A. INTRODUCTION
The Ontario Ministry of Government Services ("Ministry")
recently released their first consultation paper on reform
to the Ontario Corporations Act ("OCA").
This consultation paper, Modernization of the Legal Framework
Governing Ontario Not-For-Profit Corporations,1
marks the Ministry's first step in a project that aims to
develop a new framework for governing the structure and activities
of charities and not-for-profit corporations in Ontario. The
consultation paper focuses on a number of broad issues, each
of which the Ministry has provided background information
and consideration questions for. They have also invited feedback
on the consultation paper from stakeholders and the public
to assist them in developing draft reform legislation. This
Charity Law Bulletin ("Bulletin") will briefly
summarize the issues that are focused on in the paper and
will highlight some questions that the Ministry will need
to address before they can implement actual reform to the
OCA.
B. THE NEED FOR REFORM
The primary basis for proposing reform to the OCA was concern
that the OCA is antiquated, cumbersome, and unable to meet
requirements of the modern not-for-profit sector. The original
version of the OCA, the called the Companies Act, was
enacted in 1907 and has not been substantially revised since
1953. During this 50 year period where there has been no substantial
change to legislation, the not-for-profit sector itself has
experienced tremendous change. It is hoped that reform to
the OCA will both achieve modernization of the Act and facilitate
a legal structure that equates with the actual needs of today's
not-for-profit organizations.
C. THE INCORPORATION PROCESS
Presently, incorporation under the OCA requires that not-for-profit
organizations file an application for letters patent along
with supporting documentation and a fee. The Ministry then
reviews this application and supporting documentation, and
uses discretion to identify which organizations should be
approved for incorporation. The consultation paper recognizes
that perhaps this discretion can cause government officials
to impose unnecessary restrictions on applicants. Since the
imposition of these restrictions runs contrary to the OCA's
main objective of encouraging and facilitating not-for profit
activity, this is an area where reform is likely to occur.
As an alternative to the current system, the Ministry has
proposed that the new Act might provide organizations with
the ability to incorporate "as of right". Under
this process, applications for incorporation would be automatically
approved once basic requirements for incorporation are established.
This would limit the scope of the Ministry's review and would
also allow the incorporation process to proceed quickly.
To integrate an "as of right" system, the Ministry
will be required to determine what the basic requirements
of incorporation should be and how to apply an "as of
right" system to charitable not-for-profit organizations.
They must also take on the difficult task of determining to
what extent the new Act should be concerned with the objects
and powers of a corporation. This consideration will require
extreme mindfulness as to how reform may influence the current
legal requirements for maintaining a charitable purpose.
D. THE STRUCTURE OF THE OCA
The current Act is difficult to navigate and its structure
requires replacement. These difficulties have led the Ministry
to propose two potential models for a new structure: The Ontario
Business Corporations Act ("OBCA") or the
California Corporations Code ("CCC").
Structurally, the OBCA is very logical. Section by section
it follows the chronology of a corporation and the central
issues that need to be addressed by corporate legislation
(e.g. incorporation, membership, directors and officers, remedies).
The OBCA did form the structural basis for proposed Canada
Not-for-profit Corporations Act ("Bill C-21"),
which, however, was unsuccessful in receiving Parliament's
support. Further, the OBCA structure is designed for business
corporations and could be criticized as less suitable to the
needs of not-for-profit corporations.
The CCC is what might be described as 'divided legislation'.
It contains various sections for various designated types
of not-for-profit corporations and in each section it addresses
all things relevant to that type of corporation. While the
CCC model is user-friendly, it is also quite lengthy. Further,
under a CCC model, problems can arise in determining how to
the different corporations should be classified.
As can be seen, neither model is totally suitable for the
new Act to follow. As well, there may be other potential models
that are not listed in the consultation paper that may be
more appropriate to utilize. It is possible that the Ministry
will ultimately find that they should combine the best features
of various models in order to meet the unique needs of not-for-profit
organizations in Ontario.
E. DEFINING THE TERM 'NOT-FOR-PROFIT CORPORATION'
The consultation paper divides the framework for examining
the definition of 'not-for-profit corporation' into two separate
components: not-for profit purposes and non-distribution constraints.
Not-for profit purposes refer to the requirement that not-for-profit
corporations pursue purposes other than profit or pecuniary
advantage to their members. Non-distribution constraints refer
to the nature of not-for-profit corporations as being different
from business or commercial entities, in that they do not
distribute property to their members.
1. Not-for-profit purposes
As suggested, the current Act permits a not-for-profit organization
to become incorporated with any objects within the jurisdiction
of Ontario and requires not-for-profit corporations to be
carried on without the purpose of gain for its members. What
is problematic about the current Act is that the term 'gain
for members' has no clear meaning and it has been interpreted
to permit the incorporation of associations that indirectly
advance the pecuniary interest of their members by advancing
a common interest (e.g. trade associations).
In its reform, the Ministry is considering a more clearly
defined list of permitted purposes and activities. It is further
considering the explicit exclusion of any form of gain to
members. In making these considerations, the Ministry must
consider how the new Act should regulate the degree of for-profit
activities that not-for-profit corporations are permitted
to carry out. They must also consider whether exceptions to
the restrictions on for-profit activity should be provided
to certain corporations.
2. Non-Distribution Constraint
Currently, the OCA specifies that a not-for-profit corporation
must carry its operations on without the purpose of gain for
its members. However, the wording of the OCA is not so explicit
so as to provide a non-distribution constraint. In fact, the
OCA has been interpreted as allowing certain corporations
the distribution of assets to corporate members upon dissolution.
Of course, charitable not-for-profit corporations are prohibited
from distributing funds to their members, which creates some
confusion in relation to this aspect of the current Act. The
Ministry will be required to examine other available non-distribution
constraint techniques to determine how the new Act can best
to approach the ability of not-for-profit corporations to
distribute assets.
F. CLASSIFICATION SYSTEM
The current Act only provides for one class of not-for-profit
corporation, being a class which is made up of corporations
whose objects are within the jurisdiction of the Province
of Ontario. Reform to the OCA has called into question whether
Ontario not-for-profit corporations would be better served
if the OCA took their diversity into account and categorized
them into several different classes and regulated each class
according to their common features. The CCC model takes a
similar approach.
The Ministry must determine if a class model is desirable
and, if it is, they must evaluate a variety of different classification
models that could be used. The Saskatchewan Non-Profit
Corporations Act, 1995 categorizes not-for-profit corporations
as either charitable corporations or membership corporations,
and then more stringently restricts the ability of charitable
corporations to make fundamental changes to its object and
distribution clause. Bill C-21 distinguished between soliciting
corporations and non-soliciting corporations, with soliciting
corporations being more heavily regulated because they are
corporations that solicit funds from the public, government
or other entities. The CCC classifies corporations as mutual
benefit, public benefit or religious, with public benefit
corporations being the most heavily regulated.
The Ministry has already proposed certain areas where different
classes of corporations might be treated differently. They
suggest that the distribution of assets on dissolution, the
payment of remuneration to directors, and members' rights
and remedies are, for example, areas where differences between
not-for-profit corporations may require that organizations
are regulated differently.
Distinguishing between corporations in the manner proposed
does seem at first glance somewhat logical. Not-for-profit
corporations can vary tremendously from one corporation to
another and a regulatory system that looks to those differences
may better address specific corporate needs. Yet this classification
of not-for-profit corporations could also foster a regulatory
regime that forces corporations to fit into a specific class
description without properly considering how that exact corporation
should be regulated. This is particularly of potential concern
for religious corporations. .Possibly an alternative approach
to a classification system would involve having certain provisions
that apply to all corporations, together with optional provisions
that could be chosen to customize particular corporations
depending upon their intended purposes and activities.
G. CORPORATE POWERS AND CAPACITY
Under the current Act, a not-for-profit corporation has the
capacity of a natural person and the ability to exercise its
powers outside of Ontario. The OCA, however, prescribes that
a corporation's ability as a natural person can be limited
by the OCA or the bylaws of the corporation. This preserves
the doctrine of ultra vires which declares that actions
of a corporation that are beyond its power will be considered
void.
Many other corporate statutes that regulate both business
and not-for-profit corporations have abolished this doctrine
of ultra vires. Rather than making actions void if
they are committed outside of corporate power, these statutes
simply make the actions illegal and subject to general legal
sanctions.
The Ministry has not proposed that the doctrine of ultra
vires will be absolutely abolished. It has, however, raised
several questions, the answers to which may outline the benefits
and drawbacks of maintaining this doctrine. Given the recent
trend for the abandonment of the doctrine by other corporate
legislation, it is likely that the doctrine of ultra vires
will not form a part of the new Act.
H. OTHER RELEVANT ISSUES AND CONSIDERATIONS
The Ministry's consultation paper also raises questions surrounding
the nature of the reform as it will pertain to the more specific
topic of directors' and officers' liability, financial disclosure
and members' remedies. It suggests that more detailed papers
will be released on these topics but, as a preliminary measure,
feedback is invited.
1. Directors' and Officers' Liability
The current Act sets out no duty of care, standard of care
or defences that are applicable to the directors and officers
of not-for-profit corporations. The Ministry notes that the
not-for-profit sector often experiences difficulty in recruiting
and retaining qualified individuals to fill these positions.
The current lack of attention that this topic receives under
the OCA opens directors and officers to personal liability
in a number of ways and thus serves as a deterrent to individuals
who might otherwise wish to accept a director or officer position
within a not-for-profit corporation.
The Ministry will be required to create a liability regime
that takes into account the need for directors and officers
to be treated fairly, while still being accountable to those
who suffer losses as a result of the actions of a director,
officer, or corporation.
2. Financial Disclosure
The current Act has specific requirements for financial disclosure
but it does not require financial disclosure to the public
or to the members of the corporation. Although some corporations
are required to provide this financial disclosure because
of Canada Revenue Agency requirements, the Ministry must determine
if there is a level of financial disclosure that should be
required of all not-for-profit corporations.
3. Members' Remedies
Although the current Act does provide several remedies for
members of not-for-profit corporations, it does not provide
for an oppression remedy, a derivative action, the right to
dissent and appraisal, or provisions for a fair hearing and
natural justice. The Ministry is attempting to determine whether
these remedies should be extended to members of not-for-profit
corporations and whether, in addition to introducing new remedies,
the current remedies should be broadened or altered.
I. CONCLUSION
The consultation paper discussed in this Bulletin is a promising
first step towards the Ministry's goal of reforming the OCA
to produce a modern piece of legislation. The Ministry has
presented several important issues in this paper and has carefully
considered the questions which emerge from each of these issues.
Further, in identifying these questions and providing some
background, this paper will foster an informed consultation
with the public and with not-for-profit stakeholders-asking
concerned parties to really think about the questions and
ensuring that various possibilities for reform remain open
for consideration.
1 Ministry of Government Services, Policy and
Consumer protection Services Division, Modernization of
the Legal Framework Governing Ontario Not-For-Profit Corporations,
Consultation Paper, May 7, 2007. The paper can be found at
http://www.gov.on.ca/MGS/en/AbtMin/132784.html.
