What are a director’s responsibilities when investing charitable property?
Q: As a director of a charity, what are my responsibilities when investing charitable property?
In Ontario, charities that make investments must do so in accordance with the rules established by the Trustee Act unless their governing documents state that the Trustee Act does not apply.
The Trustee Act establishes the prudent investor standard, which requires that the directors of charitable organizations must invest property with the care, skill, diligence and judgment that a prudent investor would exhibit when making such investments.
The Trustee Act lists the factors that a prudent investor should consider when investing charitable property, which are:
- general economic conditions;
- the possible effects of inflation or deflation;
- expected tax consequences;
- the role that each investment plays in the overall investment portfolio;
- the expected return on investment;
- the need for liquidity, regularity of income and preservation or appreciation of capital; and
- an asset’s special value, if any, to the charity’s purposes or beneficiaries.
Ensuring that investments are sufficiently diversified is also a necessary requirement.
Q: Can decision-making power regarding a charity’s investments be delegated to an investment adviser?
Obtaining advice from an investment adviser is permitted by the Trustee Act. Charities are permitted to delegate investment decisions to a qualified individual, provided that:
- the delegation is done only to the extent that a prudent investor would delegate;
- an investment plan is created;
- an agency agreement between the charity and the investment manager is created; and
- the investment agent is appropriately selected and diligently supervised.
Q: What are the potential consequences if the prudent investor standard is not met?
If the directors of a charity fail to meet the prudent investor standard when making investments, the directors could potentially face personal liability for the losses incurred. The Canada Revenue Agency could potentially also revoke the charity’s charitable status due to mismanagement of charitable property.
Q: What steps should a charity take to ensure its investments are made inline with legal requirements?
It is strongly recommended that charities seek legal advice regarding their investment plans. If investment decisions are delegated to an investment adviser, having a well drafted agency agreement between the charity and the investment manager in place is crucial. Maintaining good records which show that the investment plan was made in a prudent manner considering the appropriate factors is also advisable.
If your charity needs advice ensuring it is investment strategies are compliant with applicable legal requirements, please feel free to reach out to me directly at 905-667-6419 or by email at mramsey@rossmcbride.com.
This article was originally published by The Hamilton Spectator.
