Law 101 for Boards

I am sure that most non-profit leaders are aware that certain laws that need to be followed by their organization. But if asked, could a typical director name them, let alone describe what matters the laws cover? Possibly not. Can a board member easily become familiar with his/her organization’s legal responsibilities? Yes.

The Court House in Liverpool, Nova Scotia (above) was built in 1854. It is one of many in a  “temples of justice” architectural movement. A much older image of the same building introduces a related post, Law 102 for Boards. More on the court house’s interesting history in the companion piece.

Here I will briefly outline three areas of law affecting non-profit organizations. I am not a lawyer and am not offering advice on the law. My goal is to point out the legal responsibilities that need the board’s attention. I will however offer some advice on how, via policy direction and board agenda planning, legal compliance can easily be built into the work of governance without it taking over.

The first area of law, for non-profits that employ staff, is their legal duty to collect and submit payroll deductions to the Federal government. This one seems to get a lot of attention but perhaps not always in the most effective manner.

The second area is the need to keep one’s incorporation registration, bylaws and charitable status up-to-date.

The third has to do with protection of staff, directors and other volunteers. On this I will just say a little about insurance, not strictly a legal subject and also one that I am no expert on. The bigger issues around protecting people will be taken up more explicitly in Law 102.

I am pretty sure that the legal landscape for non-profits is similar in the U.S.A and Canada. I will focus however north of the 49th parallel in North America,

Basic Legal Responsibilities

More than a decade ago I sketched out a board’s basic legal responsibilities in a 2-page governance guide. I have updated the publication, The Legal Responsibilities of Boards. The overarching legal responsibilites have not really changed. These are:

1. The duty of diligence: this is the duty to act reasonably, prudently, in good faith and with a view to the best interests of the organization and its members;
2.  The duty of loyalty: this is the duty to place the interests of the organization first, and to not use one’s position as a director to further private interests;
3. The duty of obedience: this is the duty to act within the scope of the governing policies of the organization and within the scope of other laws, rules and regulations that apply to the organization.

This post, and Law 102, focuses mostly on the third.

Legal Education Resources

There are very few publications on the broader topic of non-profit law suitable for board education. Two I know of are voluminous (60+ pages) and outline a variety of legal matters including incorporation, charitable status, governance structure and operations. ^[1]The US based Board Source recently issued the third edition of its Legal Responsibilities of Nonprofit Boards (2019, 78 pages) One, A Guide to The Law for Nonprofit Organizations in Atlantic Canada, … Continue reading A more focused approach on a few key legal risk areas could be more helpful.  

So, let me turn to three basic elements under the board’s duty of obedience. Others, including employment standards, occupational health and safety and human rights will be taken up in the next post.

1. Payroll Deductions

Most boards in Canada seem to know that their organization can get in trouble if employee payroll deductions are submitted late, or not at all, to the Canada Revenue Agency (CRA). The deductions, money deemed to be held in trust for the Government, include amounts for income tax, Canada Pension Plan (CPP) and Employment Insurance (EI). In addition there are the employer’s own CPP and EI contributions.

Boards may not know that, if they discover that their organization has failed to submit payroll deductions, and move to rectify the situation individual directors will not be held personally responsible. Here is the CRA’s 2017 statement. The CRA’s also has a detailed policy on Directors Liability. 

How should boards pay attention to this important requirement? I will take that up below.

2. Incorporation and Charitable Registration & Bylaws

Most boards also know that they are responsible for keeping their incorporation and charitable registrations up-to-date. This usually means yearly filings with one’s Provincial government and the CRA. ^[2]For recognized charities in Canada the CRA requires the filing of a T3030 Information return annually. See this information from Blumberg Segal LLP, a highly respected charity law firm. 

There is no upside to defaulting on ones incorporation registration or losing one’s charitable status. All the hard work of creating and building your organization, not to mention its reputation, is put in jeopardy. ^[3]There is lots of information how the CRA will revoke ones charitable status. See this 2011 piece by Mark Blumberg,Ten Reasons Your Canadian Charity Should File ItsT3010 on Time

Operating outside of their by-laws, a matter on which many non-profits procrastinate for years if not decades, can also get them into trouble. I do not know if, in any jurisdiction, one’ s compliance with bylaws is policed. I suspect not. However, if anyone has a complaint about your organization, an investigation may uncover that you are not complying with your own rules. The result might be that your reputation, if not some of your funding, could be put at risk,

This is not a call for boards to be amending their bylaws continuously.^[4]Non-profits should know their bylaws and pay special attention to the articles defining membership, notices of meetings, meeting quorums, and structure of the board A formal review is a good idea every other year and if a number of changes are indicated amendments brought to an AGM. Remember, the organization can either change its practices to comply with the bylaws or amend the bylaws to reflect their desired practices.

3. The protection of staff, directors, volunteers and assets

Boards should know that directors of a corporation, including a non-profit corporation, are not personally responsible for the organization’s debts, payroll deductions to the Federal government possibly excepted. The Societies Act in Nova Scotia certainly makes this clear and I am sure this is the case in other jurisdictions. After all this is one of the main purposes of incorporation. 

Operating with insurance is not a legal obligation but it is certainly a prudent one.

There are two main kinds of insurance: Insurance to cover loss (fire, theft, and other damage) and insurance to cover liabilities in the event of a lawsuit.^[5]Although the linked resources are old. Imagine Canada’s Sector Source page on Insurance is quite useful. Insurance to cover loss has to do with protecting organizational assets like buildings, computers, and records. If a non-profit owns a vehicle they would have auto insurance which typically covers both loss and liability. 

Most organizations, except the some very small ones perhaps, will have some general insurance covering both loss and liability. Most boards will also have directors and officers liability insurance. This, often just called D&O insurance, is intended intended to protect high-level decision makers if it is claimed that they were negligent in their duties as officers or board members. Errors and Omissions insurance on the other hand is different, It covers acts, errors, and omissions committed by employees.

D&O insurance can be purchased by many non-profits at a cost of between $300-$600 CDN a year.

In Canada law suits against charities and other non-profits seem rare and not all non-profits are equally at susceptible. Non-profits that have vulnerable people in their care shoulder the most risk. Information on the incidence of legal action against non-profits is not readily available. I hope with some further research to report on the incidence of lawsuits. Perhaps someone more knowledgeable than I on this will offer some information.  

I must mention that my home province, Nova Scotia, is unique in Canada in having a Volunteer Protection Act. Enacted in 2002 it remains the only stand-alone statute dedicated to shielding volunteers, including directors, of non-profit organizations from personal liability. The U.S.A. has similar Federal act that was put into law in 1997. You can read about N.S. here although I doubt that this article’s overview will cause a sigh of relief.

Insurance is not a defence for being unaware of the law and therefore ought to be regarded as the last line of protection for boards in insuring their organizations act responsibly.

How boards can pay attention to the law?

Here are the things boards ought to do to insure their organization is paying attention and adhering to the law.

• Put the responsibility to submit the required payroll related amounts as required to the Canada Revenue Agency in the executive director’s contract and job description.
• Regularly ask for proof that the remittances have been sent.
• Put incorporation renewal on the board calendar once a year. Normally this will be done following your Annual General Meeting. This is a job that most board secretaries can easily do it they are keeping track of who is on the board and their terms. In most jurisdictions there is a renewal fee.
• Put your annual charity renewal on the Board calendar. As noted above the renewal requires the annual submission of the CRA”s T3010 Information Return. Because this document requires both financial and board information it likely needs to be done by the executive director/CEO perhaps in partnership with the board treasurer.
• Schedule an annual or bi-annual review of insurance coverage including your D & O Insurance policy. Give this responsibility to the Executive Director who may, in some years, report that this insurance does not need to be reviewed. A review of D&O Insurance might easily be added to an annual report by the ED on all insurance coverage matters.

I want to say here that it seems like many boards fixate on CRA remittances. Some even require  their ED to prove that the remittances have been submitted month in and month out. The CRA wields a lot of power for sure, although asking the ED for proof of remittances every month seems like micromanaging to me.

You might well respond that requiring proof of CRA remittances is not a big deal for the ED.  It is also a legal obligation that is the easiest one for the board to check up on.  So, it does not require much of a conversation. Remember that micromanaging your ED sends the message, intentional or not, that the board is not very trusting.

Boards certainly should include payroll remittances in policy instruction to the ED and in the ED job description. Reviewing proof of remittances can be added to the items covered as part of the ED’s review, and a board might ask the ED for proof of remittances without notice once or twice a year. Obviously when the ED is new or inexperienced in the role, boards will want more regular assurance.

Coming Up

I hope this post helps your non-profit. Coming up is Law 102 for Boards. If you have read this post before Law 102, I think you will find the next piece meatier.

I am also hoping that I get comments on both of my “law for boards” posts. I will be soliciting some and am keen to get suggestions for improvements to my thinking and corrections and additions to the information. I invite readers back to see what has been said in the comments section.