Articles & Cases

Canada Not-For-Profit Corporations Act

November 15, 2004

The Federal Minister of Industry introduced on November 15, 2004 new legislation to govern federally incorporated not-for-profit corporations. Below are the Industry Canada press release together with a backgrounder on the proposed Canada Not-For-Profit Corporations Act. The proposed legislation, if implemented, will have an effect on all federal non-share capital corporations, their directors, officers, members and allied professionals.





Date: 2004-11-15

OTTAWA, November 15, 2004 -- The Honourable David L. Emerson, Minister of
Industry, today introduced new legislation to govern federally incorporated
not-for-profit corporations.

The proposed new Canada Not-for-Profit Corporations Act will replace Parts
II and III of the Canada Corporations Act with a leading-edge, modern
corporate governance framework for not-for-profit organizations
incorporating at the federal level. The proposed legislative changes will
strengthen and clarify the corporate governance rules so that not-for-profit
corporations have the necessary tools to meet the challenges of the future.

"A new Canada Not-For-Profit Corporations Act will help ensure the long-term
strength and vitality of voluntary organizations and social economy
enterprises," said Minister Emerson. "The introduction of this legislation
fulfills the government's commitment in the Speech from the Throne to foster
the social economy, in particular the legion of not-for-profit activities
and enterprises that harness civic energies to address social needs, whether
they are international, national or local."

The new Act also follows on the government's commitment to a smart
regulation agenda, which will simplify and streamline the regulatory burden
on enterprises.

Two rounds of national consultations have yielded a strong endorsement for a
new statute. The new Act will promote the development of well-governed
federally incorporated organizations. It will be among the most modern
statutes of its kind, demonstrating the government's continued commitment to
world-class corporate law. The law will be flexible enough to meet the
needs of large and small organizations while providing the accountability
and transparency necessary to maintain public trust and confidence in the
not-for-profit sector.

The proposed Canada Not-for-Profit Corporations Act will build on the
well-developed standards of corporate governance that are found in the
Canada Business Corporations Act. It will reduce regulatory burden on the
not-for-profit sector and the government; improve financial accountability;
clarify the roles and responsibilities of directors and officers; and
enhance and protect the rights of members.

Some 18,000 not-for-profit corporations and corporations without share
capital are incorporated federally. A broad range of corporations stand to
benefit from the new Act, including health and community-based
organizations, environmental organizations, cultural and heritage societies,
national charities, major religious organizations, mutual benefit clubs, and
some transportation service providers such as airports.

For additional information, please contact:

Stéphanie Leblanc
Office of the Honourable David L. Emerson
Minister of Industry
(613) 995-9001

Media Relations
Industry Canada
(613) 943-2502
http://www.ic.gc.ca/cmb/welcomeic.nsf/cdd9dc973c4bf6bc852564ca006418a0/85256
a5d006b972085256f4d0052b5ef!OpenDocument
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Backgrounder

Government Announces the Introduction of New Legislation
Governing Federal Not-for-Profit Corporations

Not-for-profit corporations are essential to the Canadian life and economy.
Canada's social and economic life is significantly influenced by the
thousands of diverse not-for-profit and volunteer organizations that
contribute to the vitality of communities across Canada. Indeed, many of
these organizations are important governmental partners in the delivery of
services and programs.

The Government of Canada has long acknowledged the importance of the "Third
Pillar" of the economy -- the not-for-profit and voluntary sectors. In
light of this, the Voluntary Sector Initiative (VSI) was initiated in 1999
to build a stronger partnership with volunteer and not-for-profit
organizations. One of the government's commitments to the VSI was to
modernize the federal not-for-profit corporation legislation in order to
improve governance and accountability, eliminate unnecessary regulation and
offer flexibility to meet the sector's needs.

The 2004 Speech from the Throne and the recent budget also emphasized the
importance of strengthening Canada's social foundations and reaffirmed the
government's commitment to a strong partnership with community-based
organizations to find solutions for problems such as poverty and social
exclusion.

The importance of modernizing the governance of not-for-profit corporations
is widely recognized. The current legislation, the Canada Corporations Act
(CCA), under which more than 18,000 not-for-profit corporations and
corporations without share capital are incorporated, has remained largely
unchanged since 1917 and lacks modern governance rules. The new
legislation, the Canada Not-for-Profit Corporations Act, will strengthen and
clarify corporate governance rules for federally incorporated not-for-profit
organizations. It will provide these organizations with the necessary
governance tools to help ensure their strength and vitality.

Many of the provisions in the proposed legislation are modelled on corporate
law statutes, but are modified to meet the needs of not-for-profit
corporations. The legislation does not by itself play a determining role on
whether a corporation qualifies as a charity or as a not-for-profit
corporation under the Income Tax Act.

The new Act also follows on the government's commitment to a smart
regulation agenda, which will simplify and streamline the regulatory burden
on enterprises.

The proposed legislation would make it easier for Canadians to take
advantage of the protections offered by incorporation and the predictability
and accountability offered by a modern corporate governance framework. In
doing so, the law will make the sector more viable and increase its
potential as a governmental partner. The key elements of the proposed
legislation are outlined below.

Streamlined Incorporation Process: The "letters patent" system of
incorporation is replaced by an incorporation "as of right" system. This
new streamlined incorporation process is a more efficient and less
burdensome process. It eliminates the current requirement for Ministerial
review of applications for incorporation. It no longer requires the filing
of by-laws and by-law amendments by the corporation for Ministerial
approval. Instead, incorporation would be granted upon the filing of
specified forms and the payment of a fee. Incorporation would be faster,
especially since the new act allows electronic filing.

Improve Financial Accountability: Not-for-profit corporations take many
different forms: some are very large while others are quite small; some are
privately funded while others solicit donations from the public or
government. The new legislation recognizes these differences and applies
its financial reporting requirements differently based upon an
organization's annual revenues and sources of funding.

Not-for-profit organizations would be categorized as either a "soliciting
corporation" (corporations which solicit public donations or receive
government funding) or a "non-soliciting corporation". Low revenue
soliciting corporations, for which an audit would be too expensive, would
have the lowest requirements -- a review engagement. These organizations
could resolve, with the consent of all members, not to undertake the review
engagement. Review engagements are distinguishable from audits in that the
scope of the review is less than that of an audit and therefore, the level
of assurance provided is somewhat lower.

Medium revenue soliciting corporations would be required to have an audit
but could resolve, with the consent of two-thirds of its members, not to
undertake an audit but, instead, to undergo a review engagement. High
revenue soliciting corporations would be required to have an audit
conducted. Low revenue non-soliciting organizations would be required to
have a review engagement. However, these organizations could resolve, with
the consent of all members, not to undertake the review engagement. High
revenue non-soliciting organizations would be required to have an audit
conducted. It should be noted that all corporations can choose to have an
annual audit.

The new law would also require that all not-for-profit corporations make
their financial statements available to their members, directors and
officers. They would also have to be available to the Director appointed
under the Act, who is the government official responsible for the
administration of the Act. Moreover, soliciting corporations would be
required to file their financial statements with the Director who would make
these documents available to the public. Disclosure of financial statements
is an important tool for ensuring that soliciting corporations are properly
managed.

Rights and Responsibilities of Directors and Officers: One of the major
shortcomings of the CCA is that it does not outline the standard of care
that directors must meet. The new Act will have an explicit standard of
care, which clarifies the parameters of a director's responsibilities and
reduces uncertainty. The new Act will adopt a modern standard of care as is
contained in the Canada Business Corporations Act and other modern corporate
law statutes. Under the new standard of care directors will have to act
honestly and in good faith with a view to the best interests of the
corporation; exercise the care, diligence and skill that a reasonably
prudent person would exercise in comparable circumstances; and comply with
the Act, articles, by-laws and any unanimous member agreements.

The new standard of care provides clear rules for the protection of
directors from liability. When directors meet the standard of care, they
will be protected from liability by a "due diligence" defence. The standard
of care that directors must meet and the due diligence defence are measures
that will reduce uncertainty for directors regarding their personal
liability. This should help attract qualified individuals to act as
directors of not-for-profit organizations.

Enhancement and Protection of Members' Rights: The new Act will also
enhance and protect member rights. By doing so, it will promote active
membership and encourage members to monitor the directors' activities.
Members will have the power to enforce their rights and oversee the
activities of their organizations. They will have the power to access
corporate records (most importantly, the financial statements); access
membership lists (subject to certain restrictions); request a meeting and to
make proposals; use the oppression remedy and the compliance order to
protect their rights; and use the derivative action remedy to enforce the
rights of the corporation. The oppression remedy allows members to seek
relief from a court if they believe their rights have been "oppressed". A
derivative action allows members to launch a suit, in the name of the
corporation itself, if they believe that directors or officers of the
corporation have acted improperly.

The oppression remedy and derivative action would not be available to a
member if the action in question was, in the view of the court, based upon a
tenet of faith held by the members of the corporation. This means that a
member of a religious organization would face restrictions on his or her
ability to use the courts to overturn an action taken by a corporation on
the basis of its religious doctrines or the tenants of its faith.

Transition and Fees: Corporations currently incorporated under the Canada
Corporations Act will have three years to apply for corporate status
(transition) under the new Act. There will be no fees for this process. If
a corporation does not apply for transition within the three-year period, it
may be dissolved by the Director appointed under the Act.

Incorporation fees for new corporations under the Canada Not-for-Profit
Corporations Act will be set by regulation. Currently, it costs $200 to
apply for incorporation status, plus an additional $30 to file mandatory
annual summaries.

Role of the Director: The Director Appointed Under the Act (Director)
functions primarily as a public registrar of corporations and exercises some
regulatory powers under the Act. For example, the Director is responsible
for the issuance of certificates of incorporation, amalgamation, or
dissolution of a corporation. The Director can order a corporation to
change its name if the name is prohibited or deceptively misdescriptive.
The Director may also apply to a court to have a corporation dissolved or,
under certain circumstances, dissolve it himself or herself. Previously,
these powers were exercised under Ministerial discretion.

The Director is also provided with broad investigative powers in the event
of a complaint. The Director may make an application to a court for a
variety of actions, including: investigation of corporations or their
affiliates; the appointment of inspectors; permission for inspectors to
enter any necessary premises; require the production of documents;
attendance at hearings; and all other powers that would be necessary for the
investigation of a complaint.

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For more information on the Blumbergs Non-profit and Charities practice group please visit:

http://www.blumbergs.ca/non_profit.php


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