Can a Canadian Charity Ever Borrow From Its Restricted Funds?

Picture this. It's the last Thursday of the month. Payroll is due in two days. A grant payment is late, and the roof still needs fixing.

Someone on the board looks at the balance sheet and spots it: a restricted fund with a healthy balance, just sitting there. "What if we borrowed from it for a few months," they ask, "and paid it back once the grant comes in?"

It's a reasonable question. It's also one of the fastest ways to land a charity in legal trouble.

This guide walks through what Canadian law actually says about restricted funds, why "borrowing" from them isn't the safety net it looks like, and what a board should do instead when cash is tight.

Key Takeaways

• A donor-restricted gift is usually held on a special-purpose charitable trust. The charity is a trustee, not an owner.
• Not all "restricted" money is equal. Donor-restricted gifts and endowments legally bind the board. Board-designated reserves generally don't.
• Good intentions don't fix a breach of trust. There's no built-in mechanism in Ontario for short-term borrowing from restricted capital.
• Lawful paths exist: written donor consent, a section 13 order, a court application, or a CRA disbursement quota reduction.
• The safest fix is a written gift acceptance policy, drafted before the cash crunch ever happens.

What Counts as a Restricted Gift in Canada?

Before deciding whether a fund is off-limits, a board first needs to know what actually makes a gift "restricted" in the eyes of the law.

A restricted gift is money a donor has earmarked for a specific purpose. Think of a bequest for a scholarship, a foundation grant for a roof repair, or a building-fund campaign.

When that direction is clear, and the charity accepts the money on those terms, Canadian courts generally treat it as held on a special-purpose charitable trust. That means the funds are legally tied to a narrower purpose than the charity's own general mission.

This principle was examined in detail by the Ontario Court of Appeal in Christian Brothers of Ireland in Canada (Re), a case that's still cited today as the leading word on how charitable trusts work in Canada.

Two things tend to catch boards off guard:

• Formality isn't required. A restriction can be created by an email, a pledge form, or a note attached to a cheque. What matters is the donor's intention and the terms the charity accepted the gift on.
• Charities can restrict their own money. A campaign that promises "every dollar goes to the new building" can create a trust over those donations, even if no single donor asked for one.

That second point matters for fundraising language. The CRA's Guidance CG-013 on Fundraising by Registered Charities expects appeals to be accurate and not misleading. Wording your campaign more flexibly — "gifts may be applied to the building project and related costs" — keeps the door open later.

Not every donor comment creates a trust, either. A polite suggestion or a "hope this helps with programming" leaves the charity with discretion. Whether specific wording crosses the line into a binding trust is a legal question, and it's usually the first thing a lawyer checks when reviewing a gift agreement.

Real-World Example

A children's literacy charity runs a campaign called "Books for Every Classroom," raising $80,000 with messaging that says funds will go toward books and reading programs.

Halfway through the year, the charity needs cash to cover a staffing gap. Because the campaign language was specific, that $80,000 is arguably trust property. Spending it on payroll instead of books would be a misapplication of restricted funds, even though the charity's overall mission includes literacy work.

Donor-Restricted Funds vs. Board-Designated Funds vs. Endowments

Not all internal fund labels carry the same legal weight, and mixing them up is where a lot of boards get into trouble.

Here's a side-by-side comparison to keep straight:

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Donor-restricted funds are legally binding. If a gift was intended for a specific program, the board can't vote to spend it on general operating costs.

Board-designated funds start out as unrestricted money that the board chose to set aside — say, a rainy-day reserve. Because the board created the restriction itself, it can usually undo it by resolution. This is subject to the standard of care under section 43 of Ontario's Not-for-Profit Corporations Act, 2010 or section 148 of the federal Canada Not-for-profit Corporations Act. If cash is tight, board-designated reserves are the first place to look — not donor-restricted funds.

Endowments are usually meant to be invested permanently, with only the income (or a set spending rate) available for use. Canada has no equivalent to the American UPMIFA rules that let U.S. nonprofits spend prudently from endowment principal in a pinch. Without an explicit encroachment clause in the original gift document, a board needs a court order to touch the capital.

Investment of endowment funds is governed by the prudent investor rule in section 27 of the Ontario Trustee Act, with delegation permitted under the Charities Accounting Act and O. Reg. 4/01.

So Can a Charity Actually Borrow From a Restricted Fund?

Here's the part that surprises a lot of well-meaning board members: calling it an "internal loan" doesn't change anything legally.

Applying restricted money to another purpose is a breach of trust, whether or not the board plans to pay it back. There's no lender, no interest rate, no enforceable repayment obligation — just a misapplication of trust property, and a paper trail showing it happened.

Endowments are the sharpest version of this problem. Spending endowment capital to cover an operating shortfall, without an express power to do so in the gift instrument, is a misapplication of trust property — full stop.

There's one narrow exception worth knowing: the doctrine of cy-près. If a fund's original purpose becomes genuinely impossible (say, a program the money was meant for has permanently shut down), a court may allow the money to be redirected to something as close as possible to the original purpose. That's a decision for a judge, not a board meeting.

What Lawful Relief Actually Looks Like in Ontario

If a charity genuinely needs access to restricted money, here are the real paths:

• Donor consent, in writing. If the donor is alive, identifiable, and willing, a written variation of the gift terms is usually the cleanest option. A conversation at a gala doesn't count — get it in writing. This gets harder with "class gifts," where hundreds of small donors gave to one campaign, since getting consent from all of them isn't realistic.
• A section 13 order. Under section 13 of the Charities Accounting Act, a charity can have a draft court order deemed an actual court order once Ontario's Public Guardian and Trustee and any other necessary parties consent. It's an out-of-court, consent-based process, and it's commonly used to expand a trust's powers or vary its purpose.
• A full court application. Where consent isn't available, a charity can apply directly to the Superior Court, with notice given to the PGT.

Charities outside Ontario should check their own province's rules — British Columbia, for example, has its own Charitable Purposes Preservation Act, and every province has its own supervisory authority over charitable property.

A Historical Footnote

During 2020, the Public Guardian and Trustee issued temporary guidelines letting charities at risk of closing access restricted trust funds for operating expenses, with notice to the PGT and a deferred section 13 application. That was a pandemic-specific measure. It's gone now, and no board should plan around it returning.

The Legal and Governance Risk Is Not Theoretical

Boards sometimes treat this risk as abstract, weighed against a very real payroll date. It isn't abstract. Here's what's actually on the line:

• Personal liability for directors. Directors of a charitable corporation owe a high fiduciary duty around charitable property. Authorizing a misapplication can expose them personally, and indemnification protection is limited under section 46 of ONCA and the Charities Accounting Act.
• PGT and Attorney General oversight. Section 6 of the Charities Accounting Act lets two or more people bring an alleged breach of charitable trust before a judge. In serious cases, courts have removed directors and appointed replacements.
• CRA registration risk. A registered charity must devote its resources to its charitable purposes. Falling short can trigger penalties under section 188.1 of the Income Tax Act, a suspension of receipting privileges, or outright revocation under section 168 — with the revocation tax under section 188 roughly equal to the charity's entire net assets.
• Public disclosure. Restricted fund activity shows up on the T3010 information return and in audited financial statements. Funders read both.
• Auditor consequences. A misapplied restricted fund is, at minimum, a disclosure issue in the financial statements — and sometimes a qualified audit opinion, which follows the charity into its next grant application. In serious enough cases, this can even factor into full revocation of a charity's registration.

Real-World Example

A mid-sized arts charity used $40,000 from a donor-restricted endowment to cover a temporary cash shortfall, intending to repay it within six months once a government grant arrived.

The grant was delayed by a year. When the charity's auditor reviewed the year-end statements, the shortfall showed up as a misapplication of trust funds — not an internal loan. The result: a qualified audit opinion, an uncomfortable conversation with the original donor's family, and a note in the file that a major funder later asked about directly.

Lawful Ways to Manage a Cash Shortfall

None of this means a struggling charity has no options. It just means the options don't involve restricted money. Here's what actually works:

• Draw on unrestricted reserves, or rescind a board designation by resolution, with the decision recorded in the minutes.
• Arrange an operating line of credit or bridge loan secured against unrestricted assets. Borrowing from a bank is not the same thing as borrowing from a trust.
• Re-sequence program delivery so restricted spending happens when the restricted cash is actually available, pushing unrestricted costs to a later period.
• Renegotiate payment terms with vendors and landlords.
• Run a targeted appeal for general operating support, worded carefully so it doesn't create a fresh restriction.
• Approach major donors and funders, in writing, about relaxing or broadening an existing restriction.
• If the pressure is coming from the annual spending requirement rather than day-to-day cash flow, ask the CRA to reduce the disbursement quota for the year under subsection 149.1(5). Note that the older "permission to accumulate property" rule under subsection 149.1(8) was repealed effective January 1, 2023 — the quota is now 3.5% on property up to $1 million and 5% above that.
• Stop labelling gifts as "restricted" internally when no donor actually asked for that.

A written gift acceptance and restricted funds policy is worth the afternoon it takes to draft. It should spell out who can accept a restricted gift, how restrictions get recorded in the general ledger, how campaign wording gets reviewed before it goes public, and what happens if a restriction becomes unworkable down the road. Solid books-and-records practices under section 230 of the Income Tax Act do a lot of this work automatically, once the fund accounting is set up properly from day one.

Where a Charity Lawyer Actually Helps

These situations tend to surface at the worst possible time — right when the board is already under pressure and the numbers aren't cooperating.

The useful legal work at that point is usually narrow and fast:

• Reading the original gift instrument or grant agreement to determine whether it's a binding trust or just a preference.
• Identifying which funds are genuinely off-limits, and which the board can legitimately redirect right away.
• Structuring a donor consent that will hold up to later scrutiny.
• Preparing a section 13 order or court application, and managing the relationship with the PGT.
• Documenting board deliberations so a good-faith decision actually looks like one on paper.

At B.I.G. Charity Law Group, we work with boards making tough calls on tight timelines. If your charity is facing a shortfall and eyeing a restricted fund, the most valuable move is pausing before the transfer, not after. Fixing the paperwork in advance is cheap. Unwinding a breach of trust is not.

Frequently Asked Questions

Can a charity borrow from an endowment fund temporarily? 

Not without either an express encroachment power in the original gift document or a court order. Intending to repay doesn't change the legal analysis.

What's the difference between a restricted fund and a board-designated fund? 

A restricted fund was earmarked by the donor and legally binds the charity. A board-designated fund was set aside by the board itself and can generally be un-designated by board resolution.

What happens if a charity misuses restricted funds? 

Possible consequences include personal liability for directors, PGT intervention, CRA penalties or revocation, and a qualified audit opinion.

Is there a faster option than going to court? 

Yes — a section 13 order under the Charities Accounting Act lets a charity get PGT consent to a draft order without a full court hearing, provided all necessary parties agree.

Can a charity ask the CRA for relief instead? 

In cases where the pressure comes from the annual disbursement quota rather than a specific restricted fund, a charity can request a quota reduction under subsection 149.1(5) of the Income Tax Act.

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