Can a Canadian Charity Provide Benefits to its Directors?

A registered charity in Canada generally cannot pay a director simply for serving on the board. It can reimburse reasonable expenses, buy directors' liability insurance, and, in some provinces, pay a director a reasonable amount for goods, services or facilities provided outside the board role, but only if strict provincial conditions are met.

The federal Income Tax Act sets the penalties. Provincial law decides whether a payment is allowed in the first place. That is why the answer depends on where your charity is and what the payment is for.

TL;DR

• Board fees: Not allowed for a charity director without a court order (Ontario) or clear legal authority. CRA defers to provincial law.
• Expenses and D&O insurance: Generally allowed if reasonable and documented.
• Payment for outside services (Ontario): Allowed only if every condition in O. Reg. 4/01, s. 2.1 is met, including a written agreement and a board of at least five directors.
• Not covered by the Ontario rule: Paying a director as an employee, for fundraising, or in a real-property deal. These need a court order or a section 13 order, or the director must leave the board.
• CRA penalty for an undue benefit: 105% of the benefit, or 110% plus a one-year receipting suspension for a repeat within five years. Reasonable pay for services actually provided is not an undue benefit.

Director payments at a glance

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Which Laws Decide Whether a Charity Director Can Be Paid?

Several layers of law apply, and each does a different job.

1. Provincial law decides whether the payment is allowed. The CRA says this directly in its summary policy on directors and trustees (CSP-D10): provincial law sets when a charity's directors can be compensated. In general, a charity cannot pay directors simply for holding the position.

2. Corporate statutes set the default, but they are not the last word for charities. Under the Canada Not-for-profit Corporations Act (s. 143), directors may fix reasonable remuneration for directors, officers and employees, subject to the articles, bylaws or any unanimous member agreement. Ontario's Not-for-Profit Corporations Act, 2010 (s. 47) leaves remuneration to the corporation's articles and bylaws. Neither statute overrides the stricter charity rules below.

3. Charity law adds a stricter layer. At common law, a charity's directors are treated like trustees of the charity's property and are expected to serve without pay. In Ontario, the Charities Accounting Act and its regulation, O. Reg. 4/01, set out the only route for paying a director without going to court. The Public Guardian and Trustee (PGT) takes the position that these Ontario rules apply to charities holding property in Ontario, including federally incorporated charities.

4. The Income Tax Act sets the penalties. The Income Tax Act penalizes a registered charity that confers an "undue benefit" on a director (s. 188.1(4)). Importantly, s. 188.1(5) says reasonable remuneration for services actually rendered is not an undue benefit. The CRA's position on undue benefits is summarized in CSP-U02.

Can a Charity Pay a Director Just for Being on the Board?

Generally, no. Charity directors are treated as quasi-trustees of the charity's property, so they are expected to govern without pay. That means no director fees, no stipends for attending meetings, and no compensation for ordinary governance work such as voting, oversight and strategy.

The same principle blocks indirect benefits. A charity should not give a director personal loans from charity funds, free personal use of charity property, or below-market deals. Each of these puts the director in conflict with the duty to protect the charity's assets.

A charity's bylaws cannot fix this on their own. Even where a corporate statute or bylaw permits director fees, the charity-law duty to serve gratuitously still applies.

What Can a Charity Provide to Directors Without Special Approval?

Reimbursement of reasonable expenses

A charity can reimburse directors for reasonable out-of-pocket costs incurred on charity business. Examples include travel to board meetings, overnight accommodation, and meals while on charity duties. Reimbursement is not a benefit because it simply puts the director back where they started.

Adopt a written expense policy that says what qualifies, sets limits, and requires receipts.

Directors' and officers' liability insurance

A charity can buy directors' and officers' liability insurance to cover defence costs and damages from claims arising out of board decisions, including employment practices claims. Ontario's O. Reg. 4/01 expressly permits this, subject to conditions. It also helps charities recruit qualified board members.

Can Our Director Who Is an Accountant Do Paid Work for Our Ontario Charity?

Possibly, but only if every condition in s. 2.1 of O. Reg. 4/01 is met. This is the only route in Ontario for paying a director, or a person connected to a director, without a court order.

The conditions under O. Reg. 4/01, s. 2.1

1. Goods, services or facilities only. The payment must be for goods, services or facilities the director or connected person provides to the charity, not for serving as a director.
2. Reasonable amount. The board must be satisfied the payment is reasonable for what is provided.
3. Best interests. The board must be satisfied the payment is in the charity's best interests.
4. Financial capacity. The payment cannot leave the charity's debts and liabilities exceeding the value of its charitable property.
5. Board size. The board must have at least five directors, at least four of whom are eligible to vote on the payment (not connected to the person being paid).
6. Board resolution. The board must approve the arrangement by resolution at a properly constituted meeting. The director being paid, and anyone connected to them, cannot attend or vote.
7. Written agreement. Before any payment, the charity must sign a written agreement with the director or connected person that sets the maximum amount payable.
8. Payment cap. Payments cannot exceed that agreed maximum unless the agreement is properly amended.
9. One-fifth limit. No more than one-fifth (20%) of the voting directors can be receiving payments under s. 2.1 at the same time.
10. Disclosure. The arrangement must be disclosed in the charity's annual financial statements and presented to members at the annual meeting.
11. PGT guidance. The board must consider the PGT's guidance, Payments to Directors and Connected Persons.

What the Ontario rule does not cover

According to the PGT's guidance, s. 2.1 does not authorize a charity to:

• Employ a director or pay a director a salary as an employee
• Pay a director for fundraising services
• Pay a director in connection with a real-property transaction (buying, selling or leasing land)

For any of these, the charity needs a court order or a section 13 order under the Charities Accounting Act. Otherwise, the director must resign from the board before the arrangement begins.

For a full walkthrough of the Ontario process, see Can a Charity Director Be Paid in Ontario? A Complete Guide.

How Do the Rules Work in British Columbia?

B.C. charities usually incorporate as societies under the Societies Act. Key points:

• Bylaws must permit director remuneration. A society cannot pay a director for being a director unless its bylaws allow it (s. 46).
• Majority rule. A majority of directors cannot be remunerated by the society, whether as employees or service providers (s. 41).
• Disclosure. The Societies Act requires director remuneration to be disclosed in the society's financial statements.
• The common-law duty still applies. A bylaw permitting director fees does not remove a charity director's common-law duty to serve gratuitously, so a bylaw alone is not enough protection for a registered charity.

B.C. has no published safe harbour equivalent to Ontario's O. Reg. 4/01, so B.C. charities should get legal advice before paying any director. Charities in other provinces should likewise check their own statute and any charity-specific rules before paying anyone on the board.

How Should the Board Handle the Conflict of Interest?

Any payment to a director, or to a director's spouse, family member or business, is a conflict of interest. A sound process looks like this:

• Declare early. The director discloses the interest in writing before the item is discussed.
• Step out. The conflicted director leaves the meeting for the discussion and does not vote.
• Document the decision. Minutes record who was present, what was compared, why the amount is reasonable, and why the arrangement is in the charity's best interests.
• Annual declarations. Every director signs a conflict-of-interest declaration each year and updates it when circumstances change.
• Keep the file. Retain the resolution, written agreement, maximum amount, invoices and disclosure. CRA and the PGT can both ask for them.

See our annual checklist for charity boards of directors for related governance steps.

What Does a Charity Report to CRA About Director Payments?

On the annual T3010 information return, a charity must answer whether it compensated any of its directors or trustees, or persons not at arm's length with them. Form T1235 is the directors/trustees worksheet filed with the T3010. It records each director's details and whether they deal at arm's length with the other directors. Answers should match your board minutes and financial statements.

What Happens If a Charity Pays a Director Improperly?

Penalties against the charity

Under the Income Tax Act, a registered charity that confers an undue benefit on a director faces:

• First infraction: a penalty of 105% of the benefit (s. 188.1(4)). A $10,000 improper payment means a $10,500 penalty.
• Repeat within five years: a penalty of 110% of the benefit plus a one-year suspension of the charity's receipting privileges (s. 188.1(4), s. 188.2(1)(b)).
• Serious non-compliance: revocation of registration, followed by the revocation tax on the charity's remaining assets.

These penalties are assessed against the charity, not the directors personally. Reasonable remuneration for services actually rendered is not an undue benefit (s. 188.1(5)). The real question is usually whether provincial law allowed the payment and whether the amount was reasonable.

Exposure for the director

• Repayment. A director who receives a payment that charity law does not allow may have to repay it to the charity as a breach of trust.
• Ineligible individual. If the charity's registration is revoked for serious non-compliance, a director involved at the time may become an "ineligible individual" under s. 149.1(1) of the Income Tax Act. CRA can then refuse, suspend or revoke the registration of another charity on whose board that person serves.

Conclusion

A Canadian charity cannot pay a director simply for sitting on the board, but it can reimburse reasonable expenses and buy liability insurance. In Ontario, it can pay a director a reasonable amount for goods, services or facilities only by meeting every condition in O. Reg. 4/01, s. 2.1. That rule does not cover employment, fundraising, or real-property transactions. Other provinces, including B.C., have their own rules, and the common-law duty to serve without pay applies everywhere.

Getting this wrong can cost the charity 105% to 110% of the payment, its receipting privileges, or its registration. It can also follow the director to the next board they join.

Navigating director compensation rules can be complex. Contact B.I.G. Charity Law Group for expert guidance on compliance requirements. Our team understands Canadian charity law and can help ensure your organization follows proper procedures.

Get professional support today by email at dov.goldberg@charitylawgroup.ca, by phone at 416-488-5888, or visit CharityLawGroup.ca. Schedule your free consultation to discuss your charity's director benefit questions with our experienced legal team.

Frequently Asked Questions

Short answers to the questions charity boards ask most about paying directors.

Can charity board members be paid in Canada?

Not for serving as directors. A charity can reimburse reasonable expenses. In some provinces, it can also pay a director for goods, services or facilities provided outside the board role. In Ontario, that requires meeting every condition in O. Reg. 4/01, s. 2.1, including a written agreement setting the maximum payment and a board of at least five directors, four of whom are eligible to vote on the payment.

Can directors of a nonprofit be paid?

A nonprofit that is not a registered charity usually has more room, because the charity-law duty to serve gratuitously does not apply. However, a nonprofit organization under s. 149(1)(l) of the Income Tax Act still cannot make its income available for the personal benefit of a member. CRA generally accepts reasonable pay for services actually provided. Check your articles, bylaws and governing statute first.

Is a reasonable payment to a director an "undue benefit" under the Income Tax Act?

No. Under s. 188.1(5), reasonable remuneration for services actually rendered is not an undue benefit. The payment must still be allowed under provincial charity law, which is usually the harder test.

What policies should a Canadian charity implement to ensure transparency in director remuneration?

Charities should create clear written policies about director compensation before making any payments. These policies should explain when and how directors can receive benefits.

The board should disclose all compensation arrangements in annual financial statements. Members should review this information at the annual meeting.

Conflict of interest policies prevent directors from benefiting inappropriately from their positions. Directors need to declare potential conflicts and abstain from related votes.

Charities should review compensation regularly to ensure it remains reasonable. Independent evaluations help keep payment levels appropriate.

Charities should keep records such as board resolutions, written agreements, and maximum payment amounts. These documents show compliance with provincial regulations and support accountability.

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