It is sometimes said that there are “too many charities.” The logic that drives that observation does not seem to apply in the for-profit realm, where the increase of firms in a particular subsector is more likely to prompt comments about the importance of choice and the value of competition. The COVID-19 pandemic has, if anything, sharpened worries about the disappearance of small business. On the voluntary sector side, some continue to welcome “rationalization”. The bigger worry should be about the impact on Canadian’s quality of life that significant shrinkage of the sector will have.
Leaving aside theory, the hard fact is that the pandemic and its economic fallout have thrown many organizations into difficult financial straits. Therefore, the number of charities and other voluntary sector groups is likely to drop markedly in 2021 and beyond. Few sector groups had the reserves or other resources to weather the hit to their income caused by the health emergency or had access to additional funding to address spikes in the need for their services stemming from the crisis.
Government relief programs provided some help, but their scope could never be expected to make up the shortfalls faced by the majority of organizations. As the pandemic resurges, the time organizations need to scrape by lengthens, and inevitably more won’t be able to make it.
Faced with these realities, the Muttart Foundation, in collaboration with the law firm Miller Thomson LLP, has produced a resource to assist groups in coping with financial hardships. Paths Forward in Financially Troubled Times – A Restructuring and Insolvency Guidebook for Charities and Non-profit Organizations is now available through the Foundation’s website. (Full disclosure, the author of this column contributed to the writing and development of the Guidebook.)
The Guidebook lays out a number of avenues that financially-stressed groups can explore.
These range from continuing operations in a different legal form or in a collaboration, to revamping finances to survive immediate threats to viability, and to wrapping up the organization and its functions in a prudent and reasonable manner. No one option will be right for every organization. The Guidebook attempts to provide an even-handed look at the merits and drawbacks of the various paths. It does, however, warn against informally abandoning operations. This can lead to exposure to liability and may alienate stakeholders in a way that makes it difficult to restart programs or services down the road.
Insolvency law is federal, so many of the observations in the Guidebook apply across the country. To a large extent, the legal tools available to groups in financial difficulty are the same whether the organization is a charity or non-profit. The Guidebook can be helpful regardless of what status an entity has under the Income Tax Act. Where special considerations apply because a group is a charity, the additional or different steps that must be taken are flagged.
If an organization uses one of the available formal legal processes to get itself out of trouble, there may be fear of a stigma attached to doing so. But, as those with experience in this area know, that is not the correct lens through which to look at things. Insolvency statutes are a lifeline to entities at risk of shutting down and a way to treat stakeholders equitably given the available resources. They are not punitive or a way to second-guess past decisions.
What’s more, the pandemic is perhaps the perfect example of how organizations can get into financial difficulty through no fault of their own. For many voluntary sector groups, the health emergency and economic downturn merely brought to a head years of underfunding and stretching of resources that never adequately addressed community needs. The potential to subsidize staffing or program costs through philanthropic revenues has evaporated with the curtailment of fundraising events necessitated by social-distancing rules. Earned income streams of many groups have also been devastated. As with many other societal flaws, the pandemic has exposed the fragility of the voluntary sector funding model.
The Guidebook describes some practical steps, both about revenues and expenses, which can improve organizational viability – either before or instead of taking legal steps under insolvency legislation.
It also discusses a range of tools available, either under the Companies’ Creditors Arrangement Act or the Bankruptcy and Insolvency Act (depending on the indebtedness of the organization), to deal with or delay fulfilling obligations to creditors.
Although revenue-generation and cost-cutting are familiar topics for lots of voluntary sector groups, the tools available to deal with creditors may be new to many in the sector. Knowing about them can only put groups in a stronger position when they set out to negotiate with landlords and other suppliers.
In post-pandemic Canada, it is likely that many of the programs and services offered by charities and their non-profit counterparts will be more needed than ever. If for no other reason than that, the loss of organizations resulting from the COVID-19 pandemic is hugely regrettable. The Guidebook is intended as a small step toward mitigating that loss.
EDITOR’S NOTE | This is Peter Broder’s last column given his retirement. We thank Peter for his generous and valuable contributions to LawNow over the years!
Looking for more information?
More articles for not-for-profits:
Or visit Charity Central – a website for Canadian charities.
The information in this article was correct at time of publishing. The law may have changed since then.
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