publication date: Nov 15, 2011
author/source: 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 looking at each new change
individually, there are times when changes in two different areas of charity
operations should be looked at together.
Review your bylaws
now - don't wait for new acts
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. It may very well be easier to
amend the bylaws before the organization continues under the new act rather
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
budget summary article) these provisions allow the Canada Revenue Agency
to revoke a charity's status if one of the
directors of the charity is ineligible to serve. The criteria for ineligibility
are effectively the following:
Conviction of a financial offence;
Conviction of an offence related to the charity's
Previous involvement in a tax shelter operation;
Previously serving as a director of a charity
when it is revoked for "serious non-compliance."
While the Charities
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 are 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.
This may sound simple in practice, but removing a director
can be extremely divisive and practically impossible if the membership is
limited and the director in question forms a significant voting bloc.
Fortunately, the solution is rather simple. While the Act
dictates certain requirements for directors, the list is not exhaustive. Corporate
bylaws could include additional criteria to serve in the position. So in this
circumstance, one would imagine that the bylaws might be amended to include
mention of a lack of past convictions, for example, 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 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.
Adam Aptowitzer of Drache
Aptowitzer LLP is a charity law lawyer with a national practice based in
Ottawa. He has been published in Canadian Taxpayer, Canadian Fundraiser (now Canadian
Fundraising & Philanthropy) and the Not-for-Profit News. He has also
published a widely distributed study on the regulation of Canadian charities
with the C.D. Howe Institute.
As a speaker,
he has presented to the National Symposium of Charity Law, the C.D. Howe
Institute, the Association of Fundraising Professionals, the Canadian Association
of Gift Planners, the Ottawa Estate Planning Council and various large and
small Canadian charities. He has also given expert advice on Parliament Hill.
Adam is an executive member of the Canadian Bar Association's Charity and
Not-for-Profit Law section.
For speaking engagements and consultations, contact
him at 613-237-3300 or visit http://www.drache.ca.