A. A NEW BILL

According to a June 13, 2008 news release, if Bill C-62 (the Canada Not-for-Profit Corporations Act) is passed, it will “significantly modernize Canada’s not-for-profit legislation for the first time since 1917”. Considering the evolution of the corporation’s role in the North- American economy and society over the last ninety years, this latest attempt to modernize the legal framework for federally incorporated not-for-profit corporations (“Corporations”) can only be applauded.

The current law (Part II of the Canada Corporations Act or “CCA”) contains very few provisions relating to Corporations, with the result that directors, managers and advisors tend to take a conservative approach to corporate governance and operational issues, for example, shying away from permitting members to hold meetings or to vote by electronic means, even where members reside outside of the country in which the Corporation is resident. Information posted on its website suggests that even Corporations Canada, which administers the CCA, struggles with it:

“…the vagueness of the CCA presents difficulties … Part II of the CCA provides few answers as to whether particular bylaw provisions are acceptable. Historically, this has led to a body of ad hoc, unwritten policy that developed over the years. This was addressed several years ago by developing written policies to provide guidance on what is acceptable or unacceptable when the Act is unclear or silent on a question. The policies reflect past practice and include information on the types of provisions that are acceptable for bylaws. Corporations Canada has also developed a set of model bylaws, which, if adopted for use by the applicant and properly identified on filing, will speed the processing of an application for incorporation”.

Although using the model bylaws may expedite the application process, Corporations Canada provides no assurance that they are authorized by the CCA. The following is a cursory overview of some of the changes that Bill C-62 will introduce if it becomes law. The changes have been grouped into those designed to: 1) reduce administrative requirements (and costs); 2) clarify the responsibilities and liabilities of directors; 3) clarify and expand the rights of members; and 4) enhance transparency.

B. REDUCTION OF ADMINISTRATIVE COSTS

Under the CCA, the Minister may issue letters patent creating a Corporation where a minimum of three people sign and submit an application and bylaws. Under Bill C-62, the Director must issue a certificate of incorporation on receiving articles of incorporation signed by one or more individuals or bodies corporate. By replacing the discretion of the Minister with incorporation as of right and doing away with the requirement for bylaw review as part of the application process, Bill C-62 would presumably reduce the time it currently takes to incorporate.

Under Bill C-62, subject to the bylaws providing otherwise and obtaining the consent of all the directors, directors may participate in a board meeting by telephonic or other electronic means. Members may participate in meetings and vote by telephonic or other electronic means so long as certain conditions are met, including having technology available that allows the members to communicate with each other during the meeting. To further streamline operations, a resolution in writing signed by all the directors or members entitled to vote on a matter is as valid as if the resolution had been passed at a meeting.

Bill C-62 distinguishes “soliciting” Corporations, (Corporations that have received income in excess of $10,000 over a 3-year period in the form of donations, gifts, money or other property, government grants, or donations or gifts from a soliciting Corporation), from other Corporations and requires them to comply with a number of requirements that do not apply to other Corporations. For example, a soliciting Corporation must have three directors, two of whom must be independent (not an officer or employee of the Corporation or its affiliates), and must provide its financial statements to the Director. Bill C-62 also distinguishes “designated” Corporations, (soliciting Corporations with gross annual revenues in their last completed financial year of up to $50,000 and other Corporations with gross annual revenues in their last completed financial year of up to $1,000,000), from other Corporations. The members of a designated Corporation (and of a soliciting corporation that is not designated, but had gross annual revenues in its last completed financial year of up to $250,000) may elect the level of financial review (“review” or “audit”) to be conducted by the Corporation’s accountants.

C. RESPONSIBILITY & LIABILITY OF DIRECTORS

Bill C-62 codifies the common law and puts to rest the notion (and hopefully the practice) that directors may appoint a delegate to attend meetings and vote on their behalf. Bill C-62 sets out a number of circumstances in which directors may be held personally liable for the acts or omissions of the Corporation. These provisions do not necessarily extend the personal liability of directors, as they may already be held personally liable under provincial and other federal statutes (for employee wages under the CCA and taxes under the Income Tax Act and Excise Tax Act). As in the CCA, directors and officers who authorize, permit or acquiesce in the commission of an offence by the Corporation, such as contravening a provision of the Act or making a false report to the Director, are liable on conviction of a fine (up to $5,000), imprisonment of up to six months, or both. As in other legislation, a defence of “due diligence” is available to directors in regard to some offences.

The due diligence defence raises the question of the standard of care expected of directors. The CCA does not establish a standard of care so the applicable standard is the common law one under which a director has a duty to exercise the care, diligence and skill that may be reasonably expected of a person with his or her knowledge and experience. The effect of this subjective standard is to hold directors with expertise in an area, for example accountants, to a higher standard than others. The objective standard that applies to directors of business corporations is the applicable standard under Bill C-62. Under the objective standard, a director has a duty to exercise the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances.

D. MEMBERS RIGHTS

Under Bill C-62, voting members may make a proposal to make, amend or repeal bylaws. As in the CCA, specified “fundamental changes” require approval by a two-thirds vote of the members. Bill C-62 expands the list of fundamental changes to include matters such as creating a new class of members or a new qualification for membership, changing how notice is given to voting members or how members may vote, in addition to matters such as changing the Corporation’s name and its objects. Members, among others, may apply for an order granting leave to bring an application on behalf of the Corporation.

Articles or bylaws may provide the directors or members with the power to discipline a member or to terminate his, her or its membership, so long as the circumstances and the manner in which the power is to be exercised are set out.

E. FINANCIAL DISCLOSURE

Directors of a Corporation must approve the financial statements, provide the members with a copy and other information regarding the financial standing of the Corporation at the annual meeting, and keep a copy of the financial statements at the registered office of the Corporation which the members may examine by request during business hours.

F. OTHER PROVISIONS OF INTEREST

It will be important to establish quorum requirements in the articles or bylaws of a Corporation because without such requirements, a majority of the directors or voting members constitutes a quorum.

Bill C-62 creates an exception to its “oppression remedy” provisions where a Corporation is a religious Corporation, the alleged oppressive or unfair acts or omissions of the Corporation are based on a tenet of faith held by its members and it was reasonable to base the act or omission on that tenet of faith having regard to the activities of the Corporation.