Earlier this year, a British Columbia society made headlines when it was sued by The New York Times. The newspaper sought to obtain access to the financial statements of AdvantageBC International Business Centre (“AdvantageBC”). Under the new B.C. Societies Act, all regular societies must provide their financial statements to the public. AdvantageBC opposed disclosure of its financial statements claiming that it was a “member-funded society”, and therefore exempt. In this bulletin, we will discuss member-funded societies, their nature, benefits, and requirements. For this, the story of AdvantageBC serves as a useful illustration.
What Happened to AdvantageBC?
The impetus for the court action was an investigation by the New York Times into a “secretive tax-incentive program” administered by the B.C. Ministry of Finance. AdvantageBC’s role is to raise awareness and promote the Province’s International Business Activity program in order to attract investment to Vancouver as an international financial centre. AdvantageBC funds its marketing activities with membership fees from rebate recipients, who must become members of the society in order to be registered in the program. AdvantageBC does not receive any public or government funding. On May 3, 2017, the New York Times published a critical article about the International Business Activity program under the headline, “A Province’s Tax Breaks are Shrouded in Secrecy”. To obtain more information about the program, the paper also first unsuccessfully requested that AdvantageBC produce its financial statements and then obtained an order for production from the BC Registrar of Companies. AdvantageBC continued to refuse production, arguing that it was a “member-funded society”.
The New Kids on the Block – Member-funded Societies
The Societies Act came into force at the end of November 2016. Among the many reforms it introduced was a new type of society, the “member-funded society”. A member-funded society differs from a regular society in two ways:
- First, as the Societies Act puts it, these societies are primarily funded by their members to carry on activities for the benefit of their members. In other words, these societies do not depend on government support or funding from the general public. This is typically the case for professional, industry or business associations, for private sports or social clubs. Based on its funding sources, AdvantageBC belongs to this category.
- Second, and importantly, the members of an existing society must have decided by a special majority to adopt member-funded status and must have followed the prescribed process under the Societies Act to implement it. These steps had not been taken by AdvantageBC. Meeting the preconditions to become a member-funded society was not sufficient without formally adopting the new status.
Pros and Cons of Becoming a Member-funded Society
Being a member-funded society brings with it certain exemptions from the governance, disclosure and distribution requirements applicable to regular societies. Because member-funded societies use little or no government funding or donations for their activities, they are thought to require less oversight in these areas.
A member-funded society only needs to have one director (instead of three, as would normally be the case), and none of the directors need to be ordinarily resident in B.C. (instead of at least one). Further, in a regular society, a majority of directors cannot be entitled to receive remuneration from the society under contracts of employment or contracts for services. For a member-funded society, however, there is no restriction on the number of directors who may receive such remuneration, as long as this is permitted under the society’s bylaws.
Reduced Disclosure Requirements
Unlike a regular society, a member-funded society is not required to:
- report in its financial statements on remuneration paid by the society to its directors, employees and service contractors; or
- provide a copy of its financial statements to members of the public.
It was this last exemption that AdvantageBC tried to rely on in its dispute with The New York Times.
Distribution of Assets on Dissolution or Liquidation
Certain restrictions on the distribution of a society’s assets on dissolution or liquidation do not apply to member-funded societies. The assets of regular societies may only be distributed to “qualified recipients”, which include other (not member-funded) societies, community service cooperatives, registered charities or charitable purpose trusts.
On the other hand, a member-funded society may distribute its assets on dissolution or liquidation to any person specified in the society’s bylaws or, if the bylaws are silent, to any person specified in an ordinary resolution of the members. The recipients could include the society’s members themselves, who effectively contributed most, if not all of the society’s funding. Before permitting distributions to members, however, member-funded societies should carefully consider other tax and legal implications.
Conversion to a Company
A member-funded society can be converted to a B.C. company, which is not an option for regular societies.
Disadvantages of Being Member-funded
The main disadvantage of member-funded societies is that they may only obtain a very limited amount of funding from the public or government sources. If the prescribed funding thresholds are exceeded, a society loses its special status.
As well, certain funding channels, such as community gaming grants, may be completely closed off to member-funded societies. For these reasons, societies considering adopting the new status should carefully review the requirements set by their government funding sources.
Who May Become a Member-funded Society?
As noted above, becoming a member-funded society is not for everyone. Some classes of societies are automatically disqualified because of the nature of their activities or their receipt of public money; these include registered charities, certain hospital societies, certain housing societies and certain societies operating independent schools, among others.
Societies must also meet a funding test. To be eligible, a prospective society must not have received, during its last two financial years, public donations or government funding, or a combination of the two, above a certain threshold, namely the greater of:
- $20,000, and
- 10% of the society’s gross income for that period.
Only if both hurdles are met will a society qualify to convert into a member-funded society.
How To Become a Member-funded Society
A society may become a member-funded society by selecting this status on incorporation, and it will retain its special status for as long as it does not belong to a disqualified class or does not fail the funding test.
For societies in existence before the Societies Act came into force, the easiest way to become a member-funded society is during the transitioning process under the new legislation. All that is required is member approval by a special resolution and selecting member-funded society status in the online transition application filed with the registrar.
If a society does not become a member-funded society on transition and chooses to do so later, in addition to approval by special resolution, the society will need to obtain a court order declaring that it is not prohibited from being a member-funded society either because it fails the funding test or because it belongs to an excluded class.
Once a society becomes a member-funded society, its constitution will contain a clause to that effect, which alerts the public to its special status.
So, What Happened to AdvantageBC?
In closing, let us return to AdvantageBC. After the society refused The New York Times’ requests for disclosure, the B.C. Registrar of Companies found that AdvantageBC was not in fact a member-funded society, and that it had failed to comply with the Societies Act by refusing to provide the requested records. The society had not passed the necessary special resolution and had failed to make the necessary changes to its constitution—apparently because it did not realize that those procedural steps were necessary. Following the Registrar’s order, AdvantageBC immediately transitioned under the Societies Act and adopted the new status in the process. By the time The New York Times filed its petition in the B.C. Supreme Court, AdvantageBC had become a member-funded society. The newspaper argued in its petition that AdvantageBC had not formally been a member-funded society when the records were requested, or when the Registrar’s order was made, and that it should be required to comply with the disclosure requirements for regular societies under the Societies Act. In the end, AdvantageBC decided to voluntarily disclose its 2016 financial statements and the matter was settled.
The lesson to be learned from AdvantageBC’s experience is that if your society qualifies for member-funded status and is concerned about public access to its financial information, it should take the formal steps necessary to become a member-funded society without delay. The transition process under the new Societies Act offers a straightforward way of doing so.