Accessing Restricted Funds Amidst the COVID-19 Crisis

  • May 22, 2020
  • Andrew Valentine

The COVID-19 pandemic and resulting measures to encourage and enforce social distancing have resulted in a severe economic slowdown that is widely expected to lead to a deep recession, if not worse.  This downturn has hit charities hard.  Foundations have seen the value of their endowments plummet and investment income is likely to diminish significantly.  The economic downturn has also adversely affected donors’ ability to give, putting further downward pressure on revenue in the sector.  For charities that rely on in-person giving (e.g., plate collections by religious congregations), social distancing has had disastrous effects on fundraising.  How long this will continue is unknown, but charities are already struggling to support their charitable programs and meet their ongoing operating costs at a time when need in the community for their services has never been greater.

For charities that hold endowment or other restricted funds, a natural question arises: can we access these funds to support our programs, meet our expenses and enable us to continue operating during this time of crisis?

Restricted Funds

“Restricted funds” refer to funds given to charity subject to specific terms limiting how the charity is permitted to hold, invest or spend the funds.  These restrictions may be imposed by the terms set out in a gift agreement or other gift instrument (e.g., a Will).  They may also arise where a donor makes a gift in response to a specific donation appeal setting out how the funds would be held or used.  Common forms of restricted funds include “capital hold” restrictions in which the capital of the gift is required to be held in perpetuity or for some other time period, with only the investment income generated by the fund available to be spent.  Funds of this nature are often referred to as “endowment funds”.  Restricted funds also include funds that have been given by the donor for a specific charitable program or project of the charity.

Charities are legally required to adhere to the terms of any gift restrictions that apply to their funds.  Unless a court order has authorized a charity to vary the restrictions that apply to the funds, a charity and its board risk being found to be in breach of trust if funds are expended in a manner that contravenes the applicable gift restrictions.

Accessing Restricted Funds

There are numerous reasons why a charity may wish to access restricted funds, even in normal times.  Funds may have been given for programs or uses that are no longer practicable.  Funds may have been raised for particular programs that exceed the amount needed to carry out the program, resulting in a restricted surplus that cannot be used for the intended program.  In times of low investment returns, it may also be necessary to access the capital of endowment funds in order to meet a charity’s annual disbursement quota spending obligation under the Income Tax Act R.S.C., 1985, c.1.

In the current COVID-19 crisis, charities may need to access restricted funds simply to enable the charity to continue operating and avoid having to massively scale back operations, incur ruinous debt, or face insolvency. 

In determining whether restricted funds can be accessed, the first step is to consider the terms of the applicable restrictions carefully.  Where the funds were given pursuant to a written gift instrument, the written instrument is the first place to look in determining the terms that apply to the funds.  It may be that the terms of the gift are less restrictive than the organization initially thought, giving greater flexibility to encroach on capital or otherwise use these funds.  Some funds also come with terms permitting the charity to vary the restrictions in circumstances where the original restrictions have become unworkable.  There may also be terms in a charity’s constating documents (i.e., letters patent, articles of incorporation, etc.) that speak to this issue and so they should be considered. 

Where the terms of the gift do not give the charity flexibility to apply the funds as needed, it is possible to apply to court for a cy-près order varying the terms that apply to the funds.  The cy-près doctrine allows a court to vary the terms of a charitable gift where the original gift terms have become impossible or impracticable to carry out.

In Ontario, a special streamlined procedure exists under section 13 of the Charities Accounting Act, R.S.O. 1990, c. C.10 which enables a charity to apply to the Public Guardian and Trustee (PGT) for an order allowing the charity to vary the terms of restricted charitable funds.  The PGT can consent to such an order, which has the same effect as an order issued by a court.