Canada: Modern Legislation For Not-For-Profit Corporations

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Not-For-Profit Corporations, October 2011

The Canada Not-for-Profit Corporations Act (the Act) was proclaimed on October 17, 2011. The federal legislation governing the not-for-profit sector was last updated in 1919, the same year the Treaty of Versailles was signed. After a failed attempt to modernize the legislation in the 1970s and several hiccups since then (as a result of changes in government, prorogued Parliament, and a delay in proclamation of more than two years), the new Act will provide a much-needed modernization of corporate governance for the not-for-profit sector. The Act is closely modelled on the Canada Business Corporations Act (CBCA), which provides practitioners, the government and the courts with a familiar base from which to work.

Ontario is also updating its not-for-profit legislation and it is hoped that this legislation will come into force by the end of 2012. We will provide further details regarding the Ontario legislation in a future bulletin.

Incorporation as of Right

Under the Act, not-for-profit corporations (NFPs) can incorporate "as of right", which means that a certificate of incorporation must be issued if the articles of incorporation, notice of registered office and notice of initial directors are properly completed and filed and the required fees are paid. The former discretion of the government to issue letters patent no longer applies, which should make incorporation quicker and less expensive for NFPs.

Capacity and Rights

Under the Canada Corporations Act (CCA), an NFP was limited to carrying out those activities that were in furtherance of the objects set out in its letters patent. Under the Act, an NFP will have the capacity and, subject to the Act, the rights, powers and privileges of a natural person, thus eliminating the doctrine of ultra vires. Therefore, provided that the NFP is not a charity, the activities that it is permitted to undertake will not be restricted unless it chooses in its articles to restrict itself.

An NFP that is a registered charity will still be required to include in its articles purposes that are deemed to be wholly charitable at law. In order to meet the requirements of the Canada Revenue Agency (CRA), a charity's activities must be restricted to the purposes for which it is incorporated. The new articles of a charity must be reviewed, and approved, by the CRA either before or after it is continued under the Act. Pre-clearance is recommended to preclude having to amend the articles of continuance if the CRA is dissatisfied with the purposes set out in the articles. If an existing charity makes no changes to its current objects when re-stating them as purposes, the CRA should be able to quickly grant approval of the articles of continuance.

Directors

Many of the provisions of the Act relating to directors and officers will be well known to those who are familiar with the CBCA. For example, as in the CBCA, directors have the duty to act honestly and in good faith with a view to the best interests of the NFP, to exercise the care, diligence and skill of a reasonably prudent person. Directors (and officers) of an NFP will be able to avoid liability for breach of fiduciary duty if they exercise the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances. It should be noted that, while the Act introduces an objective standard of care, directors of charities are considered to be trustees and may be held to a higher standard.

Under the Act, a majority of directors must be elected by members and, if the articles so provide, up to one-third of the directors may be appointed by the other directors. Therefore, the Act does not allow directors to become directors by virtue of their position, i.e., "ex officio" directors. Accordingly, any NFP that has ex officio directors will need to amend its governance structure to comply with the provisions of the Act. Under the new Act, there are no resident Canadian director requirements.

From a practical standpoint, perhaps the most important change in the Act is the ability for directors to pass written resolutions in lieu of meetings.

Members

Members of NFPs will have similar rights and remedies to those enjoyed by shareholders of CBCA corporations. The Act sets out provisions to govern member meetings, including electronic and ballot voting, which will assist NFPs to reduce costs. Members of non-soliciting corporations (see discussion of soliciting corporations below) may execute a unanimous members' agreement that removes some or all of the power of the directors. As in the CBCA, fundamental changes require the approval of members by a special resolution and they may be subject to class veto protection. In addition, non-voting members may, in certain circumstances, obtain voting rights.

By-Laws

The Act provides a new procedure for approving by-laws that eliminates the onerous government approval process. Now an NFP simply needs to send a copy of its by-law to Corporations Canada within one year after it is confirmed by the members. Except where the by-law seeks to change certain fundamental governance matters, the directors may simply pass a resolution to approve, amend or repeal the by-laws, which will immediately become effective when the resolution is passed by the directors. The resolution must then be submitted for approval at the next members' meeting. If a by-law is not adopted within one year, the Act provides for a default by-law.

Soliciting Corporations

The Act creates an important distinction between soliciting and non-soliciting corporations. An NFP will be deemed to be a soliciting corporation if it received more than C$10,000 in donations in each of its three most recent fiscal years from (a) public donors (i.e., everyone who is not a director, officer, employee or member of the NFP at the time of the request or certain relatives of such persons); (b) the federal, provincial or municipal government, or an agency of any of them; or (c) another NFP or other entity that has, during the three previous years, itself exceeded its C$10,000 threshold from the sources listed in (a) or (b).

An NFP that is a soliciting corporation must comply with several important requirements, including:

• it must have a minimum of three directors, two of whom are non-management;
• it is subject to stricter audit requirements;
• it must file annual financial statements with the government; and
• it must distribute its assets on liquidation or dissolution only to a "qualified donee", e.g., a charity or government.

Next Steps – Transitioning under the Act

NFPs incorporated under Part II of the CCA will have to transition to the Act before October 18, 2014. In the event that an existing Part II CCA corporation is not continued under the Act by then, Corporations Canada will, following written notice to the NFP and each of its directors, dissolve the NFP. While three years may seem like a long time, in our experience, many NFPs engage in extensive consultation processes when changes in their governance structure are being considered. We suggest that NFPs consider putting this process on the governance committee's agenda in the near future. The continuance process provides an excellent opportunity for NFPs to review their letters patent, by-laws and governance structure, both to ensure compliance with the Act, and to consider whether other governance changes would be beneficial to the organization.

In order to continue under the Act, each NFP will be required to submit articles of continuance to the Director. The articles of continuance are required to contain (a) the NFP's name, (b) the province or territory of its registered office, (c) the classes of members (and voting rights), (d) the number of directors or a minimum and maximum number of directors, (e) any restrictions on the activities that the NFP may carry on, (f) a statement of purpose of the NFP, and (g) a statement regarding distribution of property upon dissolution. Once the articles of continuance have been prepared, they will need to be approved by the NFP's members before submitting them to Corporations Canada.

While an NFP is dealing with its articles of continuance, it should also prepare a new by-law that complies with, and takes advantage of the benefits of, the Act. The Act contains some provisions that must be included in the by-laws. Further, certain provisions of the Act will apply by default if not addressed in the NFP's by-laws or articles.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.