use of purpose trusts in this manner is generally not permitted in Quebec due to a technical prohibition contained in the CCQ. The CCQ contains a general prohibition against corporations acting as trustees unless such corporations are authorised by law to act as such.⁶ The CCQ, which lays down the jus commun⁷ (or common law) of Quebec, creates this general prohibition at article 304 CCQ, which provides:

[Emphasis added]

Article 304 CCQ is completed by article 1274 CCQ, which is found in Title Six of Book Five governing the law of trusts, which reads:

Thus, any trustee other than a natural person must be authorized by law to act as a trustee. The CCQ does not provide any guidance as to what type of legal authorization is contemplated by articles 304 and 1274 CCQ. It is accepted by doctrine that the law can be either an act of the Quebec legislature or of Parliament.⁸ This logically flows from the shared distribution of the power of incorporation found in the The Constitution Act 1867.

Provincial incorporation power is found in subsection 92(11) of the The Constitution Act 1867 which provides that the provinces have the power to make laws in relation to "the incorporation of companies with provincial objects." The Supreme Court of Canada in Canadian Pioneer Management Ltd. et al. v. Labour Relations Board of Saskatchewan et al., [1980] 1 SCR 433 confirmed provincial power over the regulation of the activities of a trust company.

As concerns Parliament, the courts have recognized the federal incorporating power by virtue of the residuary nature of the peace, order, and good government power found in the opening words of section 91,⁹ which the Supreme Court of Canada has held includes the power to incorporate trust companies.¹⁰

Thus, a trust company incorporated under An Act respecting trust companies and savings companies, CQLR c. S-29.01 or the Trust and Loan Companies Act, S.C. 1991, c 45 may act as a trustee in Quebec. Health care or social service institutions governed by An Act respecting health services and social services, CQLR, c. S-4.2 (the "Health Act"), as well as, foundations of such institutions¹¹ may also act as trustees of contributions made to such institutions for special purposes.¹² To this list one may now add not-for-profit corporations governed by the Canada Not-for-Profit Corporations Act (the "CNCA").

Additional Exception created by the CNCA

One of the unintended consequences of the coming into force of the CNCA is that it contains an additional authorization for corporations to act as trustees in Quebec. This authorization flows from sections 31 and 32 of the Act, which provide:

Section 31 of the CNCA makes it clear that unless property is the subject of an express trust for a specific purpose, it is owned beneficially by and vested in the corporation. Section 32 of the CNCA makes it clear that the directors are not the trustees for any property of the corporation, even property held in trust. When property is transferred to a corporation in trust, the corporation is the trustee of such a trust. To understand the scope of sections 31 and 32 of the CNCA, one must understand the purpose of the provisions.¹³

It appears that the purpose behind the inclusion of sections 31 and 32 in the CNCA was to address the confusion under the common law as to whether property of a charitable corporation is owned beneficially by the charity or on trust for charitable purposes and whether directors of a "charitable" corporation are to be characterized as trustees.¹⁴ The confusion in this area stems from a number of decisions by the Ontario courts. In Re Christian Brothers of Ireland in Canada, the Court of Appeal of Ontario had to address, in part, whether the assets of the Christian Brothers were immune from tort liability because of the manner in which the assets were held. In the Court of Appeal, Feldman J.A., for the majority, recognized that while charitable corporations generally hold their assets beneficially as all corporations do, charitable corporations are obliged to use their assets only to further the charitable purposes of the corporation.¹⁵ She based her decision on the following passage by Slade J. in Liverpool and District Hospital For Diseases of the Heart v. A.-G., [1981] 1 Ch. 193 at p. 209, [1981] 1 All E.R. 994:

In a broad sense a corporate body may no doubt aptly be said to hold its assets as a "trustee" for charitable purposes in any case where the terms of its constitution place a legally binding restriction upon it which obliges it to apply its assets for exclusively charitable purposes. In a broad sense it may even be said, in such a case, that the company is not the "beneficial owner" of its assets. In my judgment, however, none of the authorities on which Mr. Mummery has relied, including the decision in Construction Industry Training Board v. Attorney General, [1973] Ch. 173, establish that a company formed under the Companies Act 1948 for charitable purposes is a trustee in the strict sense of its corporate assets, so that on a winding up these assets do not fall to be dealt with in accordance with the provisions of s. 257 et seq. of that Act. They do, in my opinion, clearly establish that such a company is in a position analogous to that of a trustee in relation to its corporate assets, such as ordinarily to give rise to the jurisdiction of the court to intervene in its affairs; but that is quite a different matter.

Feldman J.A. then went on to state that "[b]ecause of the trust-like obligations of the charitable corporation, it is accepted that the court maintains its supervisory scheme-making power whether a charity's legal form is as a charitable trust or a charitable corporation." While she held that the assets of the Christian Brothers, regardless as to whether they were held in trust or not, were available to pay the tort claims made against the corporation, her judgment essentially argues for the recognition of trustee-like obligations on chartable corporations. Although no one would dispute that charities should use their resources for the purposes for which they were given, to find that such property is held in a trust-like relationship could impose unnecessary restrictions on the manner in which such corporations use or dispose of their assets.

Likewise, in a number of decisions in Ontario, courts have grappled with the question of whether directors of a charitable corporation are subject to the same fiduciary duties as directors of non-charitable corporations or whether a higher standard of care is imposed upon such directors.¹⁶

It is arguable therefore that sections 31 and 32 of the CNCA are remedial legislation¹⁷ in that the provisions are designed to provide clarity. Thus, the provisions make it clear that the directors of a corporation governed by the CNCA are not trustees of funds held by the corporation. They also make it clear that the corporation will only be holding funds in trust when property was transferred to the corporation expressly in trust for a specific purpose or purposes.

As the CNCA does not prescribe the law that governs such trusts, based on sections 8.1 and 8.2 of the Interpretation Act¹⁸, for property transferred to the corporation in trust by a contract that would be subject to Quebec law (i.e. the CCQ), one would need to refer to the law of Quebec. It is submitted that sections 31 and 32 of the CNCA are a legislative authorization to which articles 304 and 1274 CCQ refer. As discussed above, neither article 304 nor 1274 CCQ prescribe the manner by which a corporate trustee is to be authorized by law; it merely says that the corporate trustee needs to be authorised by law. It is arguable that section 31 of the CNCA gives such authorisation in its closing words that provide "...unless that property was transferred to the corporation expressly in trust for a specific purpose or purposes." Thus, if property were transferred by way of an express purpose trust, ipso facto the corporation would be entitled to act as trustee of those funds.

There is no public policy reason that would argue against such recognition, especially since the CCQ contains detailed rules on social trusts and private trusts that are far more expansive than purpose trusts under the common law.¹⁹ Article 1268 CCQ permits the creation of a private trust for any private purpose and article 1270 CCQ permits the creation a social trust that is constituted for a purpose of general interest such as a cultural, educational, philanthropic, religious or scientific purpose. At common law, purpose trusts without beneficiaries may only be created for charitable purposes.²⁰ Such recognition under Quebec law of a not-for-profit corporation acting as a trustee of a purpose trust (both registered charities and non-registered not-for-profit corporations) can be seen as furthering this legislative intention.

The CCQ contains a rule at article 1275 CCQ, which most common law lawyers would find curious, that may be raised against the recognition of authorization. Article 1275 CCQ provides that a beneficiary or settlor of a trust may act as trustee but he or she must act with a trustee who is neither a settlor nor a beneficiary. The courts have held that article 1275 CCQ is of public order therefore it cannot be contracted out of by the parties settling the trust.²¹ The trust contemplated by section 31 of the CNCA refers to a specific purpose or purposes in which case the corporation is not a beneficiary of the trust per se therefore, there is no breach of article 1275 CCQ.²²

Conclusion

With the CNCA, Parliament has created modern corporate legislation to govern non-share capital corporations. Moreover, for Quebec donors, it has opened the door to new opportunities by providing a legal vehicle to make charitable gifts in a manner that was only permitted in common law provinces. We are convinced that this modern approach will be well received by Quebec donors.

Footnotes

1 Charlotte Cloutier, "Donor-Advised Funds in the U.S.: Controversy and Debate" (2004) 19(2) The Philanthropist 85 ("Cloutier") and Terrance S. Carter, "Donor-Restricted Charitable Gifts: A Practical Overview Revisited II" (2003) 18(1) The Philanthropist 121.

2 Cloutier, ibid at 88.

3 American Law Institute, Restatement (Second) of Trusts (Washington, D.C.: 1959) at para. 348.

4 Canada Revenue Agency, "Summary Policy CSP-R22: Restricted Funds" (September 3, 2003; revised November 23, 2005).

5 The purposes contemplated by article 1270 CCQ are broader than the common law definition of charity, which is the definition generally used by the tax authorities under the Income Tax Act (Canada) (the "ITA") and the Taxation Act (Quebec) (the "TA"). Generally, under both the ITA and the TA, the definition of charity developed by the courts culminating in the House of Lord's decision Commissioners for Special Purposes of the Income Tax Act v. Pemsel, [1891] AC 531 (HL), is used to determine what purposes are charitable. At common law, purposes and activities are charitable if they fall within one or more of the following four heads: relief of poverty, advancement of education, advancement of religion or other purposes beneficial to the community. At present, there has been limited analysis in Quebec on a civil law definition of charity and whether it is broader than the "Pemsel" definition. If such a civil law definition exists or is developed, given sections 8.1 and 8.2 of the Interpretation Act R.S.C. 1985, c I-21, it is arguable that the civilian definition should be adopted under both the ITA and the TA for charities that are located in Quebec.

6 Troy McEachren, L'Administration du bien d'autrui (Montreal: JurisClasseur Québec - Collection Thema, 2013) at para. 3; Maurice Martel & Paul Martel, La compagnie au Québec, les aspects juridiques, vol. 1 rev. ed. (Montreal: Éditions Wilson & Lafleur, Martel ltée, 1999) at 9-2 to 9-3; Jacques Beaulne, Droits des fiducies, 2nd ed. (Montreal: Wilson & Lafleur, 2005) at para.192; and John B. Claxton, Studies on the Quebec Law of Trusts (Toronto: Thomson Carswell, 2005) at para. 7.32

7 Preliminary Provision, Civil Code of Québec.

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