The recent recession highlighted various investment frauds, including some that have affected charities. What are charities to do with donations that have gone bad in this regard? For example, in 2005 Queen’s University returned a $1 million gift from David Radler and stripped his name from its business school when the former Hollinger executive pleaded guilty to fraud. The school felt its ethical credibility among students and their potential employers would be tainted if it kept the money and Radler’s name.

However, in a similar situation, Mount Sinai Hospital chose to keep the money and the name of another business executive guilty to fraud. The president of the hospital’s foundation argued that removing the donor’s name would have required using current donors’ money to return the donation, and that donors’ money should be used for helping patients and not other matters.

The Queen’s University and Mount Sinai Hospital donations illustrate the complexities faced by charities in similar situations. Directors of charitable organizations, who act as quasi-trustees, must carefully handle donated property that may have been fraudulently obtained.

When is reputation compromised?

Directors of a charity may sometimes have to protect the charity’s reputation to ensure that the charitable property is being used to further legitimate purposes. For example, it may be inconsistent to the purposes of some religious charities to use fraudulently obtained monies to advance their charitable purposes The question, however, becomes more difficult when the donor is not involved in fraudulent activities, but may have received a criminal conviction not related to fraud or criminal breach of trust.

Charities may want to return a gift for moral reasons or in order to maintain credibility with members and donors of the charity. In this regard, however, a charity cannot unilaterally decide to return a gift on such a basis. Courts of law in both the United Kingdom and Canada have held that the charity will have to obtain such permission from either the Attorney General, who in Ontario would be represented by the Ontario Public Guardian and Trustee (“PGT”), or the courts of justice themselves.

Alternatives to going to court

However, it is far less expensive to obtain written consent, for instance, from the PGT pursuant to section 13 of the Charities Accounting Act for a draft order or judgment that could have been made by the Superior Court of Justice. Such a draft is deemed to be an order or judgment of the court if both the PGT and all persons who would normally be served in a proceeding to obtain that order or judgment give consent.

This allows a charity to apply to the PGT for approval for the return of a gift while avoiding a formal court proceeding. However, it can sometimes prove challenging to obtain the consent of all those who would be required to be served. In addition, the PGT may have concerns in providing its consent where the return of the gift may impoverish the charity, making it difficult for it to pursue its charitable purposes. 

Retroactive DQ concerns

It is also important to contact the Canada Revenue Agency, as the return of the gift may have adverse tax consequences, particularly if it creates a disbursement quota shortfall in the previous year. This is becoming less of a problem because of the elimination of the 80 per cent disbursement quota. In those circumstances, the charity may be required to submit a form T1240, Registered Charity Adjustment Request, to CRA to reflect the charity’s changed financial position during the previous year(s).

Charities risk claims by fraud victims

In addition, given the characterization of charitable property as “trust” property, an aggrieved victim of the donor who was allegedly defrauded could attempt at common law to make a claim against any person that has deprived them of title. In this regard, aggrieved investors could attempt to advance a claim against the charity for those funds.

However, such a claim would be frustrated when the property is acquired by a “bona fide purchaser for value without notice of the trust.” Unfortunately, a charity is not normally considered a “bona fide purchaser for value” because no value has been given in return for the gift.

That means if victims of fraud can trace their money to the charity, and even if the gift was given to the charity some time ago and already spent, the victims can claim that the charity’s other monies had been spent and it is their money that remains (Re Hallett's Estate (1880), 13 Ch. D. 696, Eng. Ch. Div.). The claims may effectively end if the recipient charity can show that it applied the funds to a special project. (Diplock v. Wintle, [1948] 1 Ch. 465, (sub nom. Re Diplock) [1948] 2 All E.R. 318 (Eng. C.A.); affirmed (1950), (sub nom. Ministry of Health v. Simpson) [1951] A.C. 251, [1950] 2 All E.R. 1137 (U.K. H.L.) at 530 [Ch.])

When statues compel a return of the gift

Apart from the common law, a charity may be compelled to return its charitable property by statute. In this regard, subsection 462.37(1) of the Criminal Code of Canada, and, in the province of Ontario, the Civil Remedies Act, can both provide a court with the authority required to have either “proceeds of crime” or property acquired via “unlawful activity” returned by the charity.

However, these statutory remedies are only available when and if a civil action has been commenced or a criminal conviction or discharge is obtained. It is conceivable that neither may have occurred nor will ever occur. Indeed, in some instances the perpetrator may have fled the jurisdiction or worse, is now deceased, and therefore no civil judgment or criminal conviction would be obtained.

Given the uncertainty surrounding the issues described above, it is always advisable to contact legal counsel should a charity encounter questionable donations or be asked to return a gift where the donor was allegedly involved in illegal activity. There may not only be legal hurdles for the board of directors to review, but also significant media relations challenges to address, as the public may complain when a charity is holding money that is known to come from illegitimate funds.

The proper management of the return of a donation is a challenging area of the law with no simple answers, as the course of action is often dependent on the particular facts of each situation.