Following its passage by the Parliament and
being proclaimed into force, all new not-for-profit corporations
will be established under the Act. As well, all existing federal
non-share capital corporations subject to Part II of the CCA
must apply for continuance under the Act within three years
of it coming into force. However, it is important to keep
in mind that while the Act is currently expected to be passed
by the federal Parliament and receive Royal Assent in the
next six to nine months, it will likely not be proclaimed
into force until at least March 2006. As well, it is likely
that a number of amendments will be made to the current provisions
contained in the Act during the intervening period.
However, once the Act is proclaimed into force,
it is expected that this continuance process will be a straightforward
one with no filing fee required. In order to continue under
the Act though, existing corporations will have to demonstrate
the compliance of their existing corporate governance provisions
with the requirements of the Act. This will necessitate the
filing of articles of incorporation under the Act by existing
federal not-for-profit corporations, as well as possibly having
to amend the corporation's by-laws in order to conform with
the requirements of the Act and to obtain the benefit of its
new provisions. The completion of the application for continuance
under the Act is a very important step for corporations to
complete within the three-year transition period because where
they fail to do so, they could be dissolved under the Act.
For those not-for-profit corporations that are
or are in the process of applying to become registered charities
under the Income Tax Act (Canada), it is important
to be aware that the Act will not impact their status as registered
charities. However, the federal Government is also currently
in the process of enacting a number of significant amendments
to the Income Tax Act (Canada) that will impact charities
in a number of different areas. For more information on these
proposed amendments to the Income Tax Act (Canada),
reference should be made to earlier Charity Law Bulletins
No. 54, 55, 56 and 59, available at http://www.charitylaw.ca.
This Charity Law Bulletin summarizes
the proposed changes in the Act in relation to the creation
and ongoing governance of federal not-for-profit corporations
as compared to the CCA, the process by which existing corporations
can continue themselves under the Act and the potential impact
of the Act on new and continuing federal not-for-profit corporations.
B. SUMMARY OF THE ACT
1. Incorporation and Powers of the Corporation
a) "As of right" incorporation process
Currently under the CCA, in order to obtain
Letters Patent (the existing incorporation document), at least
three incorporators must apply, with accompanying by-laws,
to the Minister of Industry for a charter creating a body
corporate in order to be able to carry on a non-share capital
corporation's objects.4 Under the new system being established
by the Act, once one or more individuals or bodies corporate5
file an application for articles of incorporation under a
specified form and pays the required fees, incorporation will
be granted "as of right," thus foregoing the need
for ministerial review of the application for articles of
incorporation or the corporation's by-laws.6 With the option
to file electronically, incorporation will be effected in
a shorter time period, will be simpler and will be more efficient
than under the CCA.
b) Powers of the corporation
A not-for-profit corporation established under
the Act has the capacity, rights, powers and privileges of
a natural person7, including
the right to buy and sell property, make investments, borrow
funds and issue debt obligations. In addition, under the Act,
it will not be necessary for a by-law to be passed in order
to confer any particular power on a corporation or its directors.8
This is a significant and welcome change from the CCA, which
currently grants a non-share capital corporation only the
powers that are set out in Part II of the CCA, subject to
any limitations set out in the corporation's own Letters Patent.9
The proposed "incorporation as of right" system
will allow not-for-profit corporations to assume the new and
broader powers of a corporate legal entity unless such powers
are limited by or contrary to their articles.10
2. Articles of Incorporation
The Act requires that the articles of incorporation
(the new incorporation document) are to be in the form fixed
by the Director and shall set out the name of the corporation,
the province where the head office is located, the membership
classes or groups and the voting rights of each class or group,
the exact number of directors or the minimum and maximum number
of directors, any restrictions on the activities of the corporation,
a statement of the mission of the corporation (which is intended
to be the equivalent of the current corporate objects in Letters
Patent) and a dissolution clause.11
These requirements are somewhat different than the Letters
Patent requirements under the CCA, particularly in relation
to the inclusion of membership classes and the number of directors.
As well, it is no longer necessary for an articulated list
of powers to be included in the articles of incorporation,
although corporations will likely wish to set out its chosen
investment powers, eg. the Trustee Act of Ontario or
another provincial jurisdiction, in order to ensure consistency
of investment decision making, particularly where such corporation
is engaged in activities in multiple provinces and therefore
possibly subject to such provinces' investment regime.
3. By-laws
The CCA currently requires existing non-share
capital corporations, at the time of their incorporation,
to create by-laws that specifically address certain corporate
governance matters, which by-laws then have to be reviewed
and approved by Industry Canada before they become effective.
In this regard, Industry Canada required applicant corporations
to prepare by-laws that addressed certain basic corporate
governance matters, thereby ensuring a certain level of consistency
among federal non-share capital corporations. A similar process
of review and approval by Industry Canada of subsequent by-law
amendments is also in place.
However, under the Act, it will no longer be
necessary for applicant not-for-profit corporations to submit
their proposed by-laws (or any future amendments to the by-laws)
to Industry Canada for review and approval.12 The Act will only
require that the by-laws deal with membership issues, including
membership conditions and voting rights of members.13 It will
then be the decision of the corporation as to what other governance
matters are to be addressed in their by-laws and in what manner.
Another important change in the Act that, in
part, results from Industry Canada no longer being involved
in reviewing by-laws, is the directors will now be able to
make, amend or repeal any by-laws of the corporation that
regulate the affairs of the corporation, save and except certain
matters outlined in section 195 of the Act, which will take
effect as of the date of the directors' resolution.14
However, such by-laws will subsequently have to be submitted
for approval by the members of the corporation.
The removal of the requirement for applicant
corporations to file and obtain the approval of its by-laws
from Industry Canada will obviously result in a more efficient
and streamlined process for not-for-profit corporations. However,
it can also potentially result in many corporations never
preparing corporate by-laws at the time of their incorporation
or thereafter, resulting in such corporations never having
any kind of governance structure established or a structure
that is not properly reflective of its not-for-profit nature.
Such a situation has resulted with many not-for-profit corporations
established under other provincial regimes that do not require
by-laws to be prepared and submitted at the time of incorporation.
As a result, such not-for-profit corporations are operated
without any kind of by-laws in place, resulting in complicated
and costly "clean up" corporate work many years
later.
4. Annual and Other Meetings
Under the Act, corporations will be required
to hold annual meetings of members and special meetings can
be called, as required, from time to time,15
including on the requisition of the members.16
New provisions are also included in the Act that permit meetings
of members to be held by telephone or electronic means,17
written resolutions in lieu of meetings,18
absentee voting by members19
and decisions by consensus.20
5. Office of "Director of Corporations"
Under the Act, a new office of Director of Corporations
is established and, in doing so, the current system of ministerial
review and discretion is replaced.21
The Director appointed under the Act will exercise administrative
as well as regulatory functions and, therefore, will be empowered
to issue incorporation, amalgamation or dissolution certificates,
as well as to make inquiries related to compliance and to
access key corporate documents such as financial statements
and membership lists. As well, the Director will have extensive
powers to investigate and dissolve a corporation in the case
of a complaint by an interested party and, where deemed appropriate,
cancel such corporation's articles.22
6. Board of Directors
a) Directors' duties and number of directors
The Act specifically outlines that directors
shall manage or supervise the management of the activities
and affairs of the corporation, subject to the provisions
of the Act, the articles and any unanimous member agreements.23
The number of directors shall be one or more but, in the case
of a soliciting corporation, are not to be less than three,
two of whom shall not be officers or employees of the corporation.24
b) Election and/or appointment of directors
The Act specifically requires members to elect
all of the directors of the corporation, whose term of office
is to be no longer than three years,25
although the staggering of directors' terms is possible.26
However, despite this restriction on the length of a director's
term of office, incumbent directors will continue in office
until such time as their successors are elected.27
In this regard, it is important to note that the Act does
not specifically permit ex officio directors, although
it is anticipated that corporations will be permitted to draft
their by-laws in a manner that could achieve a similar, although
not identical, result.
As well, the Act permits the directors to appoint
other directors if the articles of the corporation so provide.
However, the term of office of such appointed officers is
not to be longer than one year and the total number of appointed
directors on the board is not to exceed one third of the number
of directors elected at the immediately preceding annual meeting
of members.28
c) Other provisions
The Act set out detailed provisions in relation
to conflict of interest issues for directors and officers
of not-for-profit corporations.29
There are also other provisions in the Act regarding directors
including, but not limited to, qualifications,30
removal,31 filling of vacancies,32
changing the number of directors,33
meetings of directors,34
decisions by consensus,35
written resolutions in lieu of meetings36
and remuneration.37
d) Directors' standard of care
Under common law, in carrying out their duties
and responsibilities to the corporation, directors have been
held to a subjective standard of care based on their own particular
abilities.38 One of the important changes in the new Act is
the inclusion of an objective standard of care for directors.
Under this new objective standard of care, in discharging
their duties and exercising their powers, directors will have
to act honestly, in good faith, with a view to the best interest
of the corporation, exercising the care, diligence, and skill
that a reasonably prudent person would exercise in comparable
circumstances as well as complying with the Act, as well as
the corporation's articles, bylaws and any unanimous member
agreements.39 This standard of care mirrors the current objective
standard required of directors of share capital corporations
incorporated under the CBCA.40
e) Directors' liability
Directors will need to be mindful that they
will continue to attract liability "jointly, severally
and solidarily" for up to six months of unpaid employees'
wages if the corporation fails to pay these.41 This obligation
continues for as long as they are directors. As well, directors
who either consent or acquiesce to any resolution or action
that breaches their duty under the Act in certain articulated
areas can be held "jointly, severally and solidarily"
liable.42
f) Protection, indemnification and defences
against liability
However, as a means of protection from liability,
the Act also establishes a due diligence defence for directors
of not-for-profit corporations that is the same as that currently
available to directors of share capital corporations under
the CBCA. Provided that directors meet the earlier mentioned
objective standard of care, they will be protected from liability
by a "due diligence" defence. Directors will satisfy
the due diligence defence requirements outlined in the Act
if "they exercise the care, diligence and skill that
a reasonably prudent person would have exercised in comparable
circumstances," including good faith reliance on financial
statements of the corporation represented to the director
by an officer of the corporation or in a written report of
the public accountant of the corporation fairly to reflect
the financial condition of the corporation or a report of
a person whose profession lends credibility to a statement
made by that person.43 A similar due diligence defence is also
available for officers of not-for-profit corporations.44
It is important to note that, in addition to
the availability of a due diligence defence, the Act also
will allow not-for-profit corporations to indemnify a director
or officer against liability as long as such director or officers
acts honestly and in good faith to the best interests of the
corporation.45 As well,
indemnification of a director or officer is possible by a
not-for-profit corporation in a criminal or administrative
action, where he or she had reasonable grounds for believing
that their conduct was lawful. The Act will also protect,
indemnify or limit the liability exposure of directors and
officers.46
In assessing the scope of directors' rights
and responsibilities proposed under the Act, it is evident
that in tandem with broadening the scope of protections for
directors of not-for-profit corporations, the Act will require
that directors meet higher diligence standards and increased
responsibilities than are currently required under the CCA
or at common law. Therefore, while the new rules provide more
certainty and protection to current directors, and is likely
an impetus to attract potential directors, the new diligence
standards as well as the enhanced members' right to access
corporate records (as discussed below) means that directors'
conduct will likely be exposed to greater scrutiny and directors
will be expected to be more astute and to generally exercise
a greater level of prudence and vigilance in the way they
manage the affairs of the corporation.
7. Enhanced Members' Rights and Protections
a) Overview
Part 10 of the Act and Part 4 of the Regulations
have extensive provisions governing conditions of membership,
termination of membership rights and notice of members' meetings
that mirror provisions under the CBCA. As well, the Act also
introduces new rules that will provide members with access
to membership lists47 unless
otherwise exempted,48 the
right to seek a court order to commence derivative actions49
and to seek an oppression remedy against a corporation,50
the option to submit proposals to amend by-laws51
or to discuss any matter at an annual meeting of members,52
the right to access various corporate records (including minutes
of members' meetings, as well as directors', officers' and
members' lists and financial statements,53
the option to participate in the members' meeting by electronic
means,54 unanimous member
agreements55 and the ability
to reject, amend and approve by-laws without ministerial approval
by either ordinary resolution (a majority vote) or special
resolution (two-thirds vote), as applicable.56
b) Input of members
There are a few areas outlined in the Act, including
proposed amendments to membership classes, rights and conditions,57
the sale of assets58 and
the dissolution of the corporation,59
which require the approval of all the members (both voting
and non-voting) of the corporation by resolution. The increased
role and input of non-voting members of a not-for-profit corporation
on these important matters is a significant change from the
CCA and may be of concern to not-for-profit corporations.
c) Financial disclosure
Disclosure of financial records is one of the
areas in which members will have new access rights when the
Act comes into force. Currently under the CCA,60 corporations
are required to keep financial records and provide audited
reports to members at the annual meetings of members but there
is no specific allowance for members to access the corporation's
financial records. This will change under the new Act and
members or their representatives will be able to access these
financial statements, on request.61
The Act also requires corporations to send copies
of the annual financial statements to each member, unless
he or she has stated in writing that they do not wish to receive
such documents.62 The only way for corporations to avoid this
obligation to send copies of these financial documents is
to either publish a notice that includes the information required
to be set out in the documents or, if the by-laws of the corporation
so provide, to publish a notice that the documents are available
at the head office of the corporation and can be requested
to be send by mail.63 Accordingly, in order to avoid the costs
associated with mailing these financial documents to clients,
corporations will need to take steps to amend their by-laws
to allow for the publication of the above-noted notice.
d) Derivative actions, oppression remedies and
faith-based defences for religious corporations
As indicated earlier, the Act will allow members
and others to apply for a court order authorizing them to
bring an action in the name of, or to intervene in, an action
by or against the corporation.64
As well, members will be permitted under the Act to seek an
oppression remedy against the corporation where an act, omission
or conduct of the corporation is oppressive or unfairly prejudicial.65
However, the Act will also introduce a new provision
- the faith-based defence, which is one of the ways in which
the above-mentioned enhanced members' rights under the Act
could be restricted.66 That is, a faith-based exemption to both
derivative actions and oppression remedies is allowed for
religious corporations' whose decisions are based on a "tenet
of faith."67 This means that a member may not be granted
redress from a religious corporation's decision it considers
oppressive if the decision was based on the corporation's
"tenets of faith" and it was reasonable to base
the act, omission, conduct or exercise of power on such tenets
of faith.
While the faith-based defence introduces an
important protection for faith-based organizations that were
wary of being compelled to potentially compromise their religious
principles, the scope of "tenets of faith" is not
defined in the Act. As a result, it is unclear how broadly
this protection will be interpreted. In addition, the scope
of this protection will also depend on what conduct will be
considered as a "reasonable" exercise of the religious
corporation's "tenets of faith" under any given
circumstances.
Synonymous to shareholders of a share capital
corporation who, in exercising their rights, are able to oversee
the operations of the corporation, members of not-for-profit
corporations will likely be empowered to play a pivotal role
in monitoring the corporation's operations based on the enhanced
members' rights and protections proposed in the Act. This
expanded role that members of not-for-profit corporations
will be empowered to play will likely be a major component
in acquiring and maintaining public confidence in the integrity
of not-for-profit corporations that are primarily dependent
on raising public funds or acquiring government funding in
order to carry out their activities and programs.
8. Financial Review and Disclosure
a) The soliciting versus the non-soliciting
corporation
The Act establishes two different types of not-for-profit
corporations: soliciting corporations and non-soliciting corporations,
with different duties and obligations being ascribed to each.
Soliciting corporations are those that solicit donations from
the public or receive government funding, while non-soliciting
corporations are those that are member-funded.
This distinction in the Act then result in the
establishment of varying standards of financial disclosure
and financial accountability based on the corporation's categorization
as a soliciting or non-soliciting corporation, as well as
on its gross annual revenues. With regards to financial accountability,
based on the graduated revenue thresholds specified in the
proposed regulations under the Act, corporations will be able
to determine whether they are required to undertake a full
audit or, instead, a less intrusive and less expensive review
engagement, in order to satisfy their financial disclosure
requirements as described in more detail below.
b) Graduated levels of review for non-soliciting
and soliciting organizations
The Act establishes a direct correlation between
the gross revenue a corporation earns and the type of financial
report that must be filed with Industry Canada. In this regard,
the Regulations will establish five graduated categories of
corporations that will determine the permissible levels of
financial scrutiny.68 The level of financial reporting that
will apply is either an audit engagement, a review engagement,
or no financial scrutiny.
Non-soliciting corporations with gross annual
revenues of less than $1M will be required to undertake a
financial review of their financial statements. Members could
opt to raise the level of review to an audit engagement or
unanimously resolve not to appoint a public accountant or
undertake any external review. Non-soliciting corporations
with gross annual revenues equal to or exceeding $1M must
undertake an audit engagement.
Soliciting corporations with gross annual revenues
of less than $50,000 will be required to undertake a financial
review of their financial statements. Members could opt to
raise the level of review to an audit engagement or unanimously
resolve not to appoint a public accountant or undertake any
external review. For soliciting corporations with annual revenues
between $50,000 and $250,000, an audit engagement will be
required unless the members resolve by special resolution
to instead undertake a review engagement. Soliciting corporations
that have revenues exceeding $250,000 must have their financial
records audited. All soliciting corporations shall forward
copies of their annual financial statements to Industry Canada,
which will then be available to the public for review.69
The graduated levels of financial scrutiny based
on gross annual revenue are examples of how the Act is geared
towards balancing transparency and protection of the public
interest versus the limited resources of some not-for-profit
corporations. The underlying assumption is that these categories
are fluid and corporations have the option to change each
year as circumstances dictate. The rationale behind this graduated
approach allows the smallest category of non-soliciting corporations
to focus their limited resources on fulfilling their mandate
instead of expending considerable monies on having their financial
books audited or reviewed. This flexibility, however, means
that there will be instances in which some corporations' financial
records may not be audited or reviewed.
C. CONCLUSION
Overall, the Act, as it currently exists, appears
to be on the right track in providing the "modern corporate
governance framework" for regulating federally incorporated
not-for-profit corporations that Industry Canada has indicated
it is trying to achieve. However, there are a few provisions
in the Act that may be of concern for not-for-profit corporations,
as were outlined in more detail in this Charity Law Bulletin.
Going forward, it will be imperative for existing
federal not-for-profit corporations to apply for continuance
under the Act during the transition period, i.e. within three
years of the Act coming into force, or risk being dissolved
under the Act. In completing this continuance under the Act,
corporations will also need to ensure that their constating
corporate documents are in compliance with the new requirements
of the Act, as well as achieve the benefit of the Act's new
provisions. However, given that the Act will not likely be
proclaimed into force until at least March 2006, likely with
amendments in the interim as it proceeds through the Parliament,
not-for-profit corporations should have sufficient time to
become familiar with the Act and achieve compliance therewith.
Endnotes
1Bill C-21, An Act respecting
not-for-profit corporations and other corporations without
share capital, 1st Sess.., 38th Parl., 2004, (1st reading
in the House of Commons 15 November, 2004) available at http://www.parl.gc.ca/38/1/parlbus/chambus/house/bills/government/C-21/C-21_1/C-21_cover-E.html.
2See "Explanatory Note - Regulations Under Canada Not-For-profit
Corporations Act," available at: http://strategis.ic.gc.ca/epic/internet/incd-dgc.nsf/en/cs02683e.html.
3See 38th Parliament 1st Session, Edited Hansard, Number 030,
available at http://www.parl.gc.ca/38/1/parlbus/chambus/house/debates/030_2004-11-23/toc030-E.htm.
4Canada Corporations Act s.154(1)
5supra note 1 s.6(1)
6Ibid, s. 9.
7Ibid, s. 16(1).
8Ibid, s. 17(1).
9Supra note 4, ss. 15 and 16.
10Supra note 1,, s. 17(2).
11Ibid, s. 7.
12Ibid, s. 8.
13Ibid, s. 154.
14Ibid, s. 153.
15Ibid, s. 160.
16Ibid, s. 167.
17Ibid, s. 159(4) and (5).
18Ibid, s. 166
19Ibid, s. 171.
20Ibid, s. 138.
21Ibid, s.279.
22Ibid, s. 287.
23Ibid, s. 125.
24Ibid, s. 126.
25Ibid, s. 129(3).
26Ibid, s. 129(4).
27Ibid, s. 129(6).
28Ibid, s. 129(8).
29Ibid, s. 142.
30Ibid, s. 127(1).
31Ibid, s. 131.
32Ibid, s. 133.
33Ibid, s. 134.
34Ibid, s. 137.
35Ibid, s. 138.
36Ibid, ss. 128(5) and 141.
37Ibid, s. 144.
38Re City Equitable Fire Insurance Company Ltd.,
[1925] 1 Ch. 407 at 428
39Supra note 1, s. 149(1)(2).
40Canada Business Corporations Act s. 122(1).
41Supra note 1, s. 147(1).
42Ibid, s. 146(1).
43Ibid, s. 150.
44Ibid, s. 151.
45Ibid, s. 152.
46Supra note 3
47Ibid, s. 23.
48Ibid, s. 173.
49Ibid, s. 249.
50Ibid, s. 251(1).
51Ibid, s. 153(6).
52Ibid, s. 163(1)(a).
53Ibid, s. 22(1).
54Ibid, s. 159(4).
55Ibid, s. 170.
56Ibid, s. 153(2).
57Ibid, ss. 195 and 197.
58Ibid, s. 212.
59Ibid, s. 219.
60Supra note 4, s. 117 (which applies by
reference to Part II corporations)
61Supra note 1, s. 174(1).
62Ibid, s. 175(1).
63Ibid, s. 175(2).
64Ibid, s. 249(1).
65Ibid, s. 251(1).
66Ibid, s. 251(2).
67Ibid, ss. 249(3) and 251(2).
68Supra note 2.
69Supra note 1, s. 176.
