The Ontario Not-for-Profit Corporations Act (ONCA), which came into force on October 19, 2021, provides a legal framework for not-for-profit (NFP) organizations incorporated in Ontario. A key aspect of the ONCA is the responsibilities and liabilities of directors who govern these organizations. Understanding these obligations is essential for directors to minimize personal risk and ensure compliance.
Duties of Directors Under ONCA
Directors of Ontario NFP corporations have several fundamental duties:
- Duty of Care – Directors must act with the care, diligence, and skill that a reasonably prudent person would exercise in similar circumstances.
- Duty of Loyalty – Directors must act honestly and in good faith, prioritizing the best interests of the corporation over personal interests.
- Duty to Comply with the Law – Directors must ensure that the organization complies with ONCA, other applicable laws, and its own governing documents (bylaws and articles of incorporation).
- Fiduciary Duty – Directors must act in the best interests of the organization and avoid conflicts of interest.
Personal Liability Risks for Directors
While directors are generally protected from personal liability when acting in good faith, there are circumstances where they may be held personally liable:
1. Breach of Fiduciary Duty
Directors who fail to act in good faith, act in their own interest over the corporation’s, or misuse funds may face legal consequences.
2. Employment-Related Liabilities
Directors may be personally liable for unpaid employee wages, vacation pay, and other employment-related obligations under Ontario’s Employment Standards Act, 2000 (ESA).
3. Unpaid Taxes and Payroll Deductions
Under the Income Tax Act and Excise Tax Act, directors may be held liable for unpaid corporate taxes, including HST and payroll remittances.
4. Environmental Liabilities
If an NFP corporation causes environmental harm, directors may be held personally responsible under provincial and federal environmental protection laws.
5. Misrepresentation or Fraud
Directors can be personally liable if they knowingly make false statements in financial reports or misrepresent the corporation’s financial position.
Protections for Directors
1. Due Diligence Defense
Directors can avoid liability if they can prove they exercised due diligence by taking reasonable steps to prevent a legal breach. This includes staying informed about the corporation’s activities and seeking professional advice when needed.
2. Indemnification and Insurance
Most NFP corporations provide indemnification for directors in their bylaws, protecting them from legal costs incurred while acting in their official capacity. Additionally, Directors’ and Officers’ (D&O) liability insurance can provide further protection against financial risks.
3. Compliance with ONCA Requirements
To reduce liability exposure, directors should ensure the organization complies with ONCA requirements, including maintaining proper records, holding required meetings, and filing necessary reports.
Conclusion
Serving as a director of an Ontario not-for-profit corporation comes with significant responsibilities. While ONCA provides a structured framework for governance, directors must be aware of their duties and potential liabilities. Implementing good governance practices, staying informed about legal obligations, and securing appropriate insurance coverage can help directors mitigate risks and serve their organizations effectively.
Legal Assistance
For legal advice on NFP governance and director liability, Call us at 905-503-1486 or 647-772-8187, or Email us at nhashmi.law@gmail.com.
We have offices in Toronto and Mississauga. We have more than 15 years of legal experience, nationally and internationally. In addition to regular business hours, we offer weekend and after-business-hours appointments if required. For more information about our legal services, please contact us or visit our website https://nhashmilaw.com.
