Legal, accounting changes set for federal not-for-profits

publication date: Aug 23, 2011
author/source: Joel Secter
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. This overview of the CNCA will help readers understand what's required in terms of articles of continuance and by-laws under the new regime.

Soliciting or non-soliciting?

To begin with, the CNCA differentiates between "soliciting corporations" and "non-soliciting corporations." 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, of course, 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.

Designated or non-designated?

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 respective amounts.

This categorization dictates whether a corporation must appoint a public accountant and determines its options for financial review (i.e. none, review engagement or audit engagement).

  • For soliciting corporations with gross annual revenues under $50,000, members can continue a current review engagement, not appoint a public accountant at all, or raise the level to an audit engagement.
  • For soliciting corporations with gross annual revenues between $50,000 and $250,000, members can maintain a current audit engagement or lower the level to a review engagement.
  • For soliciting corporations with gross annual revenues over $250,000, an audit engagement is required.
  • For non-soliciting corporations with gross annual revenues under $1 million, members can continue a current review engagement, not appoint a public accountant at all, or raise the level to an audit engagement.
  • For non-soliciting corporations with gross annual revenues of $1 million or more, an audit engagement is required.

Financial statements

Under the CNCA, financial statements will need to be prepared in accordance with generally accepted accounting principles as determined by the Canadian Institute of Chartered Accountants.

Copies of financial statements must be provided to the members each year in advance of the annual meeting of members. Soliciting corporations must also send a copy of the corporation's financial statements and public accountant's report, if any, to Corporations Canada. Non-soliciting corporations are not required to make this filing; however, the Director appointed by the Minister under the CNCA may request them.

Members' rights strengthened

One of the CNCA's overarching themes is the balance between the rights and responsibilities of members and directors. It provides 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 present 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.

Three-year deadline on articles of continuance

From the time that the impending legislation comes into force, corporations will have three years to submit their articles of continuance. 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.

While the CCA requires corporations to have comprehensive by-laws, the CNCA does not. 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.

Resources on the way

In due course, we can expect a full complement of resource materials, including a transition guide for existing not-for-profit corporations, model articles and by-laws, a handbook for federal not-for-profit corporations, reporting obligations under the CNCA, and 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. What will happen to corporations that do not transition within the stipulated time frame remains unclear.

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. A graduate of the University of Ottawa, he has previous experience in dealing with tax and charity matters. Contact him.

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