On October 17, 2011, the new Canada Not-for-Profit Corporations Act (CNFP Act) was proclaimed in force. Federally incorporated non-share capital corporations will have three years from October 17, 2011 within which to continue under the CNFP Act. For the next three years, we will have two federal statutes in force: (i) the new CNFP Act, and (ii) Part II of the Canada Corporations Act (CCA), which will continue to govern corporations that have not yet continued under the new CNFP Act. However, all new incorporations must take place under the CNFP Act — no body corporate may be incorporated under Part II of the CCA. Failure to continue within three years under the CNFP Act will result in the involuntary dissolution of the federal CCA corporation.
There are many different types of federal non-share capital corporations, including registered charities, registered Canadian amateur athletic associations and certain other corporations that benefit from tax-exempt status, for example, a "not-for-profit" corporation that meets the requirements of paragraph 149(1)(l) of the Canadian Income Tax Act (ITA).
The ITA plays an important role in respect of many federal non-share capital corporations. It will be very important to ensure that the continuance process is carried out in a manner which does not affect a corporation’s tax status.
The new CNFP Act is a modern statute and is similar in many ways to the Canada Business Corporations Act (CBCA). However, there are also fundamental differences as non-share capital corporations have members (not shareholders), and some raise money from the public in the form of gifts. There is an important concept of a "soliciting" corporation under the CNFP Act which, essentially, means any corporation that receives more than $10,000 in a financial year in the form of:
- gifts from persons who are not members, directors, officers or employees of the corporation (or persons related to this group);
- grants or similar financial assistance from the federal government or a provincial or municipal government or an agency of any such government; or
- gifts from other soliciting corporations.
There are many implications to being a soliciting corporation, including the level of financial review, the appointment of auditors versus accountants, the minimum number of directors required and their qualifications, the treatment of assets on dissolution and the use of unanimous members’ agreements.
The $10,000 test is applied at the end of the corporation’s financial year and the status of soliciting corporation lasts for three years. Soliciting corporations must file their financial statements with Industry Canada and, on dissolution, must distribute their remaining assets to one or more "qualified donees" under the ITA.
Among the more notable features of the CNFP Act are:
- CNFP corporation has all the powers of a natural person, subject to restrictions which are put into its articles;
- there are no more "objects" clauses so the ultra vires doctrine has been eliminated; instead there are "purposes" which are to be set out in the articles;
- classes of membership are to be set out in the articles;
- the directors have the authority to authorize the corporation to borrow money or issue debt obligations without having to obtain special permission from the members or adding special wording to the by-laws;
- incorporation is "as of right" — Industry Canada cannot refuse an incorporation and Industry Canada no longer needs to approve the by-laws, although a copy of by-laws must be filed within 12 months of their enactment with Industry Canada;
- there is now an objective standard of duty for directors set out in the CNFP Act which matches that in the CBCA;
- members’ rights have been expanded and non-voting members are granted limited voting rights in respect of fundamental changes;
- the scope of remedies has been increased to provide oppression remedies and derivative actions;
- a public accountant must be appointed if the corporation is a soliciting corporation that has more than $50,000 in gross annual revenues or is a non-soliciting corporation that has more than $1 million in gross annual revenues; there are some permutations and combinations of what can be done below these thresholds; and
- CNFP Act corporations can continue in and out of the federal jurisdiction and are also allowed to amalgamate.
In respect of the required continuance over the next three years, a corporation must:
- file an application in prescribed form (Form 4031) which will replace its letters patent, and
- develop a new by-law which complies with the CNFP Act.
There is no government fee in respect of the application to obtain a Certificate of Continuance. The application must be approved by two-thirds of the members of the corporation in accordance with the existing by-laws and the CCA, which may be problematic if the corporation does not have an up to date list of members. In addition, a form (Form 4002), known as "Initial Registered Office Address and First Board of Directors," must be filed with the application, together with a NUANS (name search report), if the corporation wishes to change its name on continuance.
One of the important aspects to completing the application for continuance, if the corporation is currently exempt from tax, is to seek input from a tax lawyer to ensure that continuance does not result in an inadvertent loss of such status.