The Canadian Act respecting not-for-profit corporations
On October 17, 2011, the new Act respecting not-for-profit corporations and certain other corporations came into force. It is the first substantial change in federal non-profit legislation since 1919. This type of organisation was previously covered by the Canada business corporations Act part II. In recent years, most organisations were constituted under the Quebec companies Act, given the heavy procedural burden that was attached to the federal Part II corporations. Nevertheless, a certain number of corporations are in existence under the federal Act Part II and are still in active operation today. In the future, consideration should be had to the new Federal Act instead of Part III of the Quebec companies Act, namely but without limitation for the reasons hereafter expressed.
The new Act is in line with modern legislation on business corporations. Namely, it provides for the constitution of the corporation by filing of articles and not by letters patent, as it used to be; this is equivalent to a filing procedure rather than a ministerial authorization. The new Act also allows the corporation to revert to financing in a manner comparable to the financing of regular corporations.
In order to distinguish a corporation created under the Act from a regular corporation, the former have and shall use a specific name or a number, but always with one of the following terms: association, center, centre, foundation, fondation, institute, institut or society.
As for the activities of the corporation, it is no more required to specify the purpose and goals of the corporation in the incorporation documents. A simple declaration of intention will suffice.
The provisions of the Act concerning the financing of not-for-profit corporations are generally in line with the Quebec Act Respecting the transfer of securities and the establishment of security entitlements. The new federal Act even goes one step further by allowing the issuance of bearer’s titles which is not exactly the North-American trend as this type of title is often used for illegal traffic or money laundering.
The Act provides for a board of directors of one or more persons; if the corporation is considered under the Act as a soliciting corporation, it shall not have fewer than three directors, at least two of whom are not officers or employees of the corporation or its affiliates.
If the corporation is not a soliciting corporation, a unanimous members’ agreement may be signed to limit or restrict in whole or in part the powers of the directors, just like a unanimous shareholders’ agreement for regular corporations.
A new concept appears in the Act: the consensus. The bylaws may provide for the directors or the members to take most decision by way of consensus rather than by way of vote. Some restrictions apply.
Categories of membership are part of the articles of incorporation but the conditions of admission, the procedure for exclusion and other information on each category will be found in the bylaws. Consequently, the not-for-profit corporation is not cast into a tight incorporation structure. The member’s share in the corporation is not transferable, except to the corporation itself.
The main concept of the Act is the distinction between a soliciting corporation (SC) and a non-soliciting corporation (NSC). The SCs are those receiving directly or indirectly public funds from donations or subsidies which in fact means any donation from outside of the corporation. If, in any given financial year, the corporation receives $10,000.00 or more by donations from non-members or any financial assistance from a governmental organisation or from another SC, then the corporation is qualified as SC and shall abide by the rules imposed in various respects by the Act. Any corporation that does not answer to the above criterias shall be considered NSC. The distinction is important, namely as to the type of financial statements required to be made. For example, a SC whose annual gross revenue is between $50,000.00 and $250,000.00 is not required to have audited financial statements if the members so decide but if the annual gross revenue exceeds $250,000.00$, an audit will be required: as for NSCs, if the annual gross revenue is $1,000,000.00 or more, the audit will be required.
The distinction between SCs and NSCs is also important in other circumstances such as the dissolution while only the latter may distribute its assets to its members; this is a new concept in non-profit organisations.
It is important to note that all corporations incorporated under Part II of the Canada corporations Act must proceed to the transition to the new Act within three years from October 17, 2011 failing which, they shall be automatically dissolved.
Finally, we wish to draw your attention to the notion of charity organisation under the Income tax Act. These provisions remain unchanged and the corporation shall, to maintain its charity qualification, make sure that the Canada Revenue Agency requirements continue to be met at the time of transition and on a continuous basis thereafter. The corporation constituted under the new Act is not necessarily a charity organisation as defined in the Income tax Act; these are two different things.
This bulletin is intended as a general information instrument and is not to be considered as a legal advice or opinion on any of the issues raised.