Life in Interesting Times

By: Adam Aptowitzer

There is a curse of unknown origin to the effect of "may you live in interesting times" and there is no question that the past few years have been interesting ones for charities. From the Voluntary Sector Initiative a little over ten years ago, the imposition of the intermediate sanctions, amendments to the disbursement quota and receipting rules, art flips, tax shelters, new corporate regimes and a ferocious interest in regulation of the sector - charities have been kept busy over the years. However, rather than look at each new change individually, there are times when changes in two different areas of charity operations should be looked at together.

The relatively expansive changes to the new federal (and Ontario) corporate law should promote some intensive soul searching on the part of charities reviewing their bylaws. Part of this review should look at how the organization's bylaws can be reconstructed to facilitate compliance with new regulations in other areas. This is particularly true as the new federal corporate law makes it arguably more difficult to amend bylaws where the organization has multiple membership classes, so it may very well be easier to amend the bylaws before the organization continues under the new act rather than afterwards.

When reviewing their bylaws charities may want to take another look at the so called 'good governance' provisions proposed in the 2011 budget. As we have written before (see here for our budget summary article) these provisions allow the CRA to revoke a charity's status if one of the director's of the charity is ineligible to serve as such. The criteria for ineligibility are effectively the following:

a)      Conviction of a financial offence;

b)      Conviction of an offence related to the charity's operation;

c)      Previous involvement in a tax shelter operation; or

d)     Previously serving as a director of a charity when it is revoked for 'serious non compliance'.

While the Charities Directorate has publicly stated their position to use these rules in a relatively gentle manner, the fact remains that the sheer existence of these rules gives the CRA great power. Unfortunately, the Directorate's resources in discovering the past history of directors is far greater than that of the charity, and it very well may be that it is the Directorate that alerts the charity that an ineligible individual is serving as a director.

However, the term 'ineligible' individual is a term of art and should not lead the charity to believe that the individual is automatically disqualified from serving as a director. In fact, the charity may be forced to take steps to remove that person as a director. Provisions for such removal are included in the new federal corporate law. For example, the new Canada Not for Profit Corporations Act (the "Act") allows for the removal of a director upon simple majority vote by the members, except where a director is elected by a particular class of members when only that class of members may vote to remove the director. While this may sound simple, in practice, removing a director can be extremely divisive and practically impossible if the membership is limited and the director him or herself forms a significant voting bloc.

Fortunately, the solution is rather simple. While the Act dictates certain requirements for directors, the list is not exhaustive and corporate bylaws could include additional criteria to serve in the position. So in this circumstance, one would imagine that the bylaws be amended to include mention of, for example, a lack of past convictions in the criteria for serving as a director.

Over the years, we have consistently advised that charities undertake bylaw review prior to continuing under the Act. In the past, we have cited the Act's general framework of speaking where the bylaws are silent as one good reason to do so, but the 'good governance' provisions though put the need into an entirely new context. Whatever the reason, a comprehensive bylaw review is clearly the prudent course of action for charities regardless of whether or not they are happy with their current state of affairs and whether they plan to continue under one of the new corporate regimes.