Q: Are directors of a charitable organization personably liable for actions of the organization? In a news story, I read that the directors of a volunteer organization are being held responsible for the employee deductions the organization should have paid to the tax
department.
A:Directors of a volunteer organization can be held liable for unpaid tax deductions. According to the Income Tax Act, a director is personally liable for the deductions such as pension plan or employment insurance.
However, if a director can show that she exercised “due diligence” to ensure that deductions were paid, then she can escape liability. Due diligence means being informed about the organization’s operations, taking an active part in meetings and making sure that you understand and approve financial statements.
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Say that you are a member of the Recreation Community Club. The club has employees and one employee handles all financial matters. At board meetings, the administrator reports that the organization is in good financial shape. Neither she nor the treasurer ever present
financial statements to the board. Nor do the board members ask for statements. In fact, the organization isn’t in good shape. Salary deductions that should have been sent to the tax department have been used to support daily operations. In this example, the directors have not exercised due diligence and would indeed be liable.
In most provinces, directors are also responsible for unpaid wages. For example, Saskatchewan’s Non-Profit Corporations Act provides that directors are liable to an employee for unpaid wages.
Directors can also be held liable for environmental damage caused by the organization’s activities and for unfair business practices or criminal activities by the
organization.
Similarly, if an organization is held liable for some action, in some instances the directors might also be liable. Let us say that the steps on the recreation club building get icy in winter. One day Jennie slips and falls on the steps. The issue of icy steps has been discussed at board meetings but the directors decided to do nothing. They even decided not to buy liability insurance because of the expense. In this situation, both the club and its directors might be responsible to Jennie.
It should be noted that a director can be responsible even if she didn’t actively participate in the meeting. For example, in most provinces a director is deemed to have agreed with any action unless she has asked that her dissent be recorded. If she was not at a meeting, she is also deemed to have agreed with any resolution unless she specifically takes steps, such as written notice, to record her dissent.
It is impossible in the space of this column to outline all the laws that impose duties on directors. As an Ontario author put it, “there are approximately 100 federal and Ontario statutes that impose some statutory duties on the officers and directors of charitable and non-profit corporations.”
Are there ways of protecting oneself? In some provinces, the law provides that the organization will (or “may,” there are differences between provinces) indemnify directors for personal liability they might encounter by being on the board.
In other cases, the constitutional documents of the organization might state that directors are not liable. Of course, such protection is only valid if the organization is financially viable. If Revenue Canada is coming after a director and the organization is broke, such protection is useless.
In some instances, organizations may buy
liability insurance to protect directors. The details of such insurance would have to be discussed with an insurance broker. However,
it may be expensive.
A 1996 study by the Canadian Society of
Association Executives of 414 organizations that had such insurance found that on average each spent $2,470 for such coverage.
The best defence is to be an active board member. Attend meetings, study reports, scrutinize financial reports and ask questions. In many instances as outlined earlier, you will not be held responsible if you are a diligent board member.
Finally, the possibility of legal liability of a director should not stop you from being active in the community. In my experience such liability is rare.
