Trusts as an Organizational Option

                Within the next year or so, charities and non-profits which are incorporated under both Federal and Ontario no-share corporation legislation will be faced with mandatory changes which will require re-registration under the soon to be effective corporate legislation and which has much stricter rules relating to what can and cannot be incorporated into the by-laws. There will also be more onerous requirements depending upon whether a corporation is receiving funds from the public or from the government.

                This sea change in the law will also have an impact on decisions for new organizations which are being created.most notably in which jurisdiction they wish to incorporate under.

                It may be time for organizations to take a look at another option, namely using an operating trust which takes it out of any of the statutory rules and which gives a lot more flexibiulity.

In most common law countries outside North America, the "normal" way to set up a charity is by the settling of a trust for charitable purposes. Indeed, when you look at the case law and the texts on the subject of charity, the language of "trust" is paramount. Yet, in Canada as well as in the United States, the most common way to create a charity is by way of a corporation which has no share capital.

                One can speculate about the reasons for this "new world" philosophy. Many believe it is simply because law schools teach only minimal trust law and because the commercial world, particularly banks, are unfamiliar with the workings of trusts. Thus, using corporations becomes the norm.[1]

                But arguably, the use of trusts has many attractions which corporations do not share. These include:

·         Privacy, since there is no corporate record

·         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

·         The ability to explicitly allow trustees to act at their discretion within broad guidelines also offers maximum flexibility

·         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.

·         The trust deed itself can be amended simply by following the rules in the document.whatever they might be

·         The trustees can serve indefinitely and there are no statutory limits

·         The Trustees, if the document so provides, can replace themselves, add new blood or maintain the status quo

·         The creation of a trust is cheaper as there is no need to reserve a corporate name or pay filing fees; there are no annual corporate filings required either; and in terms of turn-around time, the full trust can usually be created, signed, sealed and delivered in a day or so without government bureaucrats having any say.

So why are trusts not used more often?

There are two reasons, we would suggest. By far the most significant is that unlike the directors of a charitable or non-profit corporation, the trustees have personal liability for the debts of the trust. This possibility of liability tends to scare people away from being a trustee.

But the real question is whether the fear is justified?

First, it should be recognized that even corporate directors have significant potential exposure for personal liability under legislation ranging from the Income Tax Act to various environmental acts. So trustees have not much exposure there.

Second, in practical terms, for many types of charities, notably foundations, personal exposure ranges from minimal to nil. A group of trustees which oversees the investment of capital and the distribution of income are not likely to have much risk exposure. [2]This might not be as true with a charity which is active in providing services to people at risk.

Third, it is possible to protect the Trustees by use of both indemnities and insurance.

And fourth, in more and more cases, it is possible to use a corporation[3] as the trustee of a charity. Where this is done, the individuals who serve as officers of the charitable trusts do so as agents or employees of the corporate trustee. This was for many years standard practice with trust companies being the charitable trustees.especially where the charitable trust was created by a will. But in most provinces, a corporate trustee need not be a trust company, given that corporations have the legal capacity of a human being under their statutes of incorporation.

In the case of a charitable trust where there is just a single corporate trustee, the CRA takes the position that it will automatically be classified as a private foundation which may or may not be a problem, depending upon the facts. If warranted, there can be multiple corporate trustees.

We mentioned two reasons why trusts are not much used. If you look at the list of benefits (which is not all inclusive) of using a trust, it becomes apparent that the attractions are primarily "control" and privacy factors. Obviously, with a charity which is "public", it may be attractive to have much more transparency, to have wide membership and to have regular elections for the board. While these things can be achieved through a well-draughted trust deed, it is arguable that using the corporate form is more appropriate in such cases.

But where the organization is essentially a private one, say with a single beneficiary charity, the use of a trust may have attractions. Thus, if you have a public charity which has broad membership d which has a high level of transparency, the use of a trust to create an "associated foundation" may be appropriate, insulating it from short term considerations and allowing the trustees to take the long view.

We hardly believe that Canadians who wish to set up charities will suddenly become aficionados of trusts. But the fact of the matter is that in many cases, there is a knee-jerk reaction which leads to incorporation where the objectives might be achieved quicker, cheaper and with more flexibility by using a trust. We are, we might add, great fans of using such trusts in the case of the creation of private foundations where publicity is not sought and where family continuity can be more easily maintained.

As we said earlier, the substantive changes in no-share corporate statutes federally and in Ontario may warrant another and more sympathetic look at the use of trust.