Bracing for the budget impact
By Terrance S. Carter, Barry W. Kwasniewski and Ryan M. Prendergast, Carters Professional Corporation
Ontario’s 2019 budget may affect many nonprofit and charitable organizations across the province. Organizations expecting changes in their provincial funding arrangements need to know their specific rights and responsibilities.
Nonprofit boards of directors and leadership need to take a clear-headed and informed approach to resolve fiscal challenges. Proper planning and preparation can ease the transition for clients, community, and staff if you need to restructure. This blog post offers some points to consider for organizations facing reduced or eliminated funding, drawing on a more in-depth bulletin we have written, which we would encourage readers to read.
Know your funding agreement
If you have been told by your provincial government ministry that your funding is being reduced or eliminated, or if you need to return funding to the government, read your agreement carefully to understand your organization’s rights and obligations. For instance, there may be contractual notice requirements that layout the timing and process by which funding is reduced or eliminated – and you should make sure that the government has provided proper notice.
Consider your options
In the face of funding cuts, the board and leadership need to take a close look at their options. This means asking some hard questions, but also looking for new opportunities. It’s worth reviewing some important questions to help determine a course of action:
Can the organization continue to function, and if so, for how long? If the organization is capable of continuing, can certain programs be eliminated or reduced in scope?
If programs need to be eliminated in order for the organization to remain financially sustainable, how will the organization notify the beneficiaries or participants of the programs and manage the program wind-down process?
Are there other funding sources potentially available either in the short- or long-term?
Can the organization remain financially viable by reducing its costs, including terminating some of its employees or selling certain assets?
Can any of the organization’s programs be transferred to another charity or not-for-profit with the resources to maintain those programs?
If it is determined that the organization is not able to continue on its own, are there opportunities to join with other organizations, e.g., by amalgamation or other types of mergers?
Clearly, there is a lot to consider. As part of its fiduciary duties, the board needs to consider the strategic alternatives that may be available to the organization. The board should have available updated and current documentation with respect to the organization’s financial situation, its material contracts (including contracts with employees and suppliers) and its insurance policies, including Commercial General Liability Insurance, and Directors and Officers Liability Insurance, as well as any outstanding or potential claims. Prior to any final decisions being made, the board will need to consider obtaining professional advice from the organization’s legal and financial advisors.
Termination costs
If an organization decides that some or all of its employees need to be terminated, the board will need to carefully consider the potential costs. Losing provincial funding doesn’t absolve an organization from their legal obligations regarding giving notice or providing lieu pay. Having termination language in an employment contract may provide some limits, but each case should be carefully reviewed.
Executive management also needs to inform directors that employees are continuing to get paid on schedule, and that tax and other deductions are being applied as legally required.
If worse comes to worst, and an organization can’t pay staff or creditors, insolvency may be the only option. In this scenario, a board should seek professional advice as soon as possible in order to reduce the risk of potential personal liability and liability for the organization.
Closing up shop
If a board does choose to dissolve an organization as the best or only option, it needs to consider a number of issues:
Time: Winding up operations doesn’t necessarily mean the organization has to be dissolved immediately. The board may want to look at continued corporate indemnification of directors and officers, as well as insurance considerations that should be carefully reviewed with legal counsel.
Governing documents: If an organization is a corporation, the board should review its governing documents for a dissolution clause. This would normally lay out the default obligations of the organization with respect to the distribution of any remaining property upon dissolution.
Compliance: If the organization is incorporated, it will need to ensure that its dissolution process complies with applicable corporate legislation, e.g. the Ontario Corporations Act (“OCA”), Canada Not-for-profit Corporations Act (“CNCA”), as well as any common law requirements.
Charitable status: If the organization is a registered charity, it will need to request a voluntary revocation of its charitable registration with the Canada Revenue Agency, and transfer any of its remaining assets to an arm’s length charity (referred to as an “eligible donee”) or otherwise become subject to a 100% revocation tax under the Income Tax Act.
Property: Ontario legislation that relates to forfeited property may apply where a charity or not-for-profit dissolves without properly disposing of its property as provided for under the Forfeited Corporate Property Act, 2015 and Escheats Act, 2015. Property of a registered charity that is an Ontario corporation that is not distributed is forfeited to the Crown.
Insurance considerations
Directors considering an organization’s insolvency should review the organization’s directors and officers liability insurance policies to ensure a broad scope of coverage, and that the directors and officers have coverage for liabilities that they are statutorily liable to pay on a personal basis due to the insolvency of the organization. In the event of a voluntary windup and dissolution, there remains a legal risk of claims coming forward. Therefore, as part of the windup process the organization should seek to obtain “tail coverage” under its liability insurance policies.
Get informed before taking action
There are no easy answers when dealing with funding cuts. However, directors need to equip themselves with the information necessary to make informed and important decisions. In doing so, they should obtain advice from their legal counsel and other professional advisers as necessary before making any key decisions.
For a more detailed and comprehensive discussion of important issues nonprofits may face following budget cuts, read Carters’ Bulletin, “Implications of Ontario’s Budget Cuts for Ontario Not-for-profits.” http://www.carters.ca/pub/bulletin/charity/2019/chylb448.pdf
Terrance S Carter, BA, LLB, TEP, Trade-Mark Agent, is the managing partner of Carters, and counsel to Fasken on charitable matters. Ryan M Prendergast, BA, LLB, is a partner practicing in the area of charity and not-for-profit law at Carters. Barry W. Kwasniewski, BBA, LLB, a partner, practices employment and risk management law with Carters’ Ottawa office. Carters Professional Corporation (Carters) is a leading firm in Canada in the area of charity and not-for-profit law.
More ONN resources
ONN 2019 Budget Analysis and Funding Estimates https://theonn.ca/our-work/our-regulatory-environment/provincial-budget-2019/
Building effective collaboration while reducing administration through shared platforms https://theonn.ca/our-work/our-regulatory-environment/shared-platforms/
ONN’s vision for government funding reform https://theonn.ca/our-work/our-financing/government-investment-funding-reform/
ONN’s recommendations for modernizing Ontario’s transfer payment administration https://theonn.ca/our-work/our-financing/government-investment-funding-reform/transfer-payment-administration-modernization/
