Written by Derek Hetherington
UCalgary Law | JD Candidate 2023
Non-profit institutions are a significant component of the Canadian economy. In 2020, community non-profit institutions generated $29.9 billion in economic activity, and business non-profit institutions added $16.4 billion.[i] Given the scale and continued growth of non-profit activity in Canada, non-profit law is an important, if often overlooked aspect of the Canadian legal landscape.
There are a variety of benefits to operating as a non-profit rather than a business corporation. Non-profits can apply for charitable organization status, allowing them to solicit donations and issue tax receipts. They may also be eligible for government and private funding that is unavailable to profit-seeking enterprises.
While there may be advantages, a prospective non-profit venture founder may rightly ask whether they will be allowed to pay themselves for their work. Indeed, we cannot survive on goodwill, and even those of us with the noblest and most selfless intentions have bills to pay. The answer to this question is simple: it depends.[ii]
The issue of director compensation is treated differently from province to province. Some allow fair and reasonable compensation for services rendered, while others impose more onerous limitations. One should consult the governing statute in their province to ensure any compensation drawn from the organization is allowable.
The requirements for charitable organizations in Ontario, to use one example, are set out in the Charities Accounting Act[iii] as amended by Regulation 4/01. In that province, directors may not receive a salary or fees simply for occupying the position of director,[iv] but they can be compensated for goods, services, and facilities provided to the charity. Other requirements include:
These requirements also apply to persons connected to a director, which includes, but is not limited to, a director's family, any employers of the director's family, and corporations of which the director owns or controls more than 5% of the shares or more than 20% of the voting membership interests.
To ensure that the process is fair, a director cannot be present at any discussion, or vote on any matter, related to his or her own compensation, or the compensation of any connected persons.[ix] Moreover, the total number of directors receiving payment under the amended regulations cannot exceed 20% of the number of voting directors,[x] meaning that if one director is being compensated, there must be at least four other unrelated and uncompensated voting directors.[xi] In practical terms, this means that to compensate a second director, the organization must expand its board to 10 members.
One workaround to these requirements may be to rotate the director that is compensated. For example, if the board decides that it is in the best interest of the organization to compensate both Director A and Director B, they would first pass a resolution to compensate Director A for a certain term between board meetings.
At the next meeting, the board would pass another resolution to end Director A’s compensation and hold a new vote to compensate Director B. Director A would not participate in the discussion or vote related to Director A’s compensation, nor would Director B participate in the discussion or vote related to Director B’s compensation. Assuming the board meets every 3 months, such an arrangement would allow an Ontario non-profit or charity to compensate up to four directors in any given year.
Should a charity or non-profit wish to provide compensation outside of the rules provided in Regulation 01/04, this may be possible by obtaining a court order under section 13 of the Charities Accounting Act.[xii]
Non-profits that are also charitable organizations are subject to additional Canada Revenue Agency requirements. Directors of these organizations should also consider that their charitable status may be revoked if director compensation, whether direct or indirect, appears excessive. Thus any renumeration should be commensurate with the time and resources a director contributes to the organization.
In conclusion, directors of non-profits may receive compensation, but there are certain rules that must be followed that vary by province. Whether a non-profit is also a charitable organization will raise additional considerations. In general, where compensation is possible, it must be reasonable and directly linked to actual goods or services rendered to the organization.
[i] Statistic Canada, “An overview of the Non-Profit Sector in Canada, 2010 to 2020” (last accessed 19 November 2022), online: <https://www150.statcan.gc.ca/n1/pub/13-605-x/2022001/article/00002-eng.htm>.
[ii] Three years of law school has taught me that “it depends” is the answer to almost all legal questions.
[iii] Charities Accounting Act, R.S.O. 1990, c. C.10 (last accessed 20 March 2023) online: Government of Ontario <https://www.ontario.ca/laws/statute/90c10>.
[iv] O. Reg. 4/01: Approved Acts of Executors and Trustees s. 2(4)1 (last accessed 20 March 2023) online: Government of Ontario <https://www.ontario.ca/laws/regulation/010004>.
[v] Supra note 3 at s. 2(5)a.
[vi] Ibid at s. 2(5)b.
[vii] Ibid at s. 2(5)c.
[viii] Ibid at s. 2(6)a.
[ix] Ibid at s. 2(8).
[x] Ibid at s. 2(9).
[xi] Ibid at s. 2(7).
[xii] Supra note 4 at s. 13.
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Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.