publication date: May 17, 2011
author/source: Joel Secter
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
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
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
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.
Under the CNCA, soliciting corporations will be treated
differently compared with non-soliciting corporations in five ways:
corporations must have a minimum of three directors, two of whom are not
officers or employees of the corporation;
- On dissolution,
soliciting corporations must ensure that the assets of the corporation go
to a "qualified donee" as defined by the Income Tax Act;
corporations may not have a unanimous member agreement;
corporations must conduct a review of their financial statements and these
must in turn be reviewed by a public accountant; and
- Soliciting corporations must send a copy of the
corporation's financial statements and public accountant's report, if any, to Corporations Canada.
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
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:
- A statement of
financial position or a balance sheet;
- A statement of
comprehensive income or a statement of retained earnings;
- A statement of
changes in equity or an income statement; and
- 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.
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
with the Canada Revenue
(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.