- A restricted gift creates an obligation to apply the funds to the stated purpose.
- Spending restricted funds on general operations is a breach, however urgent the need.
- Where a purpose becomes impossible, there are routes to vary it rather than ignore it.
- Directors can face exposure for misapplying charitable property.
Restricted and unrestricted
An unrestricted gift may be applied to any of the charity’s purposes. A restricted gift is given for a stated purpose and must be applied to that purpose.
The restriction comes from the terms on which the gift was made: a written agreement, the terms of an appeal, a bequest in a will, or the conditions of a grant.
The distinction matters because a restricted fund is not simply money in the charity’s account. It is held for the stated purpose, and applying it elsewhere is a breach regardless of how pressing the alternative need is.
The pressure that causes the problem
The typical situation is an organisation with a cash flow problem, a payroll to meet, and a restricted fund sitting in the same bank account.
Borrowing from it with the intention of replacing it later is still a misapplication, and the intention rarely survives the next shortfall.
The safest practice is separate tracking, and a board that understands which funds are actually available for general purposes before it approves a budget.
When the purpose cannot be met
Purposes do become impossible or impracticable. A building fund for a building that will never be constructed, a scholarship for a programme that no longer exists.
The answer is not to redirect the money unilaterally. Depending on the circumstances and the amount, options may include obtaining the donor’s consent to a variation, relying on terms in the original gift permitting redirection, or applying to court.
These routes exist precisely because circumstances change. Using them takes time and costs something; ignoring the restriction costs more.
Exposure
Misapplication of charitable property is a breach of trust. Directors who authorise it can face personal exposure, and the CRA has an interest where charitable funds are not applied to charitable purposes.
It is also, in practice, the issue most likely to surface in a governance dispute, because a departing board member or a concerned donor raises it.
A board uncertain whether a proposed use is permitted should get advice before spending rather than after, which is the one point at which the problem is still cheap to solve.
Common questions
Can we use a restricted fund temporarily?
Borrowing from restricted funds is a misapplication even if repayment is intended. The intention frequently does not survive.
What if the donor has died?
Where the terms cannot be varied by consent, other routes including a court application may be available depending on the circumstances.
Do grant conditions create restrictions?
Frequently yes. Grant agreements commonly restrict use, and the terms should be read before the money is spent.
Who can raise a misapplication?
Donors, members, departing directors and the CRA are all realistic sources. It is not a private matter within the board.
Contacting us does not create a solicitor-client relationship. Please do not send confidential information until we have confirmed we can act for you. We aim to reply within 2 business days. Sending this form does not meet any court deadline or limitation period.
If you or a child are in immediate danger, call 911. This form is not an emergency service and is read during business hours. Assaulted Women’s Helpline 1-866-863-0511, Talk4Healing 1-855-554-4325, both open around the clock.
