A. A NEW NOT-FOR-PROFIT CORPORATIONS ACT AT LAST?
Those who have been longing for new federal not-for-profit legislation will be pleased to learn that Bill C-4, the Canada Not-for-profit Corporations Act (NPCA) received Royal Assent on June 23, 2009. It has been almost five years since the first attempt to enact modern standards for federally incorporated not-for-profit organizations (hereinafter referred to as “NPOs”).
The NPCA is intended to eventually repeal the outdated Canada Corporations Act (CCA), which has remained virtually unchanged since 1917. The corporate governance rules contained in the CCA are scant and provide very little guidance on issues relating to financial disclosures, the duties, responsibilities and liability of directors and the rights of members. Those deficiencies are addressed in the new legislation and are expected to strengthen the protections typically afforded by incorporation.
B. TOP TEN FEATURES OF THE ACT
1. THREE-YEAR TRANSITIONAL PERIOD
Upon the NPCA being proclaimed into force, NPOs currently incorporated under the CCA will have three (3) years to apply for a certificate of continuance or risk dissolution. There will be no fees for this process.
Existing NPOs are encouraged to start thinking about a “compliance plan” now to ensure a smooth transition for the organization and to avoid being part of the flood of applications for continuance that will undoubtedly be filed at the very end of the three-year transitional period. For those NPOs who have not looked at their letters patent and/or by-laws since incorporation, this may be an opportune time to conduct an in-depth governance review and update their own corporate governance practices.
2. POWERS OF A NATURAL PERSON AND ARTICLES OF INCORPORATION
Currently, a NPO does not have the capacity and powers of a natural person and possesses only the powers set out in Part II of the CCA and in its letters patent. Under the NPCA, a NPO will no longer be incorporated by way of letters patent, but rather by signing articles of incorporation. The result is that persons wishing to incorporate a NPO may do so “as of right”. Industry Canada will no longer have the discretion to refuse a request for incorporation, provided that the applicant meets the administrative requirements. The new legislation will confer on NPOs all of the rights, powers and privileges of a natural person, effectively enabling them to carry on any commercial or non-commercial activity, subject only to the restrictions included in the articles of incorporation, if any.
3. SOLICITING AND NON-SOLICITING CORPORATIONS
A soliciting corporation is defined as a corporation that has received, in the prescribed period (i.e. a period of 36 months, from the last financial year-end backwards), income in excess of the prescribed amount (i.e. $10,000) from a short-list of public sources, namely: a) public donors, b) the federal, a provincial or a municipal government, c) other soliciting corporations, or d) other prescribed entities.
A non-soliciting corporation is any other corporation that is not a soliciting corporation. The distinction is important since it affects the corporation’s obligations and actions that may be taken by it under the NPCA. Soliciting corporations are subject to stricter corporate governance and financial accountability rules than non-soliciting corporations.
4. PUBLIC ACCOUNTANTS AND AUDITS
The general rule under the NPCA is that a NPO must appoint a public accountant and conduct an annual audit. The NPCA describes a public accountant as a person who: a) is a member in good standing of an institute or association of accountants incorporated by or under an act of the legislature of a province, b) meets any provincial qualifications for performing any duty that the public accountant is required to perform under the NPCA, and c) is independent of the NPO, its affiliates or the directors or officers of the NPO or its affiliates.
The NPCA recognizes however that small organizations with limited resources may struggle to meet this requirement and provides exemptions based on the annual revenues of the corporation and annual membership approval. For the purposes of the proposed audit regime, corporations are divided into two (2) categories: “designated corporations” and those that are not designated corporations.
Designated corporations include both soliciting corporations and non-soliciting corporations, but are distinguished based on the amount of their annual revenues. Corporations that qualify as “designated corporations” are subject to less onerous financial review requirements than nondesignated corporations. Pursuant to the NPCA, a designated corporation means a soliciting corporation and non-soliciting corporation that has gross annual revenues equal to or less than the prescribed amounts (i.e. $50,000 in the case of a soliciting corporation, and $1,000,000 in the case of non-soliciting corporation). A designated corporation has three (3) options for the conduct of its financial review:
- Dispense with the requirement to appoint a public accountant;
- Appoint a public accountant to conduct a review engagement; or
- Appoint a public accountant to conduct an audit engagement.
Corporations that are not designated corporations are held to a higher standard for the conduct of their financial reviews. All non-designated corporations are required to appoint a public accountant. However, depending on the amount of their annual revenues, they may or may not be required to conduct an audit engagement.
5. MEMBERSHIP CLASSES
Once the NPCA becomes law, NPOs wishing to have more than one class of members will be required to describe each membership class in its articles of incorporation. It will no longer be sufficient to include such descriptions in the by-laws. Any voting rights attaching to each class of members of the corporation must also be set out in the articles of incorporation. At least one class or group of members must have the right to vote at a meeting of members.
6. RIGHTS OF MEMBERS
NPOs with an active and powerful membership will likely be pleased with the enhanced rights of members and protective measures provided for in the NPCA. It sets out new rules that confer upon members the following rights:
- the right to access corporate records and membership lists;
- the ability to submit proposals to members’ meetings to amend by-laws, nominate directors or to deal with any other matter relating, in a significant way, to the activities or affairs of the corporation;
- the ability to participate in members’ meetings by electronic means;
- the ability to enter into a unanimous member agreement (applies to members of a non-soliciting corporation only); and
- the right to seek an oppression remedy against the corporation or to seek a court order to commence a derivative action.
7. DUTY AND STANDARD OF CARE OF DIRECTORS
The inclusion of an objective standard of care is an attractive feature of the new legislation, especially for directors of NPOs wishing to minimize their exposure to liability. Pursuant to the NPCA, every director and officer of a NPO shall act honestly and in good faith with a view to the best interest of the corporation, and shall exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The NPCA also offers greater protection from liability by creating a due diligence defense and establishing other measures intended to reduce liability. This may help attract qualified individuals to act as directors of NPOs.
8. ELECTION AND APPOINTMENT OF DIRECTORS
There are currently no restrictions in the CCA with respect to the manner in which directors are elected or appointed. Pursuant to the NPCA, directors must be elected by ordinary resolution of the members at the annual meeting of the corporation and the term of a director so elected may not exceed four (4) years. There is no prohibition on successive terms. The NPCA also provides that directors may, if the articles of incorporation so provide, appoint a limited number of additional directors who shall hold office for a term expiring not later than the close of the next annual meeting of members. It does not provide the ability to have ex officio directors on the board, although it may be possible to draft the by-laws in such a way that accomplishes a similar result.
One of the most welcomed changes in the NPCA is the abolition of the requirement to have by-laws and by-law amendments reviewed and approved by Industry Canada. By-laws and any amendments thereto are effective from the date on which they are adopted by resolution of the board, but they must be submitted to the membership for approval at the next meeting of members. In addition, many “corporate governance-type” rules (e.g. terms of directors, removal of directors and officers, etc.) will now be expressly provided for in the legislation. Although there is no requirement to repeat such rules in the by-laws, it might be useful to do so in order to provide in one easily accessible document the complete governance framework within which the affairs of the corporation are to be conducted.
10. REGULATIONS ENACTED UNDER THE ACT
Regulations will have to be enacted before the NPCA comes into force. Corporations Canada currently has available on its website draft regulations (the “Regulations”). Many details of the new governance regime will be set out in the Regulations, which will allow authorities to respond more quickly to changes in governance practices within the not-for-profit sector since there would be no need to go before Parliament to make statutory amendments of this nature. Below are some of the matters that are dealt with in the Regulations:
- What information must be retained in the corporation’s Corporate Records and Registers;
- Rules on the content and use of corporate names;
- The manner in which consent to electronic communications may be given;
- Manner of and periods of time for providing notice of meetings of members; and
- Options for absentee voting at meetings of members.
The NPCA may not please everyone in the notfor- profit sector, but it is generally agreed that the new legislation is a significant improvement to the current corporate law regime governing NPOs. Although Bill C-4 has received Royal Assent, it will not be proclaimed into force until the Regulations are adopted, a process that could take up to twelve months or more.