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Modernization of Federal Legislation for Not-for-Profit Corporations Moves Forward

Date

December 4, 2009

AUTHOR(s)

Shanon O.N. Grauer


The Canada Not-for-Profit Corporations Act (CNFPCA) received Royal Assent on June 23, 2009, but will not be proclaimed in force until such time as regulations and forms for use with it have been developed and settled, likely in 2010. Industry Canada is advising that Proclamation could be anywhere between 12 and 24 months.

The CNFPCA will significantly overhaul and modernize the Canadian federal not-for-profit legislation. Once in force, it will replace Part II of the Canada Corporations Act (CCA), which will continue to govern federal not-for-profit corporations until then. The CCA has remained largely unaltered since 1917; it has not kept up with modern corporate governance mechanisms and has imposed administrative and financial burdens on organizations incorporated under it.

The federal government expects that the CNFPCA will "promote accountability, transparency and good corporate governance for not-for-profit organizations," and has indicated that the purpose of the CNFPCA is to provide a modern governance framework for the volunteer sector and to provide the Canadian public with the means to ensure that monies raised are utilized in an appropriate and responsible manner that will "boost Canadians’ level of trust in not-for-profit corporations."

The CNFPCA is modelled on the corporate governance provisions contained in the Canada Business Corporations Act (CBCA), the statute that governs federally incorporated for-profit business corporations. Once the CNFPCA and its proposed regulations come into force, organizations governed by Part II of the CCA will have three years to transition under the CNFPCA before the Director takes steps (described below) to dissolve them. This is reminiscent of the continuance process in the 1970s, when for-profit corporations had to continue from Part I of the CCA under the CBCA.

Highlights of the CNFPCA include:

  • The legislation confirms the role of "Director" under Industry Canada, who will not only act as a public registrar for non-profit corporations, but will also exercise regulatory, administrative and investigatory powers.

  • Incorporation under the CNFPCA is by way of right and there is no need for Ministerial approval of letters patent as there is under the CCA. As long as the statutory requirements for incorporation are followed, incorporation is automatic. Further, documents may be filed electronically. Bylaws need only be submitted within 12 months of incorporation. Industry Canada will no longer approve the bylaws, but will act as a repository for them.

  • Under the CNFPCA, a non-profit corporation has the capacity and powers of a natural person. As long as its articles of incorporation permit, a non-profit corporation assumes the broader powers of a corporate legal entity. Therefore objects clauses formerly required in letters patent for non-profit organizations under the CCA will no longer be needed.

  • The CNFPCA sets out procedures for amalgamation, continuance, liquidation and dissolution.

  • The CNFPCA recognizes two types of not-for-profit corporations, namely soliciting and non-soliciting corporations.

Soliciting corporations will be required to make their financial statements available to the public. Soliciting corporations are non-profit corporations that receive at least $10,000 of income in the form of donations, gifts and grants in its last three years. Because they are operated for public benefit and must distribute their property to a qualified donee under the Income Tax Act (Canada), e.g., a charity, the requirements respecting soliciting corporations under the CNFPCA are more stringent.

There are different and more onerous corporate governance and financial accountability requirements for soliciting corporations than there are for non-soliciting corporations — non-soliciting corporations do not solicit money from the public. For example, non-soliciting corporations may have a minimum of one director on the board, however, soliciting corporations must have at least three directors. Further, there are different financial reporting requirements for soliciting and non-soliciting corporations, depending on their revenue. For example, soliciting corporations with high revenue must be audited, as must non-soliciting corporations with an annual revenue greater than $1 million, but soliciting corporations with medium revenue may resolve to have a review engagement instead of an audit.

  • Under the CNFPCA, members’ rights will have to be detailed in the articles of the corporation rather than its bylaws, as has been the case under the CCA. Members have rights with regard to voting and attendance at meetings, and can vote by proxy, mailed-in ballots, telephone or electronically. Further, members have rights to utilize the derivative action remedy and the oppression remedy to address a wrong committed against the corporation or a member.

  • Directors under the CNFPCA have the duty to act honestly and in good faith in the best interests of the non-profit corporation, and to exercise the care, diligence and skill of a reasonably prudent person. This duty and standard of care is akin to that required under the CBCA. Under the CNFPCA, directors have a "due diligence" defence against liability for negligence.

  • It will be possible for members to enter into a unanimous members’ agreement and withdraw to themselves some or all of the powers of the board of directors, much like the process of unanimous shareholder agreements under the CBCA.

Corporations requiring assistance to continue from Part II of the CCA under the CNFPCA in the three-year period after proclamation of the CNFPCA should contact legal counsel for assistance in dealing with the procedures for continuance and in updating their corporate records and practices.

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