Ontario (Public Trustee) v. Toronto Humane Society, decided by Ontario High Court of Justice in 1987, is a leading decision invoking the common law rule against directors of a charitable corporation receiving remuneration as employees.
The Toronto Humane Society is a charitable corporation originally incorporated under Ontario law in 1887. By 1987, it had been continued under the Ontario Corporations Act and had grown to more than $12 million in assets, but was subject to a battle for control. One faction of the board had seized control, on an agenda of preventing the continued use of animals for medical research.
Two newly elected directors soon became paid employees of the corporation, one while continuing to serve as a director. Their salaries were described by the court as not "nominal".
Anderson, J. made several rulings that explain the rationale of the charity law rule prohibiting directors from receiving remuneration in their capacity as employees:
- unlike the case of a commercial corporation, a charitable corporation does not have a body of shareholders with a financial interest in scrutinizing and controlling the activities of the directors;
- directors have a fiduciary obligation akin to the duties of trustees a charitable trust;
- if directors are to pay themselves, it must be either by express provision in the constating documents of the corporation or by order of the court, the latter being the only practicable mechanism;
- where there is deemed to be sufficient warrant to pay a director a salary as an employee of the corporation, a mechanism lies in obtaining an order of the court upon notice to the Office of the Guardian and Public Trustee (PGT); and
- the court has authority to prohibit the payment of remuneration to a director either under:
- the Charities Accounting Act (Ontario); or
- the inherent equitable jurisdiction of the court.
3. Key Observations
The principle of Toronto Humane Society has much broader application than simply paying directors remuneration as employees. The court also adopted UK authority prohibiting directors from receiving remuneration in a professional capacity, stating that it was an inflexible rule that, unless otherwise provided, a director is not entitled to make a profit and is not allowed to put himself in a position where his interest and duty conflict.
A close reading of Toronto Humane Society also provides some judicial recognition that the constating documents of the corporation could expressly permit payments to directors in another capacity. Thus, if the articles or letters patent enabled a director to receive reasonable remuneration for acting in another capacity, this would seem to meet the first of the two alternate exceptions set out in Toronto Humane Society. However, this exception does not seem to have been applied in any subsequent jurisprudence and the PGT, which must approve letters patent and supplementary letters patent of an OCA charitable corporation, would definitely block this type of change.