The International Journal
of Not-for-Profit Law

Volume 4, Issue 2-3, March 2002

Canada

Ontario (Public Guardian and Trustee) v. AIDS Society for Children (Ontario) (2001), 39 E.T.R. (2d) 96

The decision of the Ontario Superior Court of Justice in the AIDS Society for Children (Ontario) case concerns the relationship of charities to third party fundraisers hired to conduct fundraising drives. The AIDS Society for Children (the “Society”) hired two fundraising companies to conduct a telephone campaign and door-to-door canvassing on its behalf. The funds raised were to be used to build a hospice for children suffering from HIV/AIDS.

Under the contracts, the fundraisers would be entitled to 10% of gross receipts, in one case, and 50% of net receipts in the other. In fact, the company conducting the telephone campaign kept some 76% of all funds raised and the door-to-door canvassers kept 80%. No funds were ever expended by the Society and by the time of the hearing, the Society was in debt. After receiving complaints from the public, the Society’s activities were suspended by the Court and the Public Guardian and Trustee (“PGT”) became the trustee of the Society’s assets.  The PGT brought an application to compel the Society to pass its accounts pursuant to the Charities Accounting Act. The application was adjourned pending the determination of a series of questions of law brought by the PGT and answered in this decision of Madame Justice Haley.

The Court made a series of findings that will affect the subsequent passing of accounts by the Society and should be considered by any charity that hires outside organizations to conduct its fundraising drives:

1. The Court re-affirmed its inherent jurisdiction to “direct and control the administration of charities” through the PGT.
2. The Court found that the Society and its directors have a fiduciary duty to the public and, as such, both are responsible to account to the public, as represented by the PGT, for all funds – i.e., its gross, not net, receipts — that the Society raises.
3. The fundraisers hired by the Society are the Society’s agents. Consequently, though not explicitly stated in the decision, as with any principal-agent relationship, the Society is liable for the actions of the fundraisers. Further, the fundraisers, as agents, are required to account to the Society for all funds they received from the public on the Society’s behalf, not merely for the net receipts.
4. The Court examined whether the agreements with the fundraisers were void or voidable as contrary to public policy or for some other reason. The Court declined to rule specifically on this question until the accounts are before it. However, the Court did hold that the agreements in question could be viewed not merely as improvident contracts but as voidable for being contrary to public policy and/or for misrepresenting to the public the amount of money that would actually be put towards fulfilling the charitable purposes of the Society.  The Court left it open to the PGT to make this argument in the course of the passing of accounts.
5. The Court also considered whether the Society offended the rules in the Income Tax Act governing the disbursement quotas for charities (the “80/20 rule”) and what the effect of this was on the relationship between the Society and each of the fundraisers. The Court noted that the contracts themselves made it impossible for the Society to meet its disbursement quota, which may have a bearing on the previous question of whether such contracts are themselves void or voidable. However, the Court left these questions to be determined on the passing of accounts.

With these questions answered, the PGT can now proceed with the application for a formal passing of accounts. Charities would be advised to examine their practices in light of this decision and scrutinize their relationships and contracts with outside fundraisers, keeping in mind the principal-agent nature of that relationship and the charity’s duty to account for all receipts.

It is interesting to note that this is one of only a few cases in which the Ontario provincial body with the constitutional authority to regulate charities, the PGT, has exercised its jurisdiction.  More often that regulatory function is performed in Canada by the taxing authority, the Canada Customs and Revenue Agency.

Rachel L. Blumenfeld of Miller Thomson LLP in Toronto, Canada; rblumenfeld@millerthompson.ca