CharityVillage® Research: Supreme Court's refusal to allow appeal of the Christian Brothers decision prejudices charities

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Supreme Court's refusal to allow appeal of the Christian Brothers decision prejudices charities
By Terry Carter
Canadian FundRaiser: Vol. 11, No. 9, 2001
The decision last November by the Supreme Court of Canada denying leave to appeal from the Ontario Court of Appeal decision in Christian Brothers of Ireland in Canada has caused confusion for charities and will prejudice the financial viability of the charitable sector in Canada. In permitting tort creditors to seize special purpose charitable trusts of a charity, the Ontario decision will likely become one of the most important decisions affecting charities in Canada in recent memory, primarily due to the negative impact it will have upon major donations to charities.
By exposing special purpose charitable trusts to claims of creditors, the Ontario Court of Appeal has undermined one of the primary means by which charities raise monies from donors. Special purpose charitable trusts used by charities include endowment funds, scholarship funds, building funds, 10-year gifts under the Income Tax Act, donor-advised funds placed with community foundations, and testamentary gifts where the testator imposes restrictions on the use of funds.
Use of special purpose trusts will be curtailed
As donors become more sophisticated with their giving, and demand more accountability from charities, the use of special purpose charitable trusts is becoming an increasingly important fundraising vehicle, particularly for donors making large gifts to charities. However, as a result of this decision, charities can not now assure donors that special purpose charitable trusts will be protected. As a result, this important means of fundraising will likely be curtailed in the future.
The apparent rationale by which the Court concluded that special purpose charitable trusts are exigible, without at the same time blatantly contradicting established principles of trust law in relation to the protection of trust property, is to make a distinction between private trusts and charitable trusts. The underlying assumption appears to be that a special purpose charitable trust held by a charity as trustee is tantamount to a trustee holding property in trust for itself, thereby precluding a trust in the first place.
Misconception: special purpose charitable trusts do not have identifiable beneficiaries
This line of reasoning comes from a misconception that special purpose charitable trusts do not have identifiable beneficiaries to enforce a charitable purpose trust. Therefore, it is as if the charity is holding the charitable property in question for itself, subject only to a trustee-like fiduciary obligation to comply with the requirements of the donor.
This decision fails to recognize is that a charitable purpose trust is a unique trust, exempt from the need for identifiable beneficiaries. Special legal status is given to a charitable purpose trust so that the public-at-large, collectively considered to constitute the beneficiaries, will receive the benefit of a charitable purpose. Since it would be impossible for all members of the public to enforce the trust, it falls to the Crown to do so.
Trustees of private trusts could be subject to creditor claims Since a charitable purpose trust is as valid as a private trust, the decision to let tort creditors seize property held by a charity in a special purpose charitable trust could mean that any trust property held by a trustee - including trust property held pursuant to a private trust - might be subject to claims against the trustee personally. Since such a result would be inconceivable as contradicting established principles of private trust law, the same should be true in relation to charitable purpose trusts.
This decision could also result in discriminatory treatment between otherwise identical special purpose charitable trusts. Some special purpose charitable trust documents permit the trust to be amended to ensure that the trust property can continue to be used for the intended charitable purpose, similar to what a court can do under its cy-prés scheme making power. Practically, this would mean that a charity facing insolvency, a winding up order, or bankruptcy, that was holding a special purpose charitable trust may be able to transfer the fund to another charity and thereby protect that fund. Most special purpose charitable trusts, however, would not likely have included adequate cy-pres clauses and therefore will now be susceptible to creditors' claims.
Are charitable purpose trusts real trusts at all?
Discriminatory results may also occur between perpetual endowment funds given to unincorporated entities and those given to incorporated charities. The Ontario decision has raised the question whether charitable purpose trusts require identifiable beneficiaries distinct from the charity as trustee. This raises the question whether charitable purpose trusts are in fact real trusts at all, as opposed to constituting a trustee-like fiduciary obligation only. This in turn adversely affects the validity of perpetual endowment funds given to charities that are unincorporated associations.
Unlike incorporated charities, unincorporated charities can not receive gifts absolutely, as they are not legal entities at law. Gifts of perpetual endowment funds to unincorporated charities can thus only be valid if the gift constitutes a charitable purpose trust. Since the Ontario decision raises the question whether such trusts exist at law, the validity of perpetual endowment funds to unincorporated charities may now be left in doubt. This may lead to increased estate litigation involving gifts of endowment funds to unincorporated charities, such as testamentary endowment funds to local churches and other small charities.

Lawyers could be held liable
Many lawyers who have advised charities and/or donors that special purpose charitable trusts are exempt from claims against a charity will now have to explain why gifts that had previously been given by donors, and were presumed to be protected from claims as trust property, are now not protected. In fact, lawyers may now be found liable if they fail to advise clients, both charities and/or donors, that special purpose charitable trusts are no longer protected from creditor claims and that alternatives should be canvassed in an attempt to "credit-proof" special purpose charitable trusts where possible.
It is unfortunate that the Supreme Court denied leave to appeal this decision. The only practical alternative now is to seek legislative protection for special purpose charitable trusts through remedial legislation at the provincial level.
Terrance S. Carter practices at Carter and Associates in Orangeville, Ontario and is affiliated with and counsel to Fasken, Martineau, DuMoulin LLP in Toronto, Ontario. He specializes in the area of charity and not-for-profit law. For more information, call 519/942-0001, fax 519/942-0000 or web site www.charitylaw.ca.