Top Ten Things You Should Know About the New Federal Law
Guest Article by Joel Secter
For the first time since 1917, there is new legislation governing federal not-for-profit corporations, including those that are registered charities. The much anticipated Canada Not-for-Profit Corporations Act (“NFP Act”) finally came into force on October 17, 2011 after receiving Royal Assent on June 23, 2009. To mark the occasion, here are the top ten things you should know about creating and maintaining a not-for-profit corporation under the new federal law.
1. Incorporation as of right
Non-share capital corporations will no longer be created by Letters Patent, which involved the Crown granting corporations the power to operate. Under the NFP Act, instead of drafting objects, applicants are required to complete a form, known as Articles of Incorporation, which includes an area to describe the main purpose of the corporation. As long as applications are complete and include the prescribed fee of $250, Corporations Canada will issue a Certificate of Incorporation in approximately five business days.
2. Three years to obtain Articles of Continuance
The new rules do not automatically apply to existing federal not-for-profit corporations. Corporations incorporated under Part II of the Canada Corporations Act (“CCA”) have until October 17, 2014 to “continue” under the NFP Act. Applying for Articles of Continuance entails submitting Form 4031 – Articles of Continuance and Form 4002 – Initial Registered Office Address and First Board of Directors. While it is no longer possible to incorporate under the CCA, the old legislation will apply to existing non-share corporations until Articles of Continuance are issued. Therefore, a corporation that has not yet made the transition to the NFP Act can still apply for Supplementary Letters Patent and seek Ministerial approval for by-law amendments.
3. Members have rights and responsibilities
Because the new federal legislation is modeled after modern corporate laws, members have rights that resemble those of shareholders. For example, unless varied by the by-laws, members are entitled to receive a copy of the corporation’s annual financial statements. In addition, the new federal law provides statutory remedies, including the derivative action and oppression remedy. A derivative action occurs when a member, with permission of the court, brings a lawsuit on behalf of the corporation. The oppression remedy permits a court to make an order to rectify an act or omission that is oppressive to the interests of a complainant (usually a member in the minority). While making these corporate law remedies available to members of not-for-profit corporations may have the positive effect of increasing accountability, it may also have the unforeseen consequence of exposing organizations to frivolous lawsuits and fracturing memberships.
4. There are two types of corporations soliciting and non-soliciting
Soliciting corporations are those that receive more than $10,000 in revenues in a financial year from public sources, including donations from non-members, government sources and other soliciting corporations. The five ways that soliciting corporations will be treated differently compared with non-soliciting corporations are as follows:
i. Soliciting corporations must have a minimum of three directors, two of whom are not officers or employees of the corporation;
ii. On dissolution, soliciting corporations must ensure that the assets of the corporation go to a “qualified donee” as defined by the Income Tax Act;
iii. Soliciting corporations may not have a unanimous member agreement;
iv. Soliciting corporations must conduct a review of their financial statements and these must in turn be reviewed by a public accountant; and
v. Soliciting corporations must send a copy of the corporation’s financial statements and public accountant’s report, if any, to Corporations Canada.
The determination whether a corporation is a soliciting corporation is based on an examination of the corporation’s sources of revenue as presented in the annual financial statements and so the status can change from one year to the next.
5. Non-soliciting corporations can have only 1 director
That being said, it would be prudent to allow for a minimum of 1 and a maximum of 3 directors considering soliciting corporations require a minimum of 3 directors. That way, if you happen to become a soliciting corporation in a given financial year, you will not need to amend your articles to allow for additional directors.
6. Even non-voting members get to vote where there are changes that affect their rights
The articles must set out the classes of membership and the rights which attach to each. If you have more than one class of members, keep in mind that even non-voting members get to vote where there are changes that affect their rights. This means that the corporation will not be able to alter the rights or conditions of any class of membership without the support of a two-thirds majority of that class. Under the new regime, the more classes of members there are, the more groups there will be who have an effective veto over fundamental changes.
7. The Act speaks where your by-laws are silent
By-laws set out the day-to-day rules for governing and operating a corporation. There are many default rules that apply if they are not overridden by provisions in the by-laws. So, if the corporation wants to exert control over its own internal processes it must have bylaws which speak to those issues.
8. Written resolutions in lieu of meetings are allowed
The directors and members of not-for-profit corporations will be able to pass resolutions in lieu of holding meetings (if they are signed by all the directors or members entitled to vote on the resolution at the meeting). This practice has not been acceptable since the late 1990s when Corporations Canada determined that written resolutions in lieu of meetings are not permitted under the CCA. Although there are inherent benefits to transacting business at meetings, the change will undoubtedly be welcome news to organizations for which the requirements to have the directors or members in the same place at one time is cumbersome.
9. Ex-officio directors are not allowed
The NFP Act stipulates that directors must be elected by the members – and only by the members. The implication is that federally incorporated not-for-profits can no longer have ex-officio directors. These are directors who sit on the board by virtue of their office or position in another organization. Not-for-profit corporations with ex-officio directors on their board will have to change their board governance structure and recognize these stakeholders in others ways.
10. For some corporations, an audit is optional
Under the CCA, the members were obligated to appoint an auditor to audit the annual financial statements of the corporation for report to the members. Under the NFP Act depending on the status of the corporation as either a soliciting or non-soliciting corporation and the gross revenue of the corporation, the members may have some latitude in deciding whether to simply have an audit engagement, a review engagement or a full audit engagement.
Joel Secter, formerly of Drache Aptowitzer LLP, provides legal counsel to charities and not-for-profit organizations across Canada. His articles have been published in periodicals such as The Canadian Taxpayer, Canadian Not-For-Profit News and Canadian Fundraising & Philanthropy. He can be reached at joel @ secterlaw.com.