The Ontario government has recently announced that the Not-for-Profit Corporations Act, 2010 (the ONCA) will come into force no earlier than January 1, 2014. While the implementation date has been delayed several times, this delay will provide Ontario’s not-for-profit corporations (NFPs) some additional time to prepare for the new act.
Unlike the Canada Not-for-Profit Corporations Act, no continuance process will be required to trigger the application of the new legislation. Therefore, once the ONCA comes into force, it will immediately apply to most NFPs in Ontario.
Most NFPs will, however, need to file articles of amendment and pass a new by-law within three years from the date that the ONCA comes into force; otherwise, these governing documents will be deemed to have been amended to comply with the ONCA. While some NFPs may be tempted to allow the deeming provision to apply after the three-year transition period rather than taking the time, and incurring the expense, involved in undertaking a comprehensive governance review, the concern with using this approach is that it will be difficult for an NFP to determine which provisions of its governing documents are in effect. Moreover, given the additional rights that members will have under the ONCA, it is important for NFPs that have more than one class of members to review their membership structure and determine whether they wish to make any changes to it before the ONCA comes into force. Consequently, it would be prudent for each Ontario NFP to take the additional time afforded by the delay to undertake a governance review.
Incorporation as of Right
Under the ONCA, NFPs can incorporate "as of right," which means that a certificate of incorporation must be issued if the articles of incorporation, together with all other prescribed documents, are properly completed and filed and the requisite 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.
An NFP that is a registered charity will still be required to include purposes that are deemed to be wholly charitable at law in its articles, and its activities must be restricted to the purposes for which it is incorporated. The Canada Revenue Agency (CRA) must review and approve the articles either before or after incorporation; we recommend pre-clearance to avoid having to amend the articles if the CRA is dissatisfied with the NFP’s purposes.
Capacity and Rights
Under the Corporations Act (Ontario), the predecessor to the ONCA, an NFP was limited to carrying out those activities that were in furtherance of the objects set out in its letters patent. Under the ONCA, an NFP will have the capacity and, subject to the ONCA, the rights, powers and privileges of a natural person, thereby eliminating the doctrine of ultra vires. Consequently, provided that the NFP is not a charity, it will not be restricted in the activities that it is permitted to undertake unless the corporation chooses to restrict itself in its articles. It should be noted that, if any of the purposes of an NFP are commercial in nature, the articles must state that the commercial purpose is intended only to support one of its not-for-profit purposes. As mentioned above, an NFP that is also a registered charity will still be required to include purposes in its articles.
One of the most controversial aspects of the ONCA involves granting voting rights to members who, under the current regime and under the corporation’s by-laws, would not have the right to vote. Under the ONCA, members will have the right to vote on certain “fundamental changes,” whether or not such members would otherwise have a right to vote. The ONCA grants non-voting members the right to vote where the corporation wishes to:
- amalgamate with another corporation
- sell, exchange or lease all or substantially all of its assets
- make certain changes to members’ rights
- continue to another jurisdiction, or
In order for an NFP to take any of these corporate actions, a special resolution is required, which means that 66 2/3% of the members must vote in favour of such step. In the case of the first three items listed above, a class vote is required. This will enable a very small number of members to veto certain actions that the directors believe are in the best interests of the corporation.
The Ministry of Consumer Services website states that it is the government’s intent that if the governing documents of an existing NFP provides that certain classes of members do not have the right to vote, then those members will not have any voting rights during the three-year transition period unless such corporation amends its governing documents during that period. This suggests that non-voting members will not have voting rights until the earlier of three years from the date the ONCA comes into force and the date on which the NFP amends its articles or passes a new by-law. However, this intent is not clear in the legislation and it is possible that a court may grant class veto rights to non-voting members during the three-year transition period. Accordingly, NFPs that wish to change their membership structure should consider doing so before the ONCA comes into force.
From a practical perspective, one of the most beneficial features of the ONCA is the ability of an NFP to set a minimum and maximum number of directors. Under the ONCA’s predecessor legislation, an NFP was required to have a fixed number of directors. This lack of flexibility created significant uncertainty in many NFPs around whether quorum could be achieved during times when there were vacancies on the board. The ability to have a flexible board should ameliorate this concern. In order for an NFP to take advantage of this change, it will need to file articles of amendment and set a minimum and maximum number of directors.
Public Benefit Corporations
The ONCA creates a new category of NFP—the public benefit corporation. An NFP is considered to be a public benefit corporation if (a) it is a charitable corporation, (b) it is a not a charitable organization, but it receives, in a financial year, more than C$10,000 in donations or gifts from persons who are not members, directors, officers or employees, or (c) it is not a charitable organization, but it receives more than C$10,000 in a financial year in grants or similar financial assistance from the government. An NFP that is a public benefit corporation must comply with a special set of rules including:
- no more than one-third of its directors are permitted to be employees of the corporation or any of its affiliates
- different audit and review engagement requirements (as discussed in more detail below)
- different rules with respect to property distribution following dissolution: in the case of a charitable corporation, it must distribute its assets to another charitable corporation with similar purposes or to a government agency, and where the NFP is not a charitable corporation, it must distribute its assets to another public benefit corporation with similar purposes or to a government agency.
Broader Audit Exemptions
The ONCA permits a simpler and more cost-effective process for reviewing the financial records of not-for-profit corporations by allowing audit exemptions in certain circumstances so long as the members approve such waiver by extraordinary resolution, which is a resolution that is passed by at least 80% of the voting members. It should be noted that an extraordinary resolution is only effective until the next annual meeting of members, so an extraordinary resolution must be passed annually to take advantage of the broader audit exemptions available under the ONCA.
Members of a public benefit corporation that had revenue of C$100,000 or less in a year are permitted to waive both the audit and review engagement requirements. A public benefit corporation that had revenues that are more than C$100,000 but less than C$500,000 in a year can avoid the audit requirements with member approval. In these cases, the corporation can use an accountant to perform a review engagement. Under the ONCA, the financial statements of public benefit corporations with revenues of C$500,000 or more in a year are still required to be audited.
Members of corporations that are not public benefit corporations that had revenues of more than C$500,000 in a year may waive the audit requirement and use the review engagement process instead. The financial statements of a corporation that is not a public benefit corporation will not be subject to an audit or review engagement if the corporation had revenues of C$500,000 or less and member approval is obtained.
Next Steps: A Practical Guide to Transitioning under the ONCA
As a first step in the transition process, an NFP should collect and review its governing documents, including the corporation’s special act (if applicable), letters patent, supplementary letters patent (if any), by-laws and governance policies. The board may wish to appoint a governance review committee to undertake this process.
NFPs should review their governing documents to determine whether the corporation’s current governance practices are reflected in its governing documents. It is common for the corporate governance practices of an NFP to evolve over time, which may result in the corporation’s practices being very different from what is set out in its governing documents. For example, an NFP may have updated its governance policies with respect to conflicts of interest, but similar provisions in the corporation’s by-laws have not been amended. To the extent that the corporation’s current practices comply with the requirements of the ONCA, these practices may be reflected in the corporation’s governing documents as part of the transition process.
Corporations that are subject to the provisions of the ONCA will need to become familiar with the new legislation to determine what provisions of its governing documents will need to be amended to achieve compliance. In addition to the areas that we have highlighted in this bulletin, NFPs should, among other things, consider whether it wishes to:
- amend the provisions of its by-laws concerning conflicts of interest, indemnification and insurance for directors and officers
- eliminate the provisions of the by-law relating to borrowing since a borrowing by-law no longer requires member approval to be effective
- permit electronic or telephonic member or director meetings, or
- modify its by-laws to address the new mandatory proxy solicitation requirements
Most NFPs will need to file articles of amendment and pass a new by-law within three years from the date that the ONCA comes into force. If a corporation has not filed articles of amendment and adopted new by-laws within that period of time, any provision of an NFP’s letters patent, supplementary letters patent, by-laws or any special resolution that does not comply with the ONCA will be deemed to be amended to bring it into conformity with the ONCA. As a result, if an NFP does not take steps to bring its governing documents into compliance with the ONCA within this three-year transition period, it will need to embark on a complex review of its letters patent or special act, its by-laws and the relevant provisions of the ONCA each time it calls a members’ meeting, elects directors, prepares and issues financial statements, and takes other corporate actions. Although three years may seem like a long time, in our experience, many NFPs engage in extensive consultation processes when they are contemplating changes in their governance structure. Accordingly, we suggest that NFPs consider putting this governance review and transition process on the board’s agenda in the near future.