Among other things, Bill 154 (the proposed Cutting Unnecessary Red Tape Act) makes significant changes to the Charities Accounting Act (“CAA”). The changes give charities increased freedom and certainty in making “social investments” where the focus is mission-related results rather than financial benefit to the charity.
A brief backgrounder is in order before we dive in to the substance of the changes. First, despite its name, the CAA applies to all corporations operating in Ontario that are incorporated for a religious, educational, charitable or public purpose – not just to registered charities. It also applies to all individual executors/trustees under a will or other instrument that vests funds for a religious, educational, charitable, or public purpose. All these corporations and individuals are referred to as “trustees” under the CAA and that is how we will refer to them here as well. The “trust property” is any real or personal property held by such a corporation, or coming under the control of such an individual.
Section 10.1 of the CAA currently states that certain parts of Ontario’s Trustee Act apply to all these corporate and individual trustees. Bill 154 is changing the CAA by modifying section 10.1 and adding new sections under it to give trustees the authority to use trust property to make “social investments” under far less limited circumstances than usual. We summarize the content of the changes below.
What is a social investment?
The Bill defines a “social investment” as an investment by a trustee of the trust property in order to (a) directly further the purposes of the trust, and (b) to achieve a financial return. A financial return is achieved if the outcome of the investment is financially better for the trust than expending all the property would be.
The use of the trust property may have other results besides these two without affecting its character as a “social investment”.
What power do trustees have to make social investments?
A trustee may make social investments as long as they are not made with trust property that is subject to a limitation on capital being spent for the purposes of the trust. It is enough that the trustee expect that making the investment will not contravene the limitation or that the trust allows for it.
The Bill also creates an exception where many Trustee Act provisions about making investments, which generally apply to trustees, do not apply to the making of social investments. However the sections specifically about mutual, pooled, segregated, and common trust do continue to apply.
Nonetheless, any of this power to make social investments may be restricted or excluded by the terms of the trust.
What duties do trustees have regarding social investments?
Unlike the powers granted by the Bill, the duties that it confers may not be restricted or excluded by the terms of the trust.
These duties include:
- Before making the investment, determining whether advice should be obtained about the proposed social investment before making it, and if so, to obtain and consider the advice;
- Before making the investment, satisfying themselves that it is in the best interests of the trust to make the investment because of the benefit they expect it will achieve for the trust;
- Review the trust’s social investments from time to time;
- When reviewing, determine whether advice should be obtained and if so, obtain it.
The trustee are entitled to rely on the advice they obtain without creating a breach of trust.
How do these changes benefit charities?
The main takeaway of the changes is that these “social” investments are not subject to many of the onerous investment rules of the Trustee Act that most other kinds of investments labour under. The Bill specifically gives this freedom to charitable organizations in order to help them along in achieving their mission.
This is particularly important for charities because they frequently make investments that prioritize social rather than financial returns, and it has never been clear to what extent such investments meet the Trustee Act investment rules. Those rules, predictably, focus on levels of financial risk and financial return as a measure of whether an investment is “prudent”.
The changes therefore makes space for charities’ particular line of investments, clarifies and simplifies what they need to do to stay within the law. It remains to be seen what material effect this increased freedom and certainty will bring, but we expect it will be palpable.