We have written much about the fact that the Canada Not-for-profit Corporations Act (the "CNCA") is on track to replace Part II of the Canada Corporations Act (the "CCA") later this year. One important facet of the new Act, which received Royal Assent on June 23, 2009, is that it differentiates between "soliciting corporations" and "non-soliciting corporations."

According to subsection 2(5.1) of the CNCA, a federally incorporated nonprofit or charity becomes a soliciting entity if it receives more than $10,000 in public money in a single financial year. The $10,000 amount is based on the proposed Regulations released on February 26, 2011.

Sources of public money include donations or gifts from non-members, grants or other similar financial assistance from a government body, or donations or gifts received from a corporation that itself meets the criteria for a soliciting corporation. Corporations that are not found to be soliciting corporations are by default non-soliciting corporations.

It is important for stakeholders in the sector to understand when and how this determination will be made as well as the issues that are different for soliciting and non-soliciting corporations.

When status is determined

Organizations will determine whether they are a soliciting corporation on the date of their financial year-end. If a corporation has income over $10,000 in a financial year from a public source, it will become a soliciting corporation. However, the commencement date for soliciting corporation status does not take effect until its next annual meeting of members.

Soliciting status lasts for three years. If the corporation does not receive public money in any of those following three years, it will cease to be a soliciting corporation as of the third annual meeting of members following the annual meeting at which it became a soliciting corporation.

In other words, a corporation becomes, or ceases to be, a soliciting corporation as of the day of an annual meeting of members. If the corporation receives public money in a future financial year, the time period for being a soliciting corporation re-commences.

Compliance and governance requirements

Under the CNCA, soliciting corporations will be treated differently compared with non-soliciting corporations in five ways:

1. Soliciting corporations must have a minimum of three directors, two of whom are not officers or employees of the corporation;
2. On dissolution, soliciting corporations must ensure that the assets of the corporation go to a "qualified donee" as defined by the Income Tax Act;
3. Soliciting corporations may not have a unanimous member agreement;
4. Soliciting corporations must conduct a review of their financial statements and these must in turn be reviewed by a public accountant; and
5. Soliciting corporations must send a copy of the corporation's financial statements and public accountant's report, if any, to Corporations Canada.
   

Financial statements

The provisions outlining the preparation of financial statements for soliciting and non-soliciting corporations are found in section 172 of the CNCA. The "comparative financial statements" must be prepared in accordance with the generally accepted accounting principles set out in the Canadian Institute of Chartered Accountants Handbook or the Canadian Institute of Chartered Accountants Public Sector Accounting Handbook.

Though the financial statements need not be designated by the names set out below, for the purpose of paragraph 172(1)(a), the prescribed documents are as follows:

1. A statement of financial position or a balance sheet;
2. A statement of comprehensive income or a statement of retained earnings;
3. A statement of changes in equity or an income statement; and
4. A statement of cash flows or a statement of changes in financial position.
   

Copies of these financial statements must be provided to members each year in advance of the annual meeting of members and, if the corporation is a soliciting corporation, must also be sent to a Director who will be appointed under the new Act.

Increased scrutiny comes with exemptions

The fact that all soliciting corporations will be required to file their financial statements with Corporations Canada marks a significant change to the status quo. While the CCA requires an auditor to conduct a review of annual financial statements for non-share corporations, financial statements do not need to be submitted to Corporations Canada with the Annual Summary and the CCA is silent on their distribution to members.

It should also be noted that the CNCA gives the Director broad discretion to exempt a corporation "if the Director reasonably believes that the detriment that may be caused to the corporation by the requirement outweighs its benefit to the members or, in the case of a soliciting corporation, the public."

Registered charities will already be familiar with submitting financial statements since all charities in Canada must file a Registered Charity Information Return (Form T3010) with the Canada Revenue Agency (CRA) every year. In addition to providing basic information, charities are required to include a copy of their financial statements. However, they do not need to be prepared in accordance with generally accepted accounting principles.

More often than not, charities export the data from their T3010 to prepare their financial statements. The difficulty is that the data collected by the CRA on the T3010 is used to calculate a charity's disbursement quota, which ensures that they spend their funds raised on charitable activities. By contrast, the requirement for corporations to submit financial statements to Corporations Canada ensures that organizations that receive public money are subject to more stringent financial disclosure requirements as part of the need for greater transparency and accountability.

At the end of the day, the new requirement under the CNCA to submit financial statements to Corporations Canada will mean additional work, at possibly greater expense, for federally incorporated nonprofits and registered charities. Considering that it is not uncommon for organizations to receive "public money" in excess of $10,000, all organizations should consider whether they will likely be a soliciting corporation when reviewing their by-laws and applying for continuance in the near future.

Joel Secter, a student-at-law with Drache Aptowitzer LLP in Ottawa, is a recent graduate of the University of Ottawa and has previous experience in dealing with tax and charity matters. Email him for more information.