Charities – Deed or Declaration of Trust?

Paul S.O. Barbeau0

 

In Canada and the United States, charities are often carried on through incorporated entities, such as non-profit corporation or societies. However, outside of North America, and in most common law countries, charities are often set up by way of a trust for charitable purposes.

This is so, as charitable trusts can be, and in fact must be, created for specific charitable purposes, and need not have a specific beneficiary.

It is also important to note, in a Canadian context, that the Income Tax Act (Canada) specifically and implicitly endorses the use of charitable trusts. That is to say, that the definition of charitable organization simply refers to an applicant which is an “organization whether or not incorporated”, and the definition of a charitable foundation is more limited but explicit, referring to a “…corporation or a trust”.

So why might someone wish to utilize a trust, rather than a corporation or society. The benefits generally understood to arise from the utilization of a trust for the purpose of establishing a charity in Canada, are as follows.

  1. Privacy, since there is no corporate record which can be searched by “outsiders”;
  2. Flexibility, since the trust need not follow the corporate rules and the settlor (the person who creates it) can allow the trustees to set their own operational rules;
  3. There is no need for “members” and directors, since the people who operate the trust are simply the trustees. This in turn eliminates extra meetings, minutes and resolutions;
  4. The trust deed itself can be amended simply by following the rules in the document (i.e. whatever they might be);
  5. The trustees can serve indefinitely and there are no statutory limits;
  6. The Trustees, if the document so provides, can replace themselves, add new blood or maintain the status quo; and,
  7. The creation of a trust is cheaper as there is no need to reserve a corporate name or pay filing fees, and there are no annual corporate filings required either;

Aside from the general Canada Revenue Agency (“CRA”) rules, only provincial Public Trustees have jurisdiction over trusts if there are  potential problems. Given that most provincial Public Trustee offices are reactive and not proactive, unless some complaint is lodged (perhaps by a trustee or perceived beneficiary) there is seldom any interference in the operations of the charity.

In relation to provincial oversight, it is important here to note, that the common law rule is that trusts are resident where a majority of the trustees reside. Recent tax cases seem to be adding a corporate test, namely where functional control resides if de facto this lies with people other than the trustee.

Charitable Registration

Turning now to the issue of registration of the charity, the trust document must contain the following:

  1. the trust’s name;
  2. the names of the original trustees;
  3. the trust’s charitable purposes;
  4. the rules governing how the trustees of the trust administer all money received;
  5. a provision in which the trustees give assurance that money received will be spent only for the purposes outlined in the trust document;
  6. a provision detailing how the trustees will be replaced;
  7. the effective date of the document; and,
  8. the signatures of all of the trustees.

CRA recommends that applicants submit a copy of the trust document in a draft format for their review when they apply for registration as a charity (i.e. along with submission of the Application to Register a Charity under the Income Tax Act – Form T2050). The reason for this request is that amendments to a trust that is already established may not be possible or may require court approval.  If the application is approved, applicants will be required to submit a signed trust document prior to registration.

Conclusion

If you would like to discuss the establishment of a charity by way of a Deed or Declaration of Trust, please call Paul Barbeau, to discuss these matters in further detail.