New Act to Govern Federal Non-Profit Corporations
Sep 24, 2009
After several attempts over the past five years, Canada
is finally getting new legislation to govern federal non-profit corporations.
Bill C-4, An Act respecting not-for-profit corporations and certain other
corporations (Act) has been set up to close many of the legislative gaps
which exist under the current Canada Corporations Act (CCA). It is
important to note that these changes will only affect non-profit corporations
that are incorporated under (and governed by) federal law.
While it will not take effect for some time, the Act will
eventually replace the CCA as the governing legislation for federal non-profits.
The following discussion sets out some of the key features of the Act and how
these features may bring new structure and clarity to federal non-profits:
- Timing The Act will not take effect until it is proclaimed
into force by an Order in Council. Once that occurs, non-profits will have three
years to apply for continuation under the Act. The application process will be
free of charge. Those that do not apply may risk dissolution.
- Process of Incorporation Non-profits will incorporate by
filing articles of incorporation, rather than letters patent filed under the
CCA. Further, non-profits will now be able to incorporate “as of right.” This
means that Industry Canada will no longer conduct discretionary reviews of a
non-profit’s articles and by-laws. So long as the non-profit meets the
administrative requirements under the Act, its application will be accepted.
Other than soliciting corporations, non-profits will be allowed to have only one
- “Soliciting Corporations” The Act includes a new concept
known as a “soliciting corporation.” As prescribed in the draft regulations, a
non-profit will be considered a soliciting corporation if it received at least
$10,000 of income in the form of certain donations, gifts and grants in its last
three years. Soliciting corporations are subject to more stringent requirements
than non-soliciting corporations because they are operated for the public
benefit and must distribute their property on dissolution to a qualified donee
(e.g., a charity) under the Income Tax Act (Canada). For example, they
must have a minimum of three directors and a public accountant, and must provide
copies of their financial statements to Industry Canada.
- Duties of Directors While the CCA is silent on the issue
of directors’ duties, the Act clearly sets out an objective standard of care for
directors of non-profits. These directors must: (a) act honestly and in good
faith, with a view to the best interests of the corporation; and (b) exercise
the care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances. Furthermore, certain defences to director liability
are expressly identified in the Act, including reliance on professionals. The
indemnification of directors by the corporation involves a process and rules
that are similar to those under for-profit legislation, including allowing for
the advance of money in certain circumstances.
- Classes and Rights of Members While non-profits were able
to describe different membership classes in their by-laws under the CCA, the Act
requires them to do so in their articles. The creation of a special
class of members now requires a special resolution (i.e., the approval of
two-thirds of the members). Any member of a non-profit may put forward a
proposal to make, amend or repeal a by-law. Members of a non-soliciting
corporation may also enter into a unanimous member agreement restricting some
(or all) of the powers of the directors.
- Audit Requirements Under the Act, non-profits are required
to appoint a public accountant to conduct annual audits. A non-profit may be
exempt from this requirement and considered a “designated corporation” under the
Act if its annual revenue falls below a prescribed amount. Both soliciting
corporations and non-soliciting corporations may be considered designated
corporations, depending on their revenues.
While the Act may not take effect for some time, federal
non-profits can begin preparing now for the changes to come by reviewing their
letters patent and by-laws, and by considering whether any changes are required.
Once the Act is proclaimed into force, existing federal non-profits will have
three years within which to file articles of continuance which can amend the
non-profit’s existing letters patent, if required.