On June 23, 2009, Bill C-4, the Canada Not-for-Profit Corporations Act (the “Act”), was given Royal Assent and is now ready to become law. The Act establishes a framework for the governance of not-for-profit corporations and other corporations without share capital, mainly based on the Canada Business Corporations Act . It sets out the capacity and powers of a corporation as a natural person, including its right to buy and sell property, make investments, borrow funds and issue debt obligations. The Act replaces Part II of the Canada Corporations Act, enacted in 1917, which contains the provisions governing federally incorporated non-profit corporations. In addition, some of the provisions contained in the Act are designed to apply to entities currently subject to Part III of the Canada Corporations Act, which governs corporations without share capital incorporated by a special Act of Parliament (Note that Bill C-4 will not affect the tax-exempt status of federal not-for-profit corporations that have charitable status, and does not by itself play a determining role on whether a corporation qualifies as a charity or as a not-for-profit corporation under the Income Tax Act) . The Act also provides for the continuance of share corporations created by Special Acts of Parliament that are currently subject to Part IV of the Canada Corporations Act under the Canada Business Corporations Act.
With the exception of a few minor additions, the Act is nearly identical to three previous Bills that died on the Order Paper. Bill C-21, An Act respecting not-for-profit corporations and other corporations without share capital, was tabled on November 15, 2004 and subsequently died on the Order Paper upon the dissolution of Parliament on November 29, 2005. Bill C-62, An Act respecting not-for-profit corporations and certain other corporations, was tabled on June 13, 2008, but died upon the dissolution of Parliament in 2008. Bill C-4, An Act respecting not-for-profit corporations and certain other corporations, was introduced on December 3, 2008 but died on the Order Paper when parliament was prorogued on December 4, 2008. An amended version of Bill C-4 was reintroduced on January 28, 2009 and was given Royal Assent on June 23, 2009, as noted above.
Highlights of the Canada Not-for-Profit Corporations Act
1. Coming Into Force Information
While the Act has been given Royal Assent, most of its provisions are not yet in force. Most of the Act will not be in effect until it is proclaimed into force by an Order-in-Council. Proclamation will occur when the regulations, including the service fees, have been approved. It will take a considerable amount of time to complete the process to approve new service fees under the User Fees Act and to complete the regulatory approval process. More information will be made available as these steps are completed. Once the Act and proposed regulations come into force, every not-for-profit corporation currently governed by Part II of the Canada Corporations Act will have three years to formally make the transition to the new Act, by way of an Application for continuance. After that time, any corporation that has not made the transition will be dissolved. There will be no government fees for this continuance process.
2. Corporations Created by Special Act of Parliament, with Share Capital
Despite the fact that most of the Act will not be in effect until it is proclaimed into force by an Order-in-Council, sections 297 (2) to (4), (6) and (7) came into force on June 23, 2009, the day the Act received Royal Assent. Subject to certain exceptions which are stated in the Act, the new Act requires corporations that are created by a Special Act of Parliament with share capital, and that are governed by the provisions of Part IV of the Canada Corporations Act to continue under the Canada Business Corporations Act . The Act requires these corporations to complete their continuance within 6 months of Royal Assent of the Act, or by December 31, 2009. If corporations have not completed the continuance by that date, then those corporations will be automatically dissolved as of that date pursuant to section 297(6).
3. Powers of a Natural Person
The Act will give not-for-profit corporations the capacity and rights of a natural person. This will enable not-for-profit corporations to carry on any commercial or non-commercial activity, subject only to the restrictions included in the articles of incorporation and applicable law including the Income Tax Act . This will replace the applicable law that is unclear as to whether a not-for-profit corporation has the capacity of a natural person.
4. A Streamlined Incorporation Process
The Act seeks to reduce the corporate and regulatory burden for both the not-for-profit sector and the government alike by establishing an “as of right” system of incorporation. Currently, in order to obtain the requisite document of incorporation under the Canada Corporations Act (Letters Patent), at least three incorporators must apply, with accompanying by-laws, for Ministerial approval. Under the system established in the Act, incorporation will be granted “as of right” upon the filing of articles of incorporation (containing certain prescribed information) by one (or more) individuals or corporations (along with payment of the required fees), foregoing the need for Ministerial review and approval. Furthermore, with the option to file electronically, incorporation will be effected more efficiently and in a shorter time period.
A corporation’s by-laws and any changes made to the by-laws will have to be submitted to Industry Canada within 12 months after the day on which the members confirm the by-law or its amendment or repeal. However, Industry Canada will no longer be involved in reviewing or approving by-laws.
In addition, not-for-profit corporations wishing to have more than one class of members will be required to describe each membership class and any voting rights attaching to each class in its articles of incorporation. Previously, these arrangements were often set out only in the organizational by-laws. At least one class or group of members must have the right to vote at a meeting of members.
5. Improved Corporate Governance
The Act seeks also to provide a modern corporate governance framework for federal corporations without share capital, by explicitly setting out the standard of care that directors must meet and by establishing a due diligence defence available to directors who meet the prescribed standard of care. The Act requires that every director and officer of a not-for-profit corporation act honestly and in good faith, with a view to the best interest of the corporation, and exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances.
6. Improved Financial Accountability and Corporate Finance
The Act distinguishes between two different types of not-for-profit corporations, namely soliciting and non-soliciting, with different duties and obligations being ascribed to each. As indicated above, a soliciting corporation is one which solicits donations or gifts of money or property from the public or that receives financial assistance from the government, in an amount exceeding a prescribed amount over a prescribed period. All corporations (soliciting and non-soliciting alike) will be required to disclose financial statements to members on request.
Under the Act, a soliciting corporation will be required to make their financial statements publicly available. There is no such obligation for non-soliciting corporations, although the Act provides that a non-soliciting corporation will be required to make their financial statements available to members, directors and officers, and to the Director appointed under the Act.
As regards the appointment of an auditor and the level of financial review required, the Act divides corporations into two categories: designated corporations and corporations that are not designated. “Designated Corporation” is defined as (i) a soliciting corporation that has gross annual revenues for its last completed financial year that are equal to or less than $50,000 or that is deemed to have such revenues, and (ii) a non-soliciting corporation that has gross annual revenues for its last completed financial year that are equal to or less than $1,000,000. An audit engagement, which means a full audit, will only be required for corporations that are not “designated corporations”, although soliciting corporations with gross annual revenues between $50,000 and $250,000 will have the option of going with the default audit engagement level of review or a lesser level of review, such as a review engagement. “Designated corporations” will have the option of leaving the level of review at the default of a review engagement or raising the level of review to an audit engagement.
The Act provides that directors shall manage or supervise the management of the activities and affairs of the corporation. The number of directors is required to be one or more, but in the case of a soliciting corporation, there must be at least three directors, two of whom must not be officers or employees of the corporation. All directors have to be elected by ordinary resolution of the members except where there is a vacancy and the remaining directors can fill the vacancy assuming there is a quorum in office.
The Act also sets out detailed provisions regarding conflict of interest issues for directors and officers of not-for-profit corporations, as well as provisions with respect to decisions by directors, written resolutions in lieu of meetings and remuneration.
8. The Enhancement and Protection of Members’ Rights
The Act enhances existing members’ rights and introduces concepts and rights which have been available to business corporations and their shareholders. For example, the Act enhances the rights of members to access membership lists (subject to certain exceptions), to seek a court order to commence derivative actions, to access various corporate records (including financial statements, which facilitates active monitoring of director performance), to request a meeting and to make proposals, and to participate in a members’ meeting by electronic means. New members’ rights are also introduced, such as the right to seek oppression remedies against the corporation.
The Act also provides that certain corporate actions, including proposed amendments to membership classes, rights and conditions, the sale or transfer of assets, amalgamation of corporations and dissolution, will require the approval of 2/3 of all members, whether specified to be voting or not. In addition, any change in the manner of giving notice to members entitled to vote at a meeting of members and any change in the method of voting by members not in attendance at a meeting of members will require approval by special resolution of the members.
9. Director of Corporation’s Rights and Obligations
Under the Act, a new office of Director of Corporations will be established. The Director will function primarily as a public registrar of corporations and will exercise some regulatory powers. The Director will have the right to apply to a court to have a corporation dissolved or, under certain circumstances, dissolve it himself or herself. The Director may make an application to a court for a variety of actions, including: investigation of corporations or their affiliates; the appointment of inspectors; permission for inspectors to enter any necessary premises; require the production of documents; attendance at hearings; and all other powers that would be necessary for the investigation of a complaint by an interested party.
10. Special Act Bodies Corporate
The Act also modernizes the legal regime that applies to corporations without share capital created by special Acts of Parliament by providing that those corporations are natural persons, requiring that an annual meeting be held and that an annual return be filed, and by regulating a change of a corporation’s name and its dissolution.
Section 212 of the Act is a permissive section which allows voting members of a body corporate incorporated under an Act of Parliament to apply for a certificate of continuance under the Act. Accordingly, there is no requirement in the Act obligating statutory corporations to continue thereunder.
The Act contains principles and provisions that are unlikely to change. The details will be contained in the regulations. As a result, the Act has many references to things being “prescribed” or set out in the regulations (e.g., time periods, amounts, etc.). This means that the regulations and the statute must be read together in order to fully understand many of the provisions. Some of the matters that will be dealt with in the proposed regulations include options for the method of giving notice of meetings; the manner in which consent to electronic communications may be given; the rules on the content and use of corporate names; the information that must be retained in the corporation’s corporate records and registers; and options for the manner of absentee voting at meetings of members.
Implications for Corporations Incorporated Under the Canada Corporations Act and Special Act of Parliament Corporations
Corporations incorporated pursuant to the Canada Corporations Act , Part II will have to file articles of continuance in order to fall under the new statute, within three years of the Act being proclaimed in force. Failure to do so will result in the automatic dissolution of the corporation. Corporations required to continue under the Act may wish to take the opportunity to review their corporate documents and make changes required to such documents at that time. For instance, corporations that have non-voting honorary or patron members may wish to delete such classes of membership in light of the fact that all members, voting and non-voting, will be required to approve certain fundamental changes, as indicated above.
As mentioned earlier, there is no requirement in the Act obligating Special Act corporations registered under Part III of the Canada Corporations Act to continue under the Act. Accordingly, such special act corporations will have to assess the pros and cons of continuation under the Act, based on their own specific corporate circumstances.
Finally, as regards corporations with share capital created by special Acts of Parliament that are subject to Part IV of the Canada Corporations Act, they will generally have six months from the coming into force of the new statute (June 23, 2009) to apply for continuance under the Canada Business Corporations Act or they will be dissolved.