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Business Law Group e-LERT - Not-For-Profit Corporations

Published: 04/28/2011

By Luke Woolford

The federal and Ontario governments have each passed, but have not proclaimed in force, new laws governing not-for-profit corporations ("NFPCs") that are game-changers for both existing and new NFPCs. Both Acts radically change the powers of NFPCs and the corporate governance rules which apply to them. The Acts streamline the regulatory regimes that oversee NFPCs. If the present federal government is returned to power in the May election, the federal Canada Not-for-profit Corporations Act (the "Canada NFPC Act") would be proclaimed in force before the end of the summer. If the present provincial government is returned to power in the October election, the Ontario Not-for-profit Corporations Act, 2010 (the "Ontario NFPC Act") would likely come into force in January 2012. If the elections yield other results, the timing of implementation, and perhaps the provisions, of the Act in question will change.

In any event, all existing NFPCs will, sooner or later, be forced to transition under a new Act. As a result, existing NFPCs would be wise to understand the impact of the new Acts and, because they have the choice to continue under either Act, the key differences between them.

Who is Affected?

The Canada NFPC Act will govern all existing federal NFPCs and corporations without share capital incorporated by a special Act of Parliament that “continue” under it, and all new federal NFPCs incorporated on or after the date on which the Canada NFPC Act comes into force.

The Ontario NFPC Act will apply to all existing Ontario NFPCs and to all corporations without share capital incorporated by a special Act of Ontario (except for co-operative corporations incorporated under the Ontario Co-operative Corporations Act and insurance corporations incorporated under Part V of the Ontario Corporations Act) that “continue” under it, and to all new Ontario NFPCs incorporated on or after the date on which the Ontario NFPC Act comes into force.

Fish or Have Your Bait Cut

It is important for existing NFPCs to be aware that at some point (generally believed to be 3 years following the coming into force of the Act in question), the Director under such Act will issue a notice to each NFPC that has not applied for articles of continuance or articles of dissolution requiring such notified NFPC to do one, or the other, within a specified period. If such NFPC fails to take either step (or fails to continue under not-for-profit legislation of another jurisdiction), then such NFPC will automatically be dissolved without any opportunity for revival.

Continuing under the New Acts

A corporation can only continue under either of the Acts if the legislation governing the corporation immediately prior to continuation does not prohibit continuance or export. By way of example, until recently, the Quebec Companies Act prohibited Quebec-incorporated business corporations from continuing out of Quebec and CNFPCs governed by the Canada Corporations Act had no right to continue under alternative legislation.

Continuance or incorporation under either Act is "as of right” and occurs automatically once completed articles of continuance or incorporation are executed and filed, and applicable name clearance requirements are complied with.

The Purpose of the New Acts

The new Acts are intended to modernize the regulatory framework for NFPCs by aligning it more closely with the regime which governs for-profit share capital corporation. The goals are to improve the operational efficiency of NFPCs, to protect the rights and interests of their members, to augment NFPC accountability and to make NFPC operations more transparent. A comprehensive description of all of the differences imposed by the new legislation is beyond the scope of this newsletter, but the following is a summary of certain of the significant features of, as well as some of the important differences between, the Acts.

Capacity of a Natural Person

Each continued or newly incorporated NFPC will have the capacity of a natural person, although any for-profit activities must be used as a source of funds for the not-for-profit purpose of the NFPC. Broader restrictions are imposed on NFPCs which are charities for purposes of the Income Tax Act (Canada) and the Charities Accounting Act (Ontario).

Directors and Officers

The new Acts introduce rules for directors and officers that are consistent with those presently governing for-profit share capital corporations, including:

• Unless the by-laws otherwise provide, a director need not be a member of the NFPC.
  
  
• Resolutions signed by all the directors are permitted in lieu of meetings.
  
  
• Subject to the by-laws and with the consent of all directors, telephone meetings of directors are permitted.
  
  
• Both Acts contain provisions relating to the disclosure in writing by directors and officers of the nature and extent of their interest in any material contract or transaction; the provisions are substantially identical to those currently set out in the Business Corporations Act of Canada and Ontario.

In addition, each Act sets out an objective standard of care for directors and officers that obligates directors and officers to act honestly and in good faith with a view to the best interests of the NFPC and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. A "due diligence" defence is available to directors and officers for claims against them. A director or officer is deemed to have met his or her obligations under the Act if he/she exercises the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances. Both Acts have updated rules governing the indemnification of directors and officers to make them consistent with those governing for-profit share capital corporations, although neither Act has an upper limit on the liability of a typically unpaid NFPC director or officer.

Under both Acts, there are two types of directors: those elected by members, and those appointed by such elected directors. NFPC directors have the extraordinary power to appoint one or more additional directors, who shall hold office for a term expiring not later than the close of the next annual meeting of members. In each case, the total number of directors so appointed may not exceed one-third of the number of directors elected at the previous annual meeting of members. There is a key difference between the federal and Ontario Acts with respect to this authority. For the directors of a federal NFPC to have this power, the power must be set out in the articles, but the power appears to be as of right in the discretion of the elected directors under the Ontario NFPC Act, unless restricted by the NFPC’s articles. This feature will accommodate NFPCs that wish to include ex officio members to their board of directors and permit NFPCs to act as administrative agents under other legislation where such legislation provides for unelected representation on such agent’s board.

One interesting feature of the Canada NFPC Act not present in the Ontario NFPC Act mandates that every director of a Canadian NFPC must verify the lawfulness of the articles and the purpose of the CNFPC. The intent of this section is not clear, and its tone is ominous. The requirement that directors personally verify the “lawfulness” of a CNFPC may be similar in effect to the approach that has been taken by the United States under its "honest services" law, which requires that public and corporate officials act in the best interests of their constituents and employers. Some of the convictions registered against Conrad Black in the United States were grounded, in part, on the ruling that his conduct breached his “honest services” duty to Hollinger. Critics of the honest services law suggest that it is too vague and that it invites abuse from regulators who may impose legal sanctions on employees, officers or directors that engage in conduct that, while unappealing or ethically questionable, is not necessarily in breach of their good faith and care obligations to the enterprise. Whether a similar concern for directors will arise under the Canada NFPC Act based on the ambiguity of what constitutes a "lawful purpose" will have to be determined in the fullness of time.

Member Rights

The Acts enhance member rights by introducing member remedies that are similar to those conferred on corporate shareholders under the federal and Ontario Business Corporations Acts, including oppression remedy rights. The list of persons entitled to make an application to the courts for relief for oppressive conduct by a NFPC under the Ontario NFPC Act is a significantly shorter list that that under the Canada NFPC Act. Existing NFPCs and unincorporated associations should bear this distinction in mind when considering which of the two Acts it may select for continuance or incorporation. This distinction favours the Ontario NFPC Act.

One significant feature of the Ontario NFPC Act not present in the Canada NFPC Act is the right of each member to vote at a meeting by proxy. The Ontario NFPC Act contains an obligation on the Ontario NFPC to solicit proxies for each member meeting. The preparation of a proxy statement for member meetings may represent a new significant new cost for Ontario NFPCs.

Financial Disclosure

Each of the new Acts imposes comprehensive financial reporting obligations on NFPCs that have the potential to significantly increase operating costs. For example, a Canada NFPC that has received more than $10,000 in any financial year from specific sources, including government bodies and public donors (making it a “soliciting corporation”) that has annual gross revenues of more than $50,000 must engage a public accountant to conduct an audit and prepare comparative audited financial statements. For many small NFPCs, the cost of an audit may threaten their financial viability. This may result in such groups electing not to incorporate at all, and to operate as a collection of individuals. This strategy, of course, may result in personal liability for all members; it would have the effect of eliminating all protections otherwise provided to members by the Acts.

Closing Comments

The impact of the Acts on existing NFPCs may be difficult to explain to members. Which Act to select for continuance, or for a proposed NFPC, incorporation, requires careful analysis and discussion among members. Members who have special rights prior to continuance may see those rights change or disappear. The NFPC will have to implement a plan to fund its annual cost of financial, and other, compliance obligations under the Act; those costs will be higher, regardless of which Act is selected. It may be appropriate to start the member education process as soon as possible so that members can appreciate the implications of the changes and the alternatives available for their NFPC. While, our analysis favours the Ontario NFPC Act over the federal counterpart, there is legislation in other provinces which may offer advantages over both the federal and the Ontario Acts. Cassels Brock can assist NFPCs in getting ready for the transition with a focus on provisions within the articles of continuance to address concerns, develop compliance procedures and transition management.

If you would like to discuss this further, please feel free to call Bruce McNeely, Luke Woolford or any other member of the Business Law Group.