New Regime for Federal Not-for-Profits Is Coming Soon
By: Joel Secter

One way or another, most layers and accountants have a connection to a federally incorporated not-for-profit or registered charity. You may recall that in the summer of 2009, Parliament passed new legislation governing federally incorporated non-share capital corporations for the first time since 1917. The Canada Not-for-profit Corporations Act ("CNCA"), which is set to replace Part II of the Canada Corporations Act ("CCA") later this year, is intended to implement modern corporate governance rules for federal not-for-profits and clarify the roles and responsibilities of members, directors, officers and other interested parties. What follows is an overview of the CNCA to help those of you who will soon be drafting articles of continuance and by-laws under the new regime.

To begin with, the CNCA differentiates between "soliciting corporations" and "non-soliciting corporations". In essence, a corporation that receives public money, either directly or indirectly, in excess of $10,000 will be considered to be a soliciting corporation. Corporations that are not found to be soliciting corporations are by default non-soliciting corporations. Soliciting corporations will be treated differently compared with non-soliciting corporations in a number of ways. For example, while non-soliciting corporations may have one director, soliciting corporations must have a minimum of three, two of whom are not officers or employees of the corporation.

The CNCA also distinguishes "designated corporations" from "non-designated corporations". Designated corporations are either soliciting corporations with $50,000 or less in gross annual revenues or non-soliciting corporations with $1 million or less in gross annual revenues. Non-designated corporations are soliciting and non-soliciting corporations with annual revenues in excess of these amounts. This categorization ultimately dictates whether a corporation is obligated to appoint a public accountant and its options for financial review (i.e. none, review engagement or audit engagement).

·         For soliciting corporations with gross annual revenues of less than $50,000, members can choose not to appoint a public accountant, leave the level of review at the default of a review engagement, or raise the level of review to an audit engagement.

·         For soliciting corporations with gross annual revenues between $50,000 and $250,000, the members can leave the level of review at the default of an audit engagement or lower the level of review to a review engagement.

·         For soliciting corporations with gross annual revenues of more than $250,000, the members have no choice other than an audit engagement.

·         For non-soliciting corporations with gross annual revenues of less than $1 million, the members may choose not to appoint a public accountant, leave the level of review at the default of a review engagement, or raise the level of review to an audit engagement.

·         For a non-soliciting corporation with gross annual revenues of $1 million or more, the members have no choice other than an audit engagement.

It is worth mentioning that under the CNCA, financial statements will need to be prepared in accordance with generally accepted accounting principles.[1] Copies of financial statements must be provided to the members each year in advance of the annual meeting of members and, in addition, soliciting corporations must send a copy of the corporation's financial statements and public accountant's report, if any, to Corporations Canada. Notwithstanding that non-soliciting corporations are not required to make this filing, the Director appointed by the Minister under the CNCA may request them.

One of the overarching themes of the CNCA is that it seeks to address the balance between the rights and responsibilities of members and directors. One way it does this is by providing that directors are to be elected by the members - and only by the members. The implication is that organizations can no longer have ex-officio directors, which the CCA permits. Further illustrating the importance of members' rights under the CNCA, the Derivative Action and Oppression Remedy will be available to members (and other complainants) who feel that either the interests of the corporation or their interests as members are not being represented.

From the time that the impending legislation comes into force, corporations will have three years to submit their articles of continuance. As a practical matter, corporations will have the option of amending their articles before, at the same time as, or after continuance. Though by-laws need not be submitted together with the articles of continuance, they must be sent to the Director within twelve months of filing.

Whereas corporations under the CCA are essentially required to have comprehensive by-laws, this is not the case under the CNCA. In fact, only a handful of clauses must be included in a corporation's by-laws, such as the conditions for membership. That being said, the default provisions of the CNCA speak where the by-laws are silent. In such cases, corporations will have to decide if they like what the CNCA has to say.

In due course, we can expect a full complement of resource materials, including:

• Transition guide for existing not-for-profit corporations
• Model articles and by-laws
• Handbook for federal not-for-profit corporations
• Reporting obligations under the CNCA
• Policies on most applications under the CNCA

While corporations that do not complete the transition can technically be dissolved, dissolution will not occur automatically after three years. It remains unclear what will happen to corporations that do not transition within the stipulated time frame because, according to a Corporations Canada representative, the intention is not to punish corporations that lag behind in the transition; rather, the objective is to do away with the archaic CCA and move everyone into the new corporate era under the CNCA.

Joel Secter is a lawyer with Drache Aptowitzer LLP in Ottawa. He is a graduate of the University of Ottawa and has previous experience in dealing with tax and charity matters. He can be reached at jsecter@drache.ca.