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 director.
  • “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.