Not-for-Profit & Charitable Organizations in the Health Sector: Evolving Governance & Compliance Issues

Transcription

1 Not-for-Profit & Charitable Organizations in the Health Sector: Evolving Governance & Compliance Issues ISBN: April 8, 2013 Ontario Bar Association Continuing Professional Development

2 DISCLAIMER This work appears as part of the Ontario Bar Association s initiatives in continuing legal education. It aims to provide information and opinion which will assist lawyers in maintaining and enhancing their competence. It does not, however, represent or embody any official position of, or statement by, the OBA except where this may be specifically indicated; nor does it attempt to set forth definitive practice standards or to provide legal advice. Precedents and other material contained herein are intended to be used thoughtfully, as nothing in the work relieves readers of their responsibility to consider it in the light of their own professional skill and judgement. NOTE RE PRECEDENTS The model precedents are provided for your consideration and use when you draft your own documents. They are NOT meant to be used "as is". Their suitability will depend upon a number of factors, such as the current state of the law and practice in each area of law, your writing style, your needs and the needs and preferences of you and your clients. These documents may need to be modified to correspond to current law and practice.

3 Not-for-Profit and Charitable Organizations in the Health Sector: Evolving Governance & Compliance Issues Date: Location: Program Chairs: Monday, April 8, :00 am to 1:00 pm Twenty Toronto Street Conferences and Events (OBA Conference Centre) 20 Toronto Street, 2nd Floor, Toronto Michelle Gibbs, Gibbs & Associates Simmie Palter, Barrister & Solicitor Agenda 9:00 am Introductory Remarks 9:05 am Not for Profit Corporations 101 Anne C. Corbett, Borden Ladner Gervais LLP 9:45 am Current Issues in the Governance of NFP Health Care Organizations Theresa Man, Carters Professional Corporation - Orangeville Allen Doppelt, Allen Doppelt Law 11:05 am Break 11:20 am Tax issues Canada Revenue Agency s New Fundraising Guidance, Receipting and Inter-Charity Transfers Mark Blumberg, Blumberg Segal LLP 12:00 pm Compliance/Risk Management Issues Mary Jane Dykeman, Dykeman Dewhirst O'Brien LLP Kathy O Brien, Dykeman Dewhirst O'Brien LLP 12:50 pm Question Period and Concluding Remarks 1:00 pm Program Concludes 4 Substantive Hours 0 Professionalism Hours Note: New members may apply any program that contains a minimum of 0.5 Professionalism Hours toward the annual CPD requirement.

4 Not-for-Profit and Charitable Organizations in the Health Sector: Evolving Governance & Compliance Issues Date: Location: Program Chairs: Monday, April 8, :00 am to 1:00 pm Twenty Toronto Street Conferences and Events (OBA Conference Centre) 20 Toronto Street, 2nd Floor, Toronto Michelle Gibbs, Gibbs & Associates Simmie Palter, Barrister & Solicitor Table of Contents Tab 1 The Not-For-Profit Corporation Anne C. Corbett, Borden Ladner Gervais LLP Tab 2 Transition Checklist for Ontario Not-for-Profit Corporations Act, 2010 Allen Doppelt, Barrister and Solicitor Tab 3 Tab 4 Tab 5 Working With The Canada Not-For-Profit Corporations Act: Incorporation and Continuance Theresa Man, Carters Professional Corporation - Orangeville Canadian Charity Legal Checklist Mark Blumberg, Blumberg Segal LLP Compliance/Risk Management Issues Mary Jane Dykeman, Dykeman Dewhirst O'Brien LLP Kathy O Brien, Dykeman Dewhirst O'Brien LLP

5 Program Participants Michelle Gibbs (Program Chair) A partner of the law firm of Gibbs & Associates in Toronto. Her core practice is in the area of professional liability and health law. She has extensive experience in handling a wide range of health-related claims, including defending health professionals in licensing, complaints, fitness to practice and discipline matters. Michelle also defends regulators, professional associations and employers in civil actions and human rights proceedings. Outside of her legal practice, Michelle is co-chair of the Board of Directors of George Herman House in Toronto, a charitable organization that provides transitional housing and supportive programming to women with mental health and addictions issues. She also sits on the Board of Directors of the Harold and Grace Baker Centre, a long-term care home and retirement residence. Simmie J. Palter (Program Chair) Ms. Palter is a sole practitioner who advises health sector clients and other lawyers about health privacy, consent and health professional regulation and policy. Ms. Palter has experience drafting a wide range of agreements, legislation and regulations and in litigation, corporate and policy matters focusing on health professional regulation, drug benefit programs, privacy and land and air ambulance services. Ms. Palter graduated from McGill University and Osgoode Hall Law School, and practised law at the Ministry of Health and Long-Term Care before entering private practice. Ms. Palter is an active member of the Ontario Bar Association Health Law Section and has served as newsletter editor, program coordinator and government relations liaison. Mark Blumberg Mr. Blumberg is a partner at the law firm Blumberg Segal LLP in Toronto and works almost exclusively with Canadian non-profits and registered charities on compliance issues. Mark is also the editor of CanadianCharityLaw.ca/ a Canadian charity law website and globalphilanthropy.ca/ a Canadian website dedicated to news about the Canadian charitable sector as well as legal and ethical issues for Canadian charities operating in Canada or abroad.

6 Anne Corbett A Senior Partner with the law firm of Borden Ladner Gervais LLP in Toronto where she specializes in the areas of corporate commercial law and health law with a special emphasis on not-for-profit corporations and corporate governance. Anne is the co-author of the Ontario Hospital Association s Guide to Good Governance for Charities and Not-for-Profit Corporations and is a frequent speaker on topics related to directors, fiduciary duties, governance and accountability including accountability agreements. Ms. Corbett received her B.A. from the University of Windsor in 1976, her LL.B from the University of Toronto in 1979 and was called to the Bar in Ontario in Mary Jane Dykeman A partner at Dykeman Dewhirst O Brien LLP, a Toronto health law firm that advises health sector clients on matters relating to mental health, consent and capacity, risk management (including disruptive situations involving residents/patients, family and staff), privacy, corporate/commercial and health research. She currently acts as external counsel to a number of teaching and community hospitals and community mental health and addictions agencies on a broad range of health law, risk management and corporate/ commercial matters. She is a frequent writer and speaker on health law and policy issues, including as co-editor (along with Kate Dewhirst) of Risk Management in Canadian Health Care. She developed and edited the Canadian Health Law Practice Manual for almost a decade (joined in later years by Kate Dewhirst) and is also the co-author of Canadian Nurses and the Law (3d ed. forthcoming, 2013). She is currently working with Dr. Hy Bloom on A Practical Guide to Mental Health, Consent and Capacity in Ontario, 2d. ed. (Carswell, 2013). Mary Jane teaches mental health law in Osgoode Professional Development s LL.M. program and has taught in the Queen's LL.B. program. Mary Jane is Board Chair at the Anne Johnston Health Station, a community health centre in Toronto serving seniors, barrier-free clients and youth. She also sits as the lawyer member on the Research Ethics Board at Canadian Blood Services in Ottawa and on the Board of the Alzheimer's Society of Toronto. Allen Doppelt Mr. Doppelt is a senior Ontario business lawyer with 36 years experience. His practice concentrates primarily on corporate and commercial law with particular emphasis on the law of non-profit corporations. He is also the Chair of the Corporate Law Committee of the Ontario Bar Association. During his 30 year career with the Ontario government (1981 to 2011), Mr. Doppelt helped to develop and write many major new corporate and commercial laws, including the Personal Property Security Act, the Securities Transfer Act and the new Not-for-Profit Corporations Act. He has lectured to both legal and non-legal audiences on new developments in corporate and commercial law.

7 Theresa L.M. Man A partner with Carters Professional Corporation, Ms.Man practices in the area of charity and notfor-profit law and is recognized as a leading expert by Lexpert. Ms. Man advises charitable and non-profit clients in relation a wide range of corporate and charity tax matters. She is an Executive Member of both the Charity and Not-for-Profit Sections of the Ontario Bar Association (OBA) and the Canadian Bar Association (CBA). In addition to being a frequent speaker at the annual Church & Charity Law(tm) Seminar, seminars hosted by the CBA and the OBA, Ms. Man has also written articles for numerous publications, including The Lawyers Weekly, The Philanthropist, The Bottom Line, Canadian Fundraiser enews and Charity Law Bulletin. Kathy O Brien Ms. O Brien is a partner with Dykeman Dewhirst O Brien LLP, a boutique health law firm in Toronto. A corporate/commercial lawyer since 1994, Kathy works with clients in the health care and charitable sectors. She is well-versed in corporate governance, outsourcing, regulatory, and procurement issues, as well as transactional, privacy and charitable law matters. She is passionate about assisting organizations to implement best governance practices.

8 Not-for-Profit and Charitable Organizations in the Health Sector: Evolving Governance & Compliance Issues Date: Location: Program Chairs: Monday, April 8, :00 am to 1:00 pm Twenty Toronto Street Conferences and Events (OBA Conference Centre) 20 Toronto Street, 2nd Floor, Toronto Michelle Gibbs, Gibbs & Associates Simmie Palter, Barrister & Solicitor Reporting This Program on the Law Society Member Portal To report your attendance for CPD hours, go to the Law Society online Member Portal at Here is how to report your attendance for credit: 1. Sign in on the member portal at (you will need to have registered for the portal first). 2. Select CPD tab on right hand side of the top tool bar. 3. Select Update My CPD Program on left hand bar. 4. Purely substantive programs are reported differently than those that contain professionalism: a. If the program contains professionalism content and has been accredited by the Law Society select: Professionalism Program/Content Click Search; Search Program/Content Professionalism by any one or a combination of program name, provider and date; or leave the search fields blank for a full list of accredited offerings; Click search; Choose program; and Click submit. b. If the program contains no professionalism content and you are claiming credit toward your 9 hours of non-accredited CPD select: Substantive Program/Content Key in the details of the substantive programs regardless of provider; and Click submit. For more information about the Law Society of Upper Canada please contact the Resource Centre at or ext For a full listing of the CPD Hours for OBA Professional Development please go to: oba.org/cpdhours 4 Substantive Hours 0 Professionalism Hours Note: New members may apply any program that contains a minimum of 0.5 Professionalism Hours toward the annual CPD requirement.

9 This program qualifies for the 2014 LAWPRO Risk Management Credit What is the LAWPRO Risk Management credit program? The LAWPRO Risk Management Credit program pays you to participate in certain CPD programs. For every LAWPRO-approved program you take between September 16, 2012 and September 15, 2013, you will be entitled to a $50 premium reduction on your 2014 insurance premium (to a maximum of $100 per lawyer). Completing 3 new modules of the Online COACHING Centre also qualifies for the credit.** Access the OCC at Why has LAWPRO created the Risk Management Credit? LAWPRO believes it is critical for lawyers to incorporate risk management strategies into their practices, and that the use of risk management tools and strategies will help reduce claims. Programs that include a risk management component and have been approved by LAWPRO are eligible for the credit. How do I qualify for the LAWPRO Risk Management Credit? Attendance at a qualifying CPD program will NOT automatically generate the LAWPRO Risk Management Credit. To receive the credit on your 2014 invoice, you must complete the online Declaration Form. STEP 1: STEP 2: Attend an approved program in person or via webcast; and/or Self-study a past approved program; and/or Complete 3 new modules on the Online COACHING Centre** Complete the online Declaration form at by Sept. 15, The credit will automatically appear on your 2014 invoice. You are eligible for the Risk Management Credit if you chair or speak at a qualifying program provided you attend the entire program. You can claim credit for an approved program on an archived webcast, CD-ROM, audio tape or video replay, provided you watch or listen to the entire program and have a copy of the program materials. In this case, you should claim credit for a self-study review on the CPD declaration form. Where can I access a list of qualifying programs? See a list of approved programs at Whom do I contact for more information? Contact practicepro by practicepro@lawpro.ca or call or ** Completing three modules of the OCC qualifies for only one $50 premium credit per year.

10 Not-for-Profit & Charitable Organizations in the Health Sector: Evolving Governance & Compliance Issues The Not-For-Profit Corporation Anne C. Corbett Borden Ladner Gervais LLP April 8, 2013 Ontario Bar Association Continuing Professional Development

11 Anne C. Corbett T F acorbett@blg.com The Not-For-Profit Corporation What is a Corporation? A corporation is a legal entity that is separate and distinct from its directors and members or shareholders. As a separate legal entity, it can sue or be sued in its own name. It may also hold property in its own name. It has perpetual existence. It continues to exist until it is dissolved. The Not-For-Profit Corporation Not-for-profit corporations are distinguished from business corporations by the purposes for which they each exist. Business corporations exist for profit. Not-for-profit corporations exist for the purpose of carrying on a specific activity usually of a philanthropic, charitable, religious, educational, scientific, artistic, cultural, social, professional or sporting nature. Accordingly, the range of not-for-profit corporations includes schools, colleges and universities, religious and faith-based organizations, health care provider organizations, research institutes, theatres, museums and art galleries, organizations that oversee public works, sports and recreation clubs and fundraising foundations, as well as volunteer organizations and community service organizations. Distinct from a business or share capital company where shareholders are entitled to share in the profits of the company by receiving dividends, a non-share corporation incorporated under Part III of thecorporations Act (Ontario)is to be carried on without the purpose of gain for its members. A similar provision is included in the new Not-for-Profit Corporations Act (Ontario). Creating a Not-For-Profit Corporation Corporations are creatures of statute and are created either by: a Special Act of the legislature; pursuant to specific governing legislation which creates a number of similar organizations (examples would include Local Health Integration Networks (LHINs) and Community Care Access Centres (CCACs); or pursuant to constating documents issued by the government in response to an application for corporate status (letters patent or articles of incorporation) under general corporate legislation (for example: Corporations Act (Ontario)). Letters patent are the constating documents issued pursuant to an application for corporate status for notfor-profit corporations under either the Canada Corporations Act or the Corporations Act (Ontario). The Canada Corporations Act is being replaced by the Canada Not-for-Profit Corporations Actand the Corporations Act (Ontario) will be replaced by the Not-for-Profit Corporations Act (Ontario) when that act is proclaimed in force. The letters patent will be replaced by articles under each of these Acts. For groups of individuals who wish to obtain corporate status, a decision must be made as to whether to apply under federal law or provincial law. Generally speaking, corporations that are subject to federal jurisdiction or that will operate in more than one province will consider incorporation under federal law. Lawyers Patent & Trade-mark Agents

12 Some corporations incorporated pursuant to a specific governing statute may not, by the terms of their statute, be subject in whole or in part to the general corporate statute that otherwise applies to the not forprofit corporations incorporated in the same jurisdiction. Examples of corporations in Ontario that are not subject in whole or in part to the Corporations Act (Ontario) include: LHINs, CCACs and the Regulated Health Professions Colleges such as the College of Physicians and Surgeons. To determine which general corporate statute law is applicable, a corporation should determine its jurisdiction of incorporation, the manner in which it was incorporated, and whether it is subject to any specific legislation to exclude some or all of the provisions of the general corporate statute. Legal advice should be obtained in any case of doubt. In addition, if the corporation is subject to specific legislation, that legislation may contain unique governance requirements that must be complied with. Corporate Governance Structure The assets of the not-for-profit corporation are dedicated to the fulfillment of the purposes or objects of the corporation. The objects or purposes are set out in incorporating documents (letters patent, articles), or in special legislation. Not-for-profit corporations usually have members although it is possible to qualify as a non-profit corporation for tax purposes and still have shareholders. Corporations incorporated under Part III of the Corporations Act (Ontario) or Part II of the Canada Corporations Act, or continued under the Canada Not-for-Profit Corporations Act or the Not-for-Profit Corporation Act (Ontario) will have members. Corporations and their Directors The affairs of the corporation are governed by its board of directors. Directors stand in a fiduciary relationship with the corporation. The fiduciary duties that are owed by a director to the corporation are among the highest standard of conduct that the law imposes. Unless the governing legislation has set out a standard of care, directors are required to act honestly, in good faith and in the best interests of the corporation, and to apply the level of skill and judgment that is reasonably expected of a person with their knowledge and experience. This is a subjective standard of care: it depends on the personal knowledge and experience of each director. The fiduciary duties owed by directors to the corporation also include the duties of loyalty, to maintain confidentiality, to avoid conflicts of interest and the duty of corporate obedience. Both the Canada Not-for-Profit Corporations Act and the Ontario Not-for-Profit Corporations Act have set out a statutory standard of care which, in the case of the Ontario Act, is as follows: 43(1) Every director and officer in exercising his or her powers and discharging his or her duties to the corporation shall, (a) act honestly and in good faith with a view to the best interests of the corporation; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. (2) Every director and officer shall comply with, 2

13 (a) this Act and the regulations; and (b) the corporation s articles and by-laws. Corporations and their Members As a not for profit corporation, a corporation usually has members (although it may in some cases under the Corporations Act have shareholders). Corporations created by special legislation may or may not have members. Members are not owners in the same sense that shareholders have an equity ownership interest in a for profit corporation. Members have the right to vote and to receive financial statements, but are not entitled to any distribution of the surplus revenues of the corporation ( dividends in a for profit context). The role of members is limited, but it is a meaningful and potentially powerful role. Directors (other than ex officio directors) are elected by the members and maybe removed by the members. Members approve fundamental changes such as amalgamations. Members are entitled to notice of, and to attend, the annual meeting. Under both the Canada Not-for-Profit Corporations Act and the Ontario Not-for-Profit Corporations Act members have expanded rights. Best Interests of the Corporation Despite the fact that the directors are elected by the members, the duty of the directors is to act in the best interests of the corporation. Because a not-for-profit exists for a purpose, the best interests of the corporation will not always be consistent with the best interests of the members. Unlike for-profit corporations where best interests of the corporation are closely linked to the financial interests of the shareholders, best interests in a not-for-profit corporation are linked to the mission, vision, values and accountabilities of the corporation. Therefore, acting in the best interests of a mission-based not-for-profit corporation means fulfilling the mission, moving towards the vision, adhering to core values and discharging accountabilities. A board will usually need to consider a broad range of interests, stakeholders and accountabilities in determining the best interests of the corporation. The stakeholders will be unique to each corporation and may include, in the context of a health care corporation: Patients, residents, clients or customers Community served Government and regulatory authorities Funding agencies Staff Volunteers who may provide financial support and unpaid hours that contribute to the fulfillment of the organization Donors and financial supporters Other providers of similar services 3

14 Factors that Impact Governance Structure and Processes A corporation s governance structure is impacted by a number of factors, including: Legislative Requirements Is the corporation subject only to general corporate legislation or is it subject to its own governing legislation? If a corporation is subject to either its own act of incorporation ( special act corporations ) or a specific piece of governing legislation, it may be subject to unique requirements with respect to such governance matters as board size, board composition, appointment of directors, required committees, board meetings open to the public and whether or not the corporation has members. Mission The corporation s mission will also impact its governance structures. In particular, the mission may impact the degree to which the board is an independent skills-based board. For example, corporations whose mission or purpose is confined to serving the interests of a limited group of persons may have a board composed entirely, or partially, of representatives of those it serves. Similarly, organizations that provide a service to the community or act in the public interest will be more likely to have independent, skills-based boards. The mission may also impact the board s structures such as its committee structure. For example, corporations whose purposes are limited to fundraising may not have the same number or types of committees as an operating organization that provides services (education, health care or social services). Resources Corporations with smaller budgets may have a limited organizational structure at the staff level and rely on volunteers for fulfillment of roles that in another organization might be performed by paid staff members. Where the board takes on roles that might be performed by staff of a corporation with a greater organizational capacity, the board will be referred to as a working board. As organizational capacity increases, the board will transition from a working board to a governing board. Not-for-Profit Corporations in the Health Sector Corporations in the health sector include: 1. Health providers: Examples: public hospitals long-term care homes community mental health centres community health centres community care access centres 2. Self-Regulatory Organizations 3. Sector Associations 4. Health Networks 5. Shared Services Corporations 6. Fundraising - Foundations 7. Volunteer Service or Auxiliaries 8. Research Organizations 9. Standard Setting Organizations 4

15 Not-For-Profit Corporations, Charities and the Income Tax Act Not-for-profit corporations are usually categorized as non-profit organizations or registered charities for tax purposes. Entities that meet the definition of a non-profit organization under subsection 149 (1) of the Income Tax Act (Canada) do not pay tax under Part I of the Income Tax Act (Canada) on their taxable income. However, they are not charities and therefore are not able to give donors charitable tax receipts. A non-profit organization for the purposes of subsection 149 (1) of the Income Tax Act (Canada), is described as follows: A club, society or association that, in the opinion of the Minister, was not a charity within the meaning assigned by subsection 149.1(l) and that was organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, no part of the income of which was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof unless the proprietor, member or shareholder was a club, society or association the primary purpose and function of which was the promotion of amateur athletics in Canada. The types of legal entities that can qualify as non-profit organizations include unincorporated associations, trusts and corporations with or without share capital. Registered charities are granted special tax treatment in Canada for example, they are exempt from income tax and, unlike other non-profit entities, they are able to issue tax receipts allowing donors to benefit from income tax credits or deductions. However, in part because of these advantages, charities are subject to statutory restrictions and obligations that do not apply to other organizations. What is a Charity? To be considered a charity, an organization must be established and operated for charitable purposes. These accepted purposes are: 1 1. The relief of poverty; 2. The advancement of education; 3. The advancement of religion; and, 4. Other purposes beneficial to the community. Generally speaking, the purposes of a charity, which are set out in the charities constating documents 2, must be of a public character and must be sufficiently specific enough to enable a court to categorize the entity under one of the four heads of charity listed above. 1 2 See the Charities Accounting Act, s. 7. The constating documents of an incorporated charity include the Letters Patent and by-laws and, in the case of a charitable trust, the trust deed. 5

16 Becoming a Registered Charity In order to access the tax benefits available to charities and their donors, charities must be registered under the Income Tax Act (Canada). When registering a charity, CRA will designate it as a charitable organization, a public foundation or a private foundation depending upon its structure, its source of funding, and the way it operates. The designation is relevant in applying various restrictions in the Income Tax Act such as carrying on a related business. Charitable organizations generally carry on charitable activities directly ( doers ), whereas charitable foundations (public or private) generally provide funding for charitable organizations. Provincial Law Ontario In Ontario, several statutes apply to charities operating in the province. The Ontario Public Guardian and Trustee has jurisdiction over enforcing these provincial rules. If a registered charity is governed by another comprehensive provincial statute, it may be exempted from certain provisions in statutes applicable only the charities. In Re Centenary Hospital Association and Public Trustee, it was determined that the Ministry of Health and Long-Term Care had exclusive jurisdiction over the operation of business activities on land owned by a hospital and that the restrictive provisions in the Charities Accounting Act and the Charitable Gifts Act (now repealed) did not apply. TOR01: : v1 6

17 Ontario Bar Association Not-for-Profit and Charitable Organizations in the Health Sector: Evolving Governance & Compliance Issues THE NOT FOR PROFIT CORPORATION April 8, 2013 Anne Corbett, Partner acorbett@blg.com Overview THE NOT FOR PROFIT CORPORATION 101 What are they? How do they differ from for profit corporations? Distinguishing characteristics Examples Charity vs. Not for Profit Impact of the Not for Profit Corporations Act,

18 What is a Corporation? Creature of statute Separate entity from members/shareholders and directors Limited liability Perpetual existence 3 Not for Profit Corporation Exists for purposes No owner Assets dedicated to purposes Best interests defined with reference to mission (objects), vision, values and accountabilities Capacity of a natural person under s.274 of the Corporations Act but is subject to ultra vires doctrine 4

19 Objects Doctrine of ultra vires applies under the Corporations Act Activities must be within the objects of the corporation or within the supplementary clauses of the Corporations Act (which are quite broad) New Not for Profit Corporations Act still requires objects and has no supplementary clauses but provides actions will be valid even if not within objects seems to abolish ultra vires however also requires directors to comply with articles so issue will still be relevant 5 For Profit Corporations Shareholders have equity interest Best interest equates with shareholders best interest No objects or purposes are set out and therefore no ultra vires doctrine 6

20 Other Entities Partnership Limited Partnership Unincorporated Association Commercial Trust 7 Examples in Health Sector Health Providers Trade Associations Health Colleges Networks Shared Service Entities Foundations Volunteer/Auxiliary Organizations Research Institutes 8

21 Governance Structures Board Acting mind and will Members Limited but meaningful role Elect directors Receive financial statements Appoint auditors Approve fundamental changes 9 Rights of Shareholders in a For Profit Corporation Expanded rights Consistent with ownership Not for profit members to get expanded rights akin to shareholders rights under new Not for Profit Corporations Act 10

22 Elements that distinguish Governance in a Not for Profit 1. Purposes 2. Resources 3. Accountabilities 4. Regulatory framework 11 Not for Profit Organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit No part of income may be paid to or personally benefit members May conduct advocacy Not qualified to be a charity 12

23 Charity Organized and operated for charitable purposes Relief of poverty Advancement of education Advancement of religion Other purposes beneficial to community 13 Charitable vs. Not for Profit All charities are registered under, and governed by, the Income Tax Act. Must devote all of the resources to charitable activities (organizations) or be constituted and operated exclusively for charitable purposes May issue charitable receipts Are permitted to carry on related businesses (except if a private foundation) A related business is not defined in the Income Tax Act, although includes any business run substantially (>90%) by volunteers CRA administrative view: Linked and Subordinate 14

24 Impact of the new Act Wide reaching Question if one size can fit all? Special Act entities are caught 15 Not for Profit Corporations Act Application to Health Care Corporations Corporations without share capital incorporated under general or special Act (Ontario) Some exceptions (not relevant to health care) (co-operative corporations and Part V Corporations Act) Conflicts other Acts prevail over NFPCA Acts applicable to charities prevail Term articles includes a special Act s.8(5) says that if a provision in articles is inconsistent with NFPCA Act/ regulations, the NFPCA or regulations prevails Rules of statutory interpretations will prevail specific Acts prevail over general Example: Act incorporating a hospital Public Hospitals Act Charities Acts NFPCA 16

25 Questions?

26 Not-for-Profit & Charitable Organizations in the Health Sector: Evolving Governance & Compliance Issues Transition Checklist for Ontario Not-for-Profit Corporations Act, 2010 Allen Doppelt Barrister and Solicitor April 8, 2013 Ontario Bar Association Continuing Professional Development

27 April 8, 2013 Transition Checklist for Ontario Not-for-Profit Corporations Act, 2010 Prepared by: Allen Doppelt Barrister and Solicitor General Considerations 1. The primary goal is to ensure that the letters patent, any supplementary letters patent, by-laws and special resolutions conform to the requirements of the new Act and regulations, bearing in mind the 3 year transition period only applies to conflicting provisions. All other provisions in the new Act apply upon proclamation. 2. Before any documents are amended, a comprehensive review should take place to determine whether they reflect the manner in which the corporation is currently governed. 3. This is also an opportunity to modernize corporate governance and eliminate inconsistencies. 4. In many cases, if a corporation s by-laws have not been amended for many years or require numerous amendments, it may be appropriate to have a completely new by-law, which is simpler, clearer and better organized. If there are numerous supplementary letters patent and articles of amendment need to be filed, consider then filing restated articles to have one comprehensive and up to date set of articles. Review of Letters Patent and Supplementary Letters Patent 1. Determine whether the corporation s current objects (purposes) are consistent with the scope of its current or proposed activities. 2. If corporation is a charity, ensure any changes to purposes or new purposes are charitable and consistent with other existing purposes (particularly if corporation is a Foundation). Prudent to obtain pre-approval from Canada Revenue Agency (CRA). Public Guardian and Trustee (PGT) approval will also be required. This applies to any amendments to articles. 1

28 3. If the corporation has a commercial purpose, articles must be amended to state that the commercial purpose is intended only to advance or support one or more of the non-profit purposes of the corporation (s. 8 (3) of new Act). Review to ensure that commercial activities will not have adverse tax consequences in light of CRA s policies and rulings. 4. Review objects (purposes) to determine if any provision conflicts with new Act. If so, amend to conform. 5. If corporation wishes to change its name to reflect amended or new purposes, ensure that the proposed name complies with rules in Act and regulations. In particular, review NUANS name search report to ensure that name is not identical to or similar to an existing corporation and will not infringe any trade-mark. Also ensure that the name reflects corporation s purposes. 6. Review size of board to determine if it is appropriate. If the corporation wishes to have the flexibility of a minimum and maximum number of directors, amend articles to set out each number. Prepare special resolution to fix a specific number of directors or to authorize Board to set number. Alternatively, if corporation wishes to change its fixed number of directors, the articles must be amended. 7. Review names of directors to ensure that no more than one-third may be employees. 8. Review list of powers to determine if they should be deleted since corporation will have all the powers of a natural person. 9. Determine if any restrictions should be placed or removed with respect to specific activities within scope of purposes or to powers (such as limitations on investment or borrowing powers). 10. Review membership structure to determine if it is necessary to have more than one class of members (such as one class each of voting and non-voting members). If so, set out each class in the special provisions with their respective right to vote, including any restrictions on voting rights, or provide for no right to vote. At least one class must have voting rights. If articles are to be amended in this way, delete equivalent provisions from by-laws. 11. Review the current dissolution clause for distribution of remaining property, if any. If corporation is a public benefit corporation, set out dissolution clause (charities must provide for distribution to another charitable corporation with similar purposes, government or government 2

29 agency; non-charitable public benefit corporations must distribute to another public benefit corporation with similar purposes, government or government agency). 12. If non-public benefit corporation, consider whether to change existing dissolution clause or add a new clause. 13. Review any other special provisions to determine if they conflict with new Act or are necessary. 14. Consider adding new special provisions not mentioned above. By-Laws Directors and Officers 1. Consider whether all directors must be members. 2. Review structure of Board. Consider whether to change term of office (maximum period for each term is 4 years) and whether or not a term limit on service by directors should be added or removed. Consider option of a rotating board and whether or not to provide for or remove provision for ex-officio directors. 3. Review current provisions for meetings of directors. Consider adding provision for telephone or internet meetings for transparency. Review quorum and notice rules to determine if they are appropriate. Consider adding a reference to latest edition of Roberts Rules of Order or other specific procedural rules for meetings. 4. Consider changes to conflict of interest rules to conform to requirements of new Act or to set a higher standard. 5. Consider changes to indemnification and insurance provisions to conform to requirements of new Act. 6. Review board committee provisions. Determine whether to add any new committees to by-law such as audit, governance or nomination committees. Consider flexibility of providing board with general authority to create new standing and ad hoc committees. Review provisions for appointment of committee members, quorum and notice rules. 7. Review any delegation provisions for officer and directors and ensure that they are appropriate and conform to Act, which sets out seven fundamental Board powers that may not be delegated. 3

30 8. Review officer positions and description of duties. Consider adding description of duties of key senior officers such as the Chair, President, Treasurer and Secretary if they are not included in current by-law. Members 1. As noted above, if current by-laws provide for more than one class of members and corporation wishes to retain or change to multiple classes of members, articles must be amended to provide for more than one class with associated voting rights or no right to vote. By-law provisions providing for multiple classes of members should then be deleted from bylaw as a consequential amendment. 2. Review membership conditions to determine if any changes should be made to them. 3. Consider adding disciplinary provisions, including termination of membership for cause. Act sets out minimum procedural rules, including at least 15 days written notice with reasons and opportunity to be heard orally or in writing before final board decision. 4. Consider procedure for members to request and obtain a copy of financial statements and audit or financial review engagement report, if any, at least 21 days before annual meeting. Consider also whether date of annual meeting will have to be changed to meet this statutory requirement. 5. Determine whether or not to change quorum and notice provisions for annual meeting. 6. Review proxy rules (default rule in Act) and consider whether any of the three other methods of absentee voting (telephone, internet or mail) should be included in addition to or as an alternative to proxy voting. Consider adding precedent for proxy voting to by-law, including mandatory proxy that corporation is required to send if proxy voting takes place. Miscellaneous 1. Review any existing borrowing provisions to determine if they are to be amended or deleted in light of default rule in Act that Board may authorize borrowing without member authorization. 4

31 2. Add a registered office address and determine if it is to be different from the head office address (in most cases, they will be the same). If head office has changed, set out new address. 3. Review corporate seal provision, if any, and determine whether or not to retain. If retained, consider providing for Board power to approve the seal. 4. Review notice provisions to determine if appropriate. Consider modernizing methods of notice, including notice by , with consent of a director or member. 5. Review any other by-law provisions not mentioned above to determine if they should be amended or deleted. Consider whether or not any additional provisions not mentioned above should be added to by-law. Special Resolutions 1. If articles are amended to address the number of directors (a fixed or minimum and maximum number), revoke any previous special resolution which changed the number of directors. 5

32 Ontario s New Not for Profit Corporations Act: An Overview Presentation By: Allen Doppelt Barrister and Solicitor April 8, 2013 Not for Profit Corporations Act, 2010 The Not for Profit Corporations Act, 2010 received Royal Assent on October 25, It is anticipated it will be proclaimed in force in July, The new Act is a comprehensive corporate statute that has modernized this important area of law. It will govern the creation, governance, and dissolution of not for profit corporations in Ontario. It is an enabling, not a regulatory, statute. Enforcement of the rights and duties under the new Act lies primarily with the corporation, its directors, and its members. 2 1

33 Not for Profit Corporations Act, 2010 The new Act will address many of the existing problems with the Corporations Act. The new Act will: provide efficient means for incorporation and operation of not for profit corporations; provide more flexible and up to date rules for directors, officers, and members of not for profit corporations; provide improved corporate governance, including greater transparency and accountability; address gaps in the current legislation (e.g., provide specific protection from liability for directors); harmonize the law with other Canadian jurisdictions and the U.S.; and provide clearer and more comprehensive rules (e.g., setting out a duty of care for directors in the statute). 3 Not for Profit Corporations Act, 2010 The new Act is written to apply generally to every type of non share capital corporation, including charitable corporations. The new Act follows the structure of the Ontario Business Corporations Act (OBCA) and is set out in a logical fashion, beginning with incorporation and moving through various topics including corporate finance, membership, directors and officers, fundamental changes, and dissolution. 4 2

34 Incorporation A main feature of the new Act is a new as of right incorporation which will result in an expedited and streamlined incorporation process with a reduced rejection rate of applications. As long as there is compliance with the requirements of the new Act and regulations, a corporation will be allowed to incorporate (s.9(1)). A review will be carried out by Ministry of Government Services (ServiceOntario) staff to ensure that certain key requirements are met such as: Ensuring that the corporation does not have only commercial purposes; and Ensuring that the corporation is not given regulatory powers. A review of the corporation s proposed name also takes place. Corporations will be able to file articles of incorporation and changes to their articles such as articles of incorporation over the internet. Charitable corporations will be to incorporate without prior approval of the Public Guardian and Trustee s Office (the PGT). The PGT is planning to review other articles such as articles of amendment and articles of amalgamation before they are filed with the Ministry of Government Services. In any event, prior approval of the Charities Directorate of the Canada Revenue Agency should be obtained. 5 For Profit Activities The new Act contains no restrictions on commercial activity which is carried out to achieve the not for profit purposes of the corporation as defined in the articles. This responds to the uncertainty in the current Corporations Act and clarifies that not for profit corporations would be permitted to engage in commercial activities that support their not for profit purposes (s.8(3)). The articles must contain a statement to this effect. Although commercial activity may be permitted under the new Act, the income generated from such activity may not necessarily be tax exempt under the Income Tax Act. A corporationwould have to demonstrate that such commercial activity is in fact within the scope of its purposes as set out in its articles. CRA policies and rulings need to be reviewed to ensure that such activity will not have negative tax consequences. 6 3

35 New Definition Charitable Corporation Charitable corporation is defined as: A corporation incorporated dfor the relief of poverty, the advancement of education, the advancement of religion or other charitable purpose. This definition is very similar to the current definition of charitable as defined by the courts. Charitable corporations are included dwithin ihi the definition of a public benefit corporation (discussed below). 7 Conflict between the New Act and Charities Law In a conflict between the new Act and charities law (such as the Charities Accounting Act, its regulations or judge made law), charities law prevails (subsection 5 (2) of the new Act). One example is compensation for directors of charitable corporations. Although permitted under the new Act, charities law prohibits directors from receiving compensation from the corporation as a director or in any other capacity unless approved by a court. There are also additional rules regarding the giving of an indemnity and the purchase of directors and officers liability insurance ( the rules set out in a regulation under the Charities Accounting Act must be followed or a court order obtained). Upon dissolution, charitable corporations may only distribute their remaining property to another charitable corporation with similar purposes or government (a Ministry or Crown agency see s. 167 (1) (d) (i) (A) ). 8 4

36 Corporate Powers The new Act provides not for profit corporations with all the powers of a natural person, with any restrictions on activities and powers to be set out in the incorporating documents (articles see s.15). This responds to the legal uncertainty concerning the extent of powers available to a not for profit corporation under the current Act in light of conflicting provisions. It ensures corporations have all the necessary powers to fulfil lfiltheir purposes, and eliminates the risk of liability arising from an inability to carry out certain activities due to insufficient powers (s.16(3)). 9 Directors and Officers Statutory Duty of Care The new Act sets out a statutory duty of care for directors and officers, which does not exist in the current Act. The new Act clearly l sets out that directors and officers have a duty to act honestly and in good faith with a view to the best interests of the corporation. They must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances (s.43). Personal Liability The new Act also sets out provisions that will better protect directors and officers from personal liability through the addition of a broad due diligence defence/good faith reliance defence, and indemnification and insurance provisions. This will allow directors and officers to rely in good fih faith on professional advisors, di and advice by management and other employees of the corporation (e.g., reliance on audit reports prepared by independent auditor)(s.44). 10 5

37 Directors and Officers Minimum number of Directors the new Act maintains the requirement to have a minimum of 3 directors (s.22(1)). A public benefit corporation shall have no more than 1/3 of the directors who are employees of the corporation (s.23(3)). A not for profit corporation may provide in its articles for a minimum and maximum number of directors (s.22(2)). The articles must also be amended to change a fixed number of directors. Directors do not need to be members of the not for profit corporation unless the by laws require this qualification (s.23(2)). Term Four years is the maximum period for each term of office of a director (s.24(1)). The by laws may provide for ex officio members and directors (ss.23(4) and 48(2)). Meetings Notice of meeting provisions are included in the new Act which includes a waiver of notice. The notice does not need to specify the general nature of the business to be transacted at the meeting unless it is a matter than can not be delegated to a managing director or committee of the board (s.34(3) and 36 (2)). A unanimous resolution in lieu of a meeting is permitted (s.35(2)). 11 Directors and Officers Removal of Directors Directors can be removed by ordinary resolution (majority vote) passed by the members (s.26(1)). Resignation of Directors Provisions to govern the resignation of directors are now included. A director s resignation becomes effective when a written resignation is received by the corporation or at the time specified in the resignation, whichever is later (s.25(2)). Directors who resign or are removed have a right to have their written reasons for resignation or for opposing removal, distributed to the members (s.27). Conflict of interest provisions are broadened so that the rules apply to both directors and officers and address situations relating generally to transactions that the corporation enters into rather than being limited to contracts (s.41). 12 6

38 Members Access to membership lists access to membership lists is restricted to members and directors, including directors who are not members of the corporation (s.96). Information included in membership lists Names and addresses of members are to be included in membership lists and the by laws may provide for additional information (s.96(2)). Membership interests are not transferable unless the articles or bylaws provide otherwise (s.48(8)). ( The new Act provides certain minimum rights in the event of a disciplinary action or termination of membership (e.g a minimum 15 days notice with reasons before the disciplinary action or termination becomes effective; opportunity to be heard)(s.51(3)). 13 Member Meetings and Proposals Members entitled to vote have a new right to submit and discuss proposals at the annual meeting. The proposal together with a supporting statement, which must be submitted at least 60 days before the meeting, is required to be sent with ihthe notice of meeting (s.56). A proposal may include nominations for directors if signed by at least 5 per cent of members or such lower percentage set out in the by laws. Nominations can also be made at the meeting (s.56(5)). The proposal must relate in a significant way to the activities and affairs of the corporation (s.56(6)). A resolution may be signed by all voting members in place of having a meeting (s.59(1)). At least 10 per cent of voting members may requisition a meeting (s.60). A proposal may not address matters that are within the exclusive authority of the directors (absent a by law provision to the contrary) such as the power to approve contracts (with limited exceptions in the case of a conflict of interest), setting fees and authorizing borrowing by the corporation). In addition, there are rules to prevent abuse of this new member right (if the same proposal, which was submitted to the members within the previous two years, was defeated, it may not re submitted). 14 7

39 Right of Class of Non voting Members to Vote A class of non voting members is entitled to vote concerning the following fundamentalchanges: articles of amendment and articles of continuance (of other Ontario bodies corporate such as co operative corporations continuing under the new Act) affecting class or group rights of members (s. 105 (2) and 115 (4) ) articles of amalgamation (s. 111 (3) ) application for authorization to continue to another jurisdiction (s. 116 (3) ) sale, lease or exchange of all or substantially all of corporation s property not in ordinary course of corporation s activities (s. 118 (4). 15 Member Remedies Members will have increased remedies to ensure directors are acting in the corporation s best interests. Compliance Order A compliance order can be obtained where a corporation, or its directors and officers, fails to comply with the duties set out in the new Act and regulations, the articles or by laws (s.191). Derivative Action The derivative action gives members the right to bring an action in the name of the corporation (except religious corporations) to enforce one of its rights (s.183). 16 8

40 Proxies The default rule is that every member entitled to vote at a meeting may appoint a proxyholder who does not have to be a member (s.64). The corporation is required to send a proxy or make it available to each member entitled to a notice of meeting (mandatory solicitation of proxies) (s.65). This could be done by having an electronic form of proxy on the corporation s web site or sending an electronic form of proxy by e mail. The by laws may provide for three other methods of voting for persons who can t be present at a meeting in addition to or as an alternative to proxies: by mail by telephone by computer (electronic means) (s.67). 17 Public Benefit Corporations The new Act makes a new distinction between public benefit corporations versus other not for profit corporations. The new Act defines a public benefit corporation as a charitable corporation, or a non charitable corporation that receives financial benefits from non members, including government, that exceed $10,000 in a financial year (s.1). Public benefit corporations are held to a higher standard than non public benefit corporations in terms of being accountable for their financial activities because they receive funding from non members. 18 9

41 Public Benefit Corporations There are three basic rules for public benefit corporations: audit exemption limits are capped at a lower level than for non public benefit corporations (s.76). no more than one third of the directors can be employees. remaining assets upon voluntary dissolution must be distributed to a another public benefit corporation (another charitable corporation, in the case of a charity) with similar purposes or government (s.167(1)(d)). A non charitable corporation is deemed to be a public benefit corporation during the financial year in which it files articles of dissolution if it came within the dfiiti definition of a public benefit corporation in any of the three preceding financial years (s.167(6)). Note that this is not an issue for charitable corporations, which always come within the definition of a public benefit corporation) 19 Audit Requirements Another new feature of the new Act is permitting a less costly financial review engagement in specified circumstances instead of a more expensive and onerous full audit. A corporation that is not a public benefit corporation may: have a financial review engagement in place of an audit when annual revenue is more than $500,000. be exempt from the audit requirement or financial review engagement if its annual revenue is $500,000 or less (s.76(2)). A public benefit corporation may: have a financial review engagement in place of an audit when annual revenue is $100,000 or more but less than $500,000. be exempt from the audit requirement or financial review engagement if its annual revenue is less than $100,000 (s.76(1)). This will relieve smaller corporations of the higher financial and administrative burdens associated with an audit. Members can approve the audit exemption or review engagement option at each annual meeting for the next financial year by an extraordinary resolution (at least 80 per cent approval by voting members present at the meeting) (s.76(3)

42 Corporate Finance The corporation s financial statements and auditor s report or financial review shall be given to members upon request at least twenty one days before the annual meeting (s.84(2)). Members are alsoentitled to examine andmake copies offinancialstatementsfinancial at the registered office (s.98 (2)). This is an important new member right that provides interested members with the information that would allow them to more fully participate in annual general meetings by holding the directors accountable for the financial management of the corporation. The by laws set out the method by which the financial statements will be made available to interested members. The board may exercise borrowing powers without member authorization unless required by the articles or by laws (s.85). 21 By Laws The new Act provides for new default organization by laws (e.g. calling of meetings) (s.18). This new default by law will be a very basic by law that may need to be customized to meet the needs of individual corporations. The default by law will come into effect 60 days after incorporation unless a different by law is adopted within the 60 day period (s.18(1)). The corporation may amend or replace the standard form by laws at any time. It is anticipated that the default by law approved by the Director appointed under the new Act will be posted on an Ontario government website (s.18(2))

43 Current Corporations Act After the new Act comes into force, the existing Corporations Act will remain in force to govern insurance companies until a different corporate Act is made applicable to such companies (new s.2(1) of the Corporations Act). Share capital social club corporations will be given five years after proclamation of the new Act to continue under: the Ontario Business Corporations Act; the Co operative Corporations Act as a share capital or non share capital co operative corporation; or the new Not for Profit Corporations Act, (new s.2.1 of the Corporations Act). There are approximately 160 such corporations and all were incorporated before 1971; most are country clubs, tennis clubs or golf clubs. Until share capital social clubs continue under one of the above stated Acts, they will continued to be governed by the current Corporations Act. If one of these corporations fails to continue under another Act by the end of the five year period, it will be dissolved, but can revive by filing articles of continuance under one of the three Acts. (new s.2(1) of the Corporations Act). 23 Transition When it comes into force the new Act will apply immediately to charitable and other non profit corporations currently subject to the Corporations Act and to corporations created or continued by or under another statute, subject to the provisions of that statute. Not for profit corporations will be given three years to amend their letters patent, by laws and special resolutions to amend conflicting provisions to conform to the requirements of the new Act. At the end of the three years, any provisions in these documents that still conflict with the requirements of the new Act will be deemed to be amended to conform with the requirements of the new Act. With input from the Ministry of Government Services, the Ministry of Consumer Services has been preparing plain language guides to assist the sector to understand the rules under the new Act. The Ministry of Government Services in partnership with the Public Guardian and Trustee s Office is preparing a revised Not for Profit Incorporators Handbook

44 Not-for-Profit & Charitable Organizations in the Health Sector: Evolving Governance & Compliance Issues Working With The Canada Not-For-Profit Corporations Act: Incorporation and Continuance Theresa Man Carters Professional Corporation - Orangeville April 8, 2013 Ontario Bar Association Continuing Professional Development

45 WORKING WITH THE CANADA NOT-FOR-PROFIT CORPORATIONS ACT: INCORPORATION AND CONTINUANCE Theresa L.M. Man Table of Contents A. Introduction...1 B. Overview of Incorporation Process...2 C. Overview of Continuance Process...4 D. Key Features of the CNCA Relationship between the CNCA, regulations, articles and by-laws Types of Corporations and Financial Review Election and appointment of directors Directors number, change and term Board meetings Duties and due diligence defence of directors and officers Members Members meetings Members remedies Amalgamations, import and export By-laws...34 E. Federal Special Act Corporations...36 F. Drafting Articles of Incorporation/Continuance Corporate name Corporation number Province or territory in Canada where registered office is located Number of directors Statement of purpose Restrictions on activities of the corporation Classes, or regional or other groups of members that the corporation is authorized to establish Statement regarding distribution of property on dissolution Additional provisions...41 G. Drafting By-laws General issues Mandatory provisions that must be included in the by-laws Other provisions to be included in the by-laws Detailed by-laws or simple by-laws...47 a) Minimalist approach...47 b) Comprehensive approach By-law approval...52 H. Special Considerations for Continuance Gather and review current governance structure and practice Review key features of the CNCA Compare the CNCA rules with current governance structure and practice...55 i

46 4. Determine whether changes should be made prior to continuance...55 a) Changes affecting membership rights...56 b) Change of corporate objects Obtaining membership approval and filing application of continuance Consequential Filings and Records Up-dates After Continuance...60 a) Canada Revenue Agency...60 b) Provincial and territorial filings...60 c) Others filings...61 d) Updating corporate records and procedures Managing the Continuance Process...62 I. Conclusion...62 ii

47 WORKING WITH THE CANADA NOT-FOR-PROFIT CORPORATIONS ACT: INCORPORATION AND CONTINUANCE April 8, 2013 Theresa L.M. Man* Carters Professional Corporation 2013 Carters Professional Corporation A. INTRODUCTION It has been a year and a half since the coming into force of the Canada Not-for-profit Corporations Act 1 ( CNCA ) on October 17, All federal incorporation of non-share capital corporations must do so under the CNCA. 2 As well, all non-share capital corporations incorporated under Part II of the Canada Corporations Act 3 ( CCA ) have three years, until October 17, 2014, to continue under the CNCA. These corporations are required to continue under the CNCA by completing a continuance process. Failure to continue within this time frame will result in dissolution of the corporation. 4 While many CCA Part II corporations have taken steps to continue under the CNCA, the vast majority of them have not yet done so. Up to March 12, 2013, only 763 of approximately 17,000 corporations had continued under the CNCA. * Theresa L.M. Man is a partner of Carters Professional Corporation and practices charity and not-for-profit law. This paper is based on an earlier version How CCA Corporations Continue Under the Canada Not-For-Profit Corporations Act presented at the Canada And Ontario Not-For-Profit Law How Will The Historical Changes Impact Not-For Profit Corporations? held by the Ontario Bar Association on June 7, 2011 and The Practical Impact of the Canada Not-For-Profit Corporations Act presented at the Osgoode Hall Law School Professional Development CLE, Intensive Short Course on Legal and Risk Management For Charities and Not-For- Profit Organizations on October 5, S.C. 2009, c Ibid., section 298, 3 R.S.C., 1970, c. C Supra note 1, section 297(5). It states that for any CCA Part II corporation that does not apply for a certificate of continuance to be continued under the CNCA within 3 years after the coming into force of the CNCA, the Director may dissolve the corporation under section 222 of the CNCA. Transitional provisions of the CNCA (sections 297 and 298) are not contained in the version of the CNCA posted on the Department of Justice s website. Rather, they are contained in the Royal Assent version of the CNCA available on the Parliament of Canada website at < 1

48 Part II of the CCA governs the incorporation and governance of federal non-share capital corporations. This framework has remained essentially unchanged since The CCA sets out very few rules on corporate governance, and corporations are required to comply with Corporations Canada s policy statements on these matters. After various attempts of corporate reform, 6 the CNCA was finally enacted by Parliament and received Royal Assent on June 23, 2009, and was eventually proclaimed into force on October 17, The CNCA is modelled after the Canada Business Corporations Act 7 ( CBCA ) and provides a very detailed set of rules for the governance of federal not-for-profit ( NFP ) corporations. This paper reviews essential concepts of the new rules under the CNCA, the steps involved in incorporating under the CNCA, the steps involved in the process for CCA Part II corporations to continue under the CNCA, as well as relevant issues to consider when drafting articles (both articles of incorporation and articles of continuance) and by-laws that comply with the CNCA. B. OVERVIEW OF INCORPORATION PROCESS Under the CNCA, incorporation is as of right, similar to the mechanism used in the CBCA. One or more individuals or corporations may incorporate an NFP corporation by filing articles of incorporation. 8 Upon receipt of the articles of incorporation, a certificate of incorporation will be issued. 9 Incorporation as of right is a welcome development compared to the system under the CCA. Under the CCA, incorporation is subject to the discretion of the Minister. The ability to incorporate as of right and to file articles of incorporation electronically means that incorporation under the CNCA is now much faster. Under the CCA, corporations must set out their objects in the letters patent. Under the CNCA, NFP corporations must set out a statement of the purpose of the corporation, any restrictions on 5 Historically, NFP corporations were incorporated by Special Acts of Parliament until the enactment of the Companies Act Amending Act, 1917, which later became the CCA in The legislation has remained largely unchanged with respect to NFP corporations since The CNCA is the result of several similar attempts at legislative reform, including Bill C-21, which died on the Order Paper November 29, 2005 when the 38th Parliament dissolved. In 2008, both Bill C-62 and Bill C-4 suffered the same fate. 7 R.S.C., 1985, c. C Supra note 1, section 6(1). 9 Ibid., sections 8 and 9. 2

49 the activities that the corporation may carry on, and a statement concerning the distribution of property remaining on liquidation after the discharge of any liabilities of the corporation. 10 Under the CNCA, NFP corporations have the capacity, rights, powers and privileges of a natural person. 11 The doctrine of ultra vires no longer applies to NFP corporations. The CNCA also provides that a corporation may carry on activities throughout Canada, but its capacity to carry on its activities, conduct its affairs and exercise its powers outside Canada is limited to the extent that the laws of that jurisdiction permit. 12 The CNCA also provides that a corporation shall not carry on any activities or exercise any power in a manner contrary to its articles, but no act of a corporation is invalid by reason only that the act or transfer is contrary to its articles or the CNCA. 13 Details regarding the information to be included in the articles are reviewed later in this paper. An initial notice of registered officers and first directors must also be filed with the articles. The individuals listed on the form will act as directors of the corporation from the date of the certificate of incorporation until the first meeting of members. 14 After incorporation, the CNCA requires the incorporator(s) or director(s) to call an organizational meeting of the directors to organize the corporation by adopting a number of resolutions so that the corporation would be ready to conduct activities. 15 A minimum of 5 days notice of this meeting is required to be given to each director listed in the initial notice. At this meeting, the directors may: make by-laws; adopt forms for corporate records and debt obligation certificates; authorize the issue of debt obligations; appoint officers; appoint an interim public accountant to hold office until the first meeting of members; issue memberships; make banking arrangements; and transact other business. 16 Alternatively, instead of holding a first meeting of 10 Ibid., section 7(1). 11 Ibid., section Ibid. 13 Ibid., section Ibid., section Ibid., section Ibid., section 127(1). 3

50 the directors, it is possible for the directors to sign organizing resolutions to deal with all of the above matters. This is especially suitable if the number of directors is small. 17 After the organizational meeting of the first directors, an organizational meeting of the members will then need to be held. Although most of the corporation s initial organizing business can be dealt with by the directors at the directors first meeting, certain matters may not be decided by the directors or may require confirmation by the members. The first directors must call the first members meeting within 18 months of the corporation s date of incorporation. 18 This meeting is usually held immediately after the first organizational meeting of the directors. Similar to the first meeting of the directors, the members may also adopt these initial resolutions by written resolutions instead of holding a members meeting, provided the written resolutions are signed by all members. 19 Corporations Canada s website provides a lot of helpful information about the CNCA, including a general overview on how to operate under the CNCA, model by-laws, by-law builder, as well as all of the forms under the CNCA. 20 C. OVERVIEW OF CONTINUANCE PROCESS The CNCA does not automatically apply to existing CCA Part II corporations. These corporations must apply for continuance by October 17, However, the CCA does not permit CCA Part II corporations to be exported and continued under another statute or legislation. There is therefore no mechanism under the CCA to allow them to be continued under the CNCA. This gap is remedied by the transitional provisions in the CNCA, which requires CCA Part II corporations to apply for a certificate of continuance under section 211 of the CNCA, 21 and subsections 212(3) and 212(7) of the CNCA which provide CCA corporations with two mechanisms to approve the continuance process. 17 Ibid., section 127(5). 18 Ibid., section 160 and Section 61(1) of the Regulations. 19 Ibid., section Corporations Canada, online: 21 Supra note 1, section 297(1). 4

51 The continuance process involves applying for a certificate of continuance by filing articles of continuance and an initial notice of registered officers and directors. Corporations should also prepare and adopt new by-laws that comply with the CNCA. Because the rules under the CNCA are very different from the rules under the CCA, information that needs to be set out in the articles and by-laws are also different from what are currently set out in their letters patent, supplementary letters patent and by-laws. This difference means that the continuance process is not simply a matter of transposing the provisions of the letters patent and supplementary letters patent into the articles and using the same by-laws. The following is an overview of the steps required for the continuance process: 1. In preparation for a smooth continuance into the CNCA, a corporation should begin by collecting and reviewing all of its governing documents. The next step is for the corporation to gain a clear understanding of the rules contained in the CNCA so as to determine how these new rules impact the governance of the corporation and what provisions to include in the articles of continuance and new by-laws. Examples of questions to consider include: whether the current by-laws or the desired governance structure and process are inconsistent with CNCA requirements. If so, the corporation should consider how its governance structure and process would need to be revised in order to comply with the CNCA requirements. 2. A corporation should also decide when to start the by-law review process. Key considerations in determining when to begin the process include the length of time and complexity of the process required in revising the by-laws; whether the by-laws will require substantive changes; the size of membership and time required to consult members; the board structure; whether changes to membership structure are required; and whether changes of corporate objects are required. 3. Articles of continuance and new by-laws should be prepared. The articles need approval from at least a two-thirds resolution of the members and must be filed with Corporations Canada. Upon issuance of the certificate of continuance, the articles and the certificate 5

52 replace the letters patent and any supplementary letters patent. Corporations Canada s approval is no longer necessary for by-laws to take effect; however, a corporation must still file its by-laws with Corporations Canada within twelve months of adoption by its members. 4. Registered charities must also file their articles of continuance, certificate of continuance and new by-laws with Canada Revenue Agency ( CRA ). Additionally, charities in Ontario need to file their articles of continuance and certificate of continuance with the Ontario Public Guardian and Trustee, which oversees charities in Ontario. Other applicable filings and records should also be updated. The above steps are explained in more detail later in this paper. Prior to applying for continuance, the CCA continues to apply to CCA Part II corporations. As such, until a CCA corporation has continued under the CNCA, it can continue to apply for supplementary letters patent and approval of by-law amendments under the CCA. Upon the issuance of the certificate of continuance, the CCA will cease to apply to them. Corporations Canada s website provides a helpful transition guide on the continuance process. 22 As well, information on the incorporation process is also helpful in relation to continuance, such as the general description on how to operate under the CNCA, the model by-laws and by-law builder. D. KEY FEATURES OF THE CNCA Many of the rules of the CNCA are similar to those contained in the CBCA and are familiar to lawyers who work with the CBCA. However, these rules are unfamiliar to the NFP sector. Having a clear understanding of the rules contained in the CNCA and how these rules impact the governance of a corporation is essential in the preparation of the articles (incorporation/continuance) and in preparing the by-laws. In the case of the continuance process for CCA Part II corporations, such an understanding is even more important because these rules are very different from the rules that they had to work with under the CCA. 22 Corporations Canada, online: 6

53 1. Relationship between the CNCA, regulations, articles and by-laws At the outset, it is necessary to understand the framework of the CNCA. When reviewing the CNCA, many provisions make reference to certain requirements being prescribed. The prescribed requirements are set out in the regulations to the CNCA. Other provisions of the CNCA also make reference to certain requirements being set out in the regulations. At this time, only one set of regulations has been released by Corporations Canada. In the future, more regulations will be made. The CNCA contains many mandatory rules that apply to NFP corporations which cannot be overridden by including provisions in a corporation s articles, by-laws or unanimous member agreement. For example, NFP corporations must be membership organizations with both members and directors; ex officio directors are not permitted; 23 it is not permissible to require the removal of directors be subject to a higher approval than an ordinary resolution. 24 The CNCA also contains a set of default rules, which would apply to NFP corporations if their articles, by-laws and/or unanimous member agreement are silent on those issues. It is possible to override the default rules, but the overriding provisions must be set out in the document(s) specified by the CNCA: 25 (a) Articles only For example: the articles can provide for classes of members with different voting rights rather than the default rule of one member one vote; 26 the articles can permit other classes of members to cancel a particular class of members without the approval of the class of members being cancelled; Supra note 1, section Ibid., section 7(5). 25 A useful table of the default rules in the CNCA and how they may be overridden is contained in Appendix A of a paper by Jane Burke-Robertson & Linda J. Godel, Here Comes the CNCA: Are You Ready to Advise Your Clients? (Paper delivered at the CBA s and OBA s 2011 National Charity Symposium, Toronto, 6 May 2011) online: Carters Professional Corporation < 26 Supra note 1, section 154(5). 27 Ibid., section 199(1)(a). 7

54 the articles can permit the creation of new classes of members with equal or superior rights to an affected class without the approval of the affected class; 28 the articles may permit the board to appoint additional directors to hold office until the end of the next annual meeting of members, provided that the number of such appointed directors does not exceed one third of the directors elected at the previous annual meeting of members; 29 (b) By-laws only For example: by-laws can provide for other modes of transferability of membership, rather than the default rule of transferring membership back to the corporation; 30 the by-laws can prohibit or restrict members electronic participation at members meetings, rather than the default rule that permits it; 31 (c) Articles or by-laws For example: the articles or by-laws may provide other mechanisms to override the default rule requiring the rights of a member ceases upon termination of membership; 32 the articles or by-laws may provide for another mechanism to override the default rule that directors may meet at any place.; 33 (d) Articles or unanimous member agreement For example: the articles or unanimous member agreement can restrict the responsibility of the board for managing or supervising the management of a corporation; 34 the articles or unanimous member agreement can require a greater number of votes of directors or members than are required by the CNCA to effect any 28 Ibid., section 199(1)(e), 29 Ibid., section 128(8). 30 Ibid., section 154(8). 31 Ibid., section 159(4). 32 Ibid., section Ibid., section 136(1). 34 Ibid., section

55 action (other than to require the removal of directors be subject to approval higher than an ordinary resolution); 35 or (e) Articles or by-laws or unanimous member agreement For example: the articles, by-laws or unanimous member agreement can restrict the power of the board to borrow funds without members approval; 36 the articles, by-laws or unanimous member agreement can provide for another mechanism to override the default rule that directors can designate, appoint and specify the duties of officers. 37 Where it is possible to override the default rules, some of the overriding provisions are limited to certain choices (alternate rules) that are set out in the regulations. For example: to override the default rule that members cannot have absentee voting, the by-laws can permit absentee voting by choosing one or more of the three methods prescribed in the regulations, namely (a) proxy, (b) mailed-in ballots and (c) telephonic, electronic or other communication facility; 38 and the by-laws may provide for a different quorum for a meeting of members to override the default rule of a majority, but the quorum must be set out in the manner as prescribed in the regulations, namely a fixed number, a percentage of members, or a number or percentage to be determined by a formula. 39 Therefore, where it is desirable to override the default rules in the CNCA, it is necessary to insert the appropriate provisions in the articles, by-laws and/or unanimous member agreement. Where the CNCA requires certain provisions to be included in the by-laws, those provisions may be included in the articles instead, and the CNCA requirement that those provisions are to be set out in the by-laws will be deemed met Ibid., section 7(4). 36 Ibid., section 28(1). 37 Ibid., section 142(a). 38 Ibid., section Ibid., section Ibid., section 7(3.1). 9

56 The members of soliciting corporations (as explained below), however, are not permitted to enter into unanimous member agreements and their options to override default rules are limited to including appropriate provisions in the articles or the by-laws. 41 It is important to understand that it is necessary to work with at least four or five documents in order to have a complete picture of what rules apply to a corporation: namely the CNCA, the regulations made under the CNCA, the articles, the by-laws, as well as any unanimous member agreements in the case of a non-soliciting corporation. It is therefore necessary for the incorporators (or a CCA corporation in the case of a continuance) to review and determine, at the outset, which default rules are to be accepted or overridden, and whether the appropriate overriding provision would need to be included in the articles or by-laws (or unanimous member agreement in the case of a non-soliciting corporation as explained below). 2. Types of Corporations and Financial Review Under the CNCA, corporations are categorized into one of two categories: soliciting corporations and non-soliciting corporations. The concept of soliciting corporations and non-soliciting corporations is one of the key concepts contained in the CNCA. Depending on whether a corporation is soliciting or non-soliciting, the distinction will affect its governance structure, e.g., the size of the board and the dissolution clause to be included in the articles, the composition of the board to be set out in the by-laws, whether a unanimous member agreement may be utilized and what provisions are to be included in the agreement, and whether financial statements will need to be filed with Corporations Canada. As such, it is essential to determine the categorization of the corporation early in the process of incorporation/continuance. A soliciting corporation is defined in section 2(5.1) of the CNCA, with the relevant time periods and prescribed monetary amounts set out in section 16 of the regulations. A corporation becomes a soliciting corporation if, in a fiscal year, the corporation receives more than $10,000 in gross annual revenue, directly or indirectly, from public sources, namely: 41 Ibid., section 170(1). 10

57 (a) requests for donations or gifts from a person who does not fall into any of the following categories: members, directors, officers, or employees of the corporation at the time of the request for donation or gifts; legal or common law spouse of the above list of persons; or children, parents, brothers, sisters, grandparents, uncles, aunts, nephews or nieces of the above list of persons; (b) grants or other similar financial assistance received from the federal or a provincial or a municipal government, or agencies of such government; or (c) donations or gifts received from a soliciting corporation. A corporation that does not meet the definition for a soliciting corporation is a non-soliciting corporation. The determination of whether a corporation is soliciting or not is based on the annual gross income as of the fiscal year-end. If a corporation has income in excess of $10,000 in a fiscal year from a public source, then it would become a soliciting corporation, but the commencement date for soliciting corporation status would only take effect at its next annual meeting of members. The soliciting status would continue for three years and end as of the third annual meeting of members that follows. If the corporation receives public money in a future fiscal year, then the three year time period for being a soliciting corporation would start again. If the corporation does not receive public funds during the three year period, then it would not affect the three year soliciting corporation status. The reason why the soliciting corporation status commences and ends at annual meetings of members is because this status affects the composition of the board (as explained below), and this period will give the corporation an opportunity to elect the suitable number of directors at the annual meeting of members at the time when it becomes a soliciting corporation. 11

58 If a corporation is a soliciting corporation, then it is required to comply with the following rules: First, it must have at least three directors (as opposed to non-soliciting corporations, which are only required to have a minimum of one director), and at least two of the directors must not be officers or employees of the corporation or any of its affiliates. 42 This requirement therefore affects the size of the board to be included in the articles. Furthermore, this requirement affects the composition of the board to be set out in the new bylaws. The term officer is defined in the CNCA to mean a person appointed as an officer under section 142, the chairperson of the board of directors, the president, a vice-president, the secretary, the treasurer, the comptroller, the general counsel, the general manager or a managing director of a corporation, or any other individual who performs functions for a corporation similar to those normally performed by an individual occupying any of those offices. For soliciting corporations that are also registered charities in common law jurisdictions, it would not be a problem for them to meet the requirement that at least two directors must not be employees of the corporation. This is because at common law, persons receiving remuneration directly or indirectly from a charity are prohibited from being directors on the board of the charity. 43 However, corporations that are not registered charities and do have paid employees sitting on their boards will need to arrange their governance structures accordingly and consider what provisions are to be included in the by-laws. In the context of continuance for CCA Part II corporations, compliance with this requirement may require revising their board structure. 42 Ibid., section Ontario follows the common law rule on the issue of remuneration of directors. At common law, directors of a charity are considered to be quasi-trustees for purposes of managing and investing the charitable property of a charity. They are prohibited at common law from receiving any direct or indirect benefit from the charity. As a result, charities cannot pay members of their boards any form of remuneration for services rendered without court approval, even if the services may be provided at a reasonable rate or below market cost. This is because directors of charities are considered to have trustee-like fiduciary obligations placed on them in relation to charitable property and, as a result, it is a conflict of interest, as well as a breach of trust for a charity to pay any monies of the charity to any director as remuneration for any services rendered by the director to the charity, whether it is in his/her capacity as a director or for other services provided to the charity. This prohibition, however, does not prevent directors/trustees from being reimbursed their reasonable out-of-pocket expenses. See for example: Re French Protestant Hospital, [1951] Ch. 567; Ontario (Public Guardian and Trustee) v. AIDS Society for Children (Ontario), [2001] O.J. No (Sup. Ct.J.); Re Public Trustee and Toronto Humane Society (1987), 40 D.L.R. (4th) 111 (Ont. H.Ct.J.); Re David Feldman Charitable Foundation (1987), 58 O.R. (2d) 626 (Surr. Ct.); Ontario (Public Guardian and Trustee) v. National Society for Abused Women and Children, [2002] O.J. No. 607 (Sup. Ct.J.); McLennan v. Newton (1927), [1928] 1 D.L.R. 189 (Man. C.A.). 12

59 For small organizations where volunteer directors also serve as officers, they often have a small board of a few directors, with each person taking on an officer position, such as president, secretary, treasurer. The new rule in the CNCA requires these corporations to carefully structure the size and composition of the board and who may be appointed to be officers of the corporation. For example, in the case of a board with three directors, this rule means that two of the three directors cannot be appointed officers, leaving only one director to be eligible to be appointed as an officer. In this case, either this director will have to take up more than one officer positions or officers will need to be appointed from outside the board. The term affiliate is not defined in the CNCA. For corporations that have a relationship with a related entity, such as an operating charity and a parallel foundation of the charity, they might be caught off-side with the new rule if they have crossover directors, where the crossover director is a paid employee of the other corporation (such as the executive director of the parallel foundation having a seat on the operating charity), if the other corporation is an affiliate of the corporation. Second, soliciting corporations (as well as registered charities even if they are non-soliciting corporations) are required to provide in their articles that any property remaining on liquidation after the discharge of any liabilities of the corporation shall be distributed to one or more qualified donees, as defined in subsection 248(1) of the Income Tax Act. 44 This provision is commonly referred to as the dissolution clause. This requirement applies regardless of whether the soliciting corporation is a registered charity or has other status under the Income Tax Act, e.g., non-profit organizations under paragraph 149(1)(l) of the Income Tax Act. This requirement should not be a problem for registered charities, since they are already subject to the same requirement under the Income Tax Act. However, soliciting corporations that are not registered charities would need to ensure that the required provision is inserted in the articles. Third, members of a soliciting corporation are not permitted to enter into a unanimous member agreement. 45 All the members or the sole member of a non-soliciting corporation may enter into 44 Supra note 1, sections 235(1)(b) and 235(2) of the CNCA. Income Tax Act, R.S.C., 1985, c.1 (5 th Supp). However, pursuant to section 234 of the CNCA, if a person has transferred property to a corporation subject to the condition that it be returned on the dissolution of the corporation, the liquidator shall transfer that property to that person, and the property will not be subject to the distribution requirement set out in the dissolution clause. 45 Supra note 1, section 170(1). 13

60 a unanimous member agreement to restrict the powers of the directors. 46 Therefore, if it was decided that a corporation is a soliciting corporation, then no consideration would need to be given regarding whether to prepare a unanimous member agreement. In that case, provisions that override default rules would need to be included in the articles or the by-laws, as appropriate. If it was decided that a corporation is a not a soliciting corporation, then it would need to decide whether the members wish to enter into a unanimous member agreement. In addition, a decision would need to be made regarding whether provisions intended to override default rules should be included in the unanimous member agreement, as opposed to the articles or the by-laws. Fourth, soliciting corporations are required to file their financial statements, the report of the public accountant, if any, and any further information respecting the financial position of the corporation and the results of its operations required by the articles, the by-laws or any unanimous member agreement with Corporations Canada annually. 47 This annual filing requirement does not apply to non-soliciting corporations, but Corporations Canada may require them to file. 48 Fifth, soliciting corporations are subject to higher requirements in terms of the appointment of a public accountant and level of review of their financial statements. 49 The CNCA contains rules regarding the qualifications of a public accountant under the CNCA. In this regard, a public accountant must meet all of the following requirements: 50 is a member in good standing of an institute or association of accountants incorporated by or under a statute of the legislature of a province (e.g., chartered accountant, certified general accountant or certified management accountant); Ibid., section Ibid., section 176(1). Specifically, a soliciting corporation must provide its annual financial statements to Corporations Canada not less than 21 days before the annual general meeting of members or without delay in the event that the corporation s members have signed a resolution instead of holding a meeting, approving the statements. In any event, a corporation must send financial statements to Corporations Canada within 15 months from the preceding annual meeting (by which time an annual meeting is required to be held under the CNCA or a resolution in writing signed in place of a meeting), but not later than 6 months after the end of the corporation s preceding financial year. 48 Ibid., section Ibid., Part 12. Specifically, sections 179, 181, 182, 188 and Ibid., section 180(1). 51 Ibid., sections 188 to

61 meets any qualifications under an enactment of a province for performing any duty that the person is required to perform under the CNCA (e.g., a provincial licence to conduct audit or review engagements); and subject to an order of the court under section 180(6) of the CNCA, is independent of the corporation, its affiliates or the directors or officers of the corporation or its affiliates. 52 These requirements are usually not included in by-laws. However, some corporations may want to include these requirements in their by-laws to ensure compliance with the CNCA. Therefore, it is important that corporations are aware of these rules. All soliciting corporations and non-soliciting corporations are further divided into designated corporations and non-designated corporations, depending on their income as follows: For soliciting corporations, a corporation receiving $50,000 or less in gross annual revenues for its last fiscal year is a designated corporation, and a corporation receiving income in excess of this level is a non-designated corporation. 53 o Members of a designated soliciting corporation are required to appoint a public accountant by ordinary resolution at each annual meeting. 54 In that case, the public accountant must conduct a review engagement of the financial statements, but the members may pass an ordinary resolution to require an audit instead. 55 It is possible for the members to waive the appointment of a public accountant annually by a unanimous resolution. 56 In that case, a compilation of the financial statements would be sufficient. 52 Under section 180(6) of the CNCA, an interested person may apply to the court for an order relieving a public accountant from meeting the qualifications described in section 180(1), if the court is satisfied that such an order would not unfairly prejudice the members of the corporation. The court may make such an order on such terms as it considers fit. 53 Supra note 1, section Ibid., section Ibid., section Ibid., section

62 o All non-designated soliciting corporations must appoint a public accountant. In terms of the level of review required, it will depend on the income of the corporation. Those corporations that receive more than $50,000 and up to $250,000 in gross annual revenues for the last fiscal year must have the public accountant conduct an audit, but their members can pass a special resolution to require a review engagement instead. Those corporations that receive more than $250,000 in gross annual revenues for the last fiscal year must have the public accountant conduct an audit, and it is not permissible for their members to require a review engagement instead. 57 For non-soliciting corporations, a corporation receiving $1 million or less in gross annual revenues for its last fiscal year is a designated corporation and a corporation receiving income in excess of this level is a non-designated corporation. 58 o Members of a designated non-soliciting corporation are required to appoint a public accountant by ordinary resolution at each annual meeting. In that case, the public accountant must conduct a review engagement of the financial statements, but the members may pass an ordinary resolution to require an audit instead. It is possible for the members to waive the appointment of a public accountant annually by a unanimous resolution. In that case, a compilation of the financial statements would be sufficient. o All non-designated non-soliciting corporations must appoint a public accountant. The public accountant must conduct an audit and it is not permissible for their members to require a review engagement instead. The above rules are summarized in the table below: 57 Ibid., section Ibid., section

63 Type of Corporation (Gross Annual Revenues) Appointment of Public Accountant (PA) Review Engagement or Audit Soliciting Designated $50,000 or less Members must appoint a PA by ordinary resolution at each annual meeting. Exception Members may waive appointment by annual unanimous resolution Non- Soliciting Non- Designated Non- Designated Designated Non- Designated More than $50,000 and up to $250,000 more than $250,000 $1 million or less more than $1 million Members must appoint a PA by ordinary resolution at each annual meeting Members must appoint a PA by ordinary resolution at each annual meeting Members must appoint a PA by ordinary resolution at each annual meeting. Exception Members may waive appointment by annual unanimous resolution Members must appoint a PA by ordinary resolution at each annual meeting PA must conduct review engagement, but members may pass an ordinary resolution to require an audit instead. (If no PA is appointed, then compilation only) PA must conduct an audit, but members can pass a special resolution to require a review engagement instead PA must conduct an audit. PA must conduct review engagement, but members may pass an ordinary resolution to require an audit instead. (If no PA is appointed, then compilation only) PA must conduct an audit. On the one hand, since the $10,000 threshold for soliciting corporations is a very low threshold, it is possible that many, if not most, corporations would become soliciting corporations, and therefore their governance structure and corporate procedure would need to comply with the above requirements. On the other hand, for corporations that do not receive public funding at all, they would be non-soliciting corporations and their corporate documents would need to be drafted to reflect this state of affairs. However, an important issue to keep in mind is that because the threshold is so low and is dependent on its revenue sources from year to year, it is possible that a corporation may move in and out of the soliciting corporation status from year to year. This oscillation might not be an issue for a corporation that does not have revenue from public sources, such as a membership recreational club that derives its revenues from membership dues and does not receive public donations or government funding. However, even in this scenario, the corporation may still 17

64 become a soliciting corporation for three years if, for example, it received a grant from a foundation (which receives public donations) for a special project. As well, for small corporations that receive revenue from public sources that may be at the $10,000 threshold level, it is possible that these corporations may move in and out of the soliciting corporation status from year to year. An example would be if the corporation received more than $10,000 from public sources in year 1 and became a soliciting corporation at the annual meeting of members in year 2 and continues to have this status until the annual meeting of members in year 5. In this case, even if the corporation received less than $10,000 in public funding in years 2 or 3, this reduced amount would not change its soliciting corporation status for those years. Whether or not the corporation will continue its soliciting corporation status at the end of the annual meeting of members in year 5 will depend on its income in year 4. If the corporation then received more than $10,000 in year 4, then it will continue to be a soliciting corporation from the annual meeting of members in year 5 for another three years until the annual meeting of members in year 8. When preparing incorporation or continuance documents for an NFP corporation, it is important to review the funding sources of the corporation to determine whether it will be a soliciting corporation all the time, a non-soliciting corporation all the time, or may move in and out of soliciting and non-soliciting corporation status. For an existing CCA Part II corporation preparing for continuance, it is necessary to review the past track record of funding sources, and future anticipated funding sources as well. If it was determined that the likelihood of moving in and out of soliciting corporation status is high, then it may be prudent to structure the board composition in compliance with the rules that apply to a soliciting corporation (i.e., there are at least three directors and at least two of the directors are not officers or employees of the corporation or any of its affiliates) and to ensure that the members do not enter into a unanimous member agreement. Then, in the years when it was a soliciting corporation, it would then comply with the applicable financial reporting, appointment of public accountant and level review requirements, and vice versa. 18

65 3. Election and appointment of directors An NFP corporation must have a board of directors. The general rule is that members must elect directors by ordinary resolution at annual members meetings. 59 There are two exceptions to the general rule that the members must elect the directors. First, where there is a vacancy in the office of a director, the remaining directors may fill the vacancy so long as there is a quorum. If there is no quorum, the directors then in office must call a special meeting of members to fill the vacancy. 60 Second, the articles may include a provision allowing directors to appoint additional directors between annual meetings. In that case, the number of appointed directors must not exceed one third of the number of directors elected at the previous annual meeting. Directors appointed in this manner will hold office until the close of the next annual meeting of members. 61 Note that the maximum number of directors to be appointed is not one third of the size of the board, but one third of the directors who were actually elected at the previous annual members meeting. As such, in determining how many directors can be appointed by the board in this manner, consideration must be given to how many directors would be elected at each annual meeting, which in turn is affected by the length of the term of the directors and whether they have a stagger term. The fundamental rule that directors must be elected by members in effect precludes having ex officio directors for NFP corporations. This preclusion is unfortunate, as the use of ex officio directors is a very commonly utilized mechanism in the NFP sector, such as an operating charity sending a representative to have a seat on the board of its parallel foundation. Therefore, these corporations would need to develop a workaround solution to this problem or cease the use of ex officio directors. What is an acceptable workaround would depend on the governance structure of the NFP corporation in question. Where the existing ex officio is appointed by a person or a group of persons, a potential strategy would be to establish a special membership class for the person or group of persons in question, and the by-laws would permit this class of members to elect a director. However, the downside of this mechanism is that this class of members would have the right to have a separate class vote on certain fundamental matters, as explained below, and 59 Ibid., section 128(3). 60 Ibid., section Ibid., section 128(8). 19

66 therefore would have a de facto class veto right on those matters. As an alternative to this mechanism, the by-laws may set out specific qualification requirements for certain seats on the board and that a consultation or nomination process involving a person or a group of persons is required for a person to be eligible for election to the board by the general membership. Another potential strategy is for the articles to provide for the appointment of directors by the board as permitted by subsection 128(8), in which case, a policy could provide that only certain office holders would qualify for appointment. However, the downside of this strategy is that the appointment is subject to the board appointing the director in question and a mechanism would need to be put in place to address situations where the board refuses or delays to make the appointment. A further strategy is not to include the desired persons on the board, but to provide them with rights to participate in board meetings (including the right to receive notice, attend and speak at meetings), except for the right to vote. However, this mechanism may not be suitable if it is essential that these persons must have a vote on the board. 4. Directors number, change and term Directors must be individuals that are least 18 years of age and are neither bankrupt nor have been declared incapable. There is no requirement that a director be a member of the corporation. 62 All corporations, except for soliciting corporations, must have a minimum of one director. 63 As mentioned above, soliciting corporations must have a minimum of three directors, and at least two of the directors must not be officers or employees of the corporation or its affiliates. The implications of this requirement on soliciting corporations that are also registered charities due to common law requirements have been explained above. 62 Ibid., section Ibid., section

67 It is necessary to specify in the articles a fixed number of directors or a minimum and a maximum number of directors. 64 When a minimum and a maximum number of directors is chosen, the precise number of directors to be elected may be determined from time to time by ordinary resolution of the members. The members may also delegate this power to the directors. 65 The corporation must notify Corporations Canada of any change of directors within the maximum and minimum range set out in the articles within 15 days following the change. A director who has moved must notify the corporation within 15 days after moving, and the corporation must notify Corporations Canada of the change in residential address of the director. 66 The members may change the number of or the minimum or maximum number of directors by amending the articles. However, any decrease cannot shorten the term of an incumbent member. 67 That being said, the members may shorten the term of an incumbent member by removing the director, subject to a particular class right to remove a director exclusively elected by it. 68 A director holds office for a term set out in the by-laws, which must not be more than four years. 69 Where a director is not elected for a specified term, he or she will hold office until the close of the first annual members meeting following his or her election. The CNCA permits staggered terms, thus allowing directors to hold office for different term lengths. If no successor directors are elected at a members meeting, then the incumbent directors will continue in office notwithstanding the rules regarding the prescribed four year expiry date and directors elected for unspecified terms. 70 A director ceases to hold office when he or she dies, resigns, is removed, becomes a bankrupt or is declared incapable. 71 Members may remove a director by ordinary resolution at a special meeting. Where a director was elected by a class of members that have the exclusive right to 64 Ibid., section 7(1). 65 Ibid., section 133(3). 66 Ibid., section Ibid., section Ibid., section Ibid., section 128(3). 70 Ibid., section 128(2)-(6). 71 Ibid., section

68 elect the director, only that class or groups may remove the director by ordinary resolution. Although it is common in the NFP sector to require a two-thirds majority vote of the members in order to remove a director, this is not possible under the CNCA. The CNCA specifically provides that it is not permissible for coronations to require a higher level of approval than an ordinary resolution to remove directors. 72 If a vacancy occurs, the remaining directors may continue to exercise the powers of directors as long as the number of directors constitutes a quorum (i.e., a majority of the directors or the minimum number of directors required at a meeting is present unless specified otherwise in the corporation s by-laws). 73 A vacancy created by the removal of a director may be filled at the same meeting where the removal occurred or at a later date. 74 When a vacancy is filled, a director appointed or elected to fill the vacancy holds office for the unexpired term of their predecessor. 75 All directors, whether they are elected or appointed, must take action to confirm their directorship otherwise the appointment or election will not be effective. In the case of an individual who was present at the meeting when the election or appointment took place, he or she is deemed to have consented to act as a director, unless they refuse to be elected or appointed. In the case of an individual who was not present at the meeting, he or she must consent in writing before the actual election or appointment or within ten days thereafter. In the alternative, the person must act as a director after the election or appointment Board meetings Board meetings can be held at such time and place that the board wishes, unless the corporation s by-laws or articles provide otherwise. 77 A quorum of the directors must be present at board meetings. The quorum may be set out in the articles or the by-laws. If the by-laws are silent, a quorum shall be a majority of the number of directors or minimum number of directors required by the articles. Despite any vacancy among the directors, a quorum of directors may 72 Ibid., section 7(4) and (5). 73 Ibid., section 136(2). 74 Ibid., section Ibid., section 132(6). 76 Ibid., section 128(9). 77 Ibid., section 136(1). 22

69 exercise all of the powers of the directors. 78 If a corporation has only one director, that director may constitute a meeting. 79 If a director is absent from a board meeting, he or she cannot appoint someone else to act on his or her behalf at the meeting. 80 Notice of board meetings must be provided to the directors according to the by-laws. The notice need not specify the purpose of or the business to be transacted at the meeting, unless the meeting involves any matter that requires member approval, fills a vacancy of a director or the public accountant, appoints additional directors, issues debt obligations, approves financial statements, adopts, amends or repeals by-laws, or establishes members contributions or dues. 81 Notice of meeting can be waived by the directors and attendance at a board meeting is deemed to constitute a waiver, unless the director attends the meeting for the purpose of objecting to the holding of the meeting because it is not lawfully called. Notice of an adjourned meeting of directors is not required to be given if the time and place of the adjourned meeting is announced at the original meeting. 82 Directors may conduct business by signing written resolutions in lieu of holding meetings, provided that the resolutions are signed by all directors. 83 Unless the by-laws provide otherwise, directors may participate in board meetings by telephone or electronically, provided that all the directors of the corporation consent and that the directors can communicate adequately with each other. As well, how these meetings may be held will also need to comply with requirements set out in the regulations to be made under the CNCA in the future Duties and due diligence defence of directors and officers The directors have the duty to manage and supervise the activities and affairs of the corporation. 85 However, such duties may be restricted by the articles or unanimous member agreement. The directors may appoint one of them to act as a managing director or appoint a 78 Ibid., section 136(2). 79 Ibid., section 136(6). 80 Ibid., section 126 (3). 81 Ibid., sections 136(1), 136(3) and 138(2). 82 Ibid., sections 136(3) to (5). 83 Ibid., section 140(1). 84 Ibid., section 136 (7). 85 Ibid., section

70 number of directors to act as a committee of directors, and delegate to the managing director or committee any of the powers of the directors. 86 However, directors are not, in their capacity as directors, trustees for any property of the corporation, including property held in trust by the corporation. 87 Directors may designate offices of the corporation (e.g., president, secretary or any other position), appoint officers and delegate powers to them to help the board to manage the corporation. There is no requirement whether an officer must be a director of the corporation. Two or more offices may be held by the same person. 88 However, regardless of the officer position designated by the board, the following persons are also defined in the CNCA to be officers : the chairperson of the board, the president, a vice-president, the secretary, the treasurer, the comptroller, the general counsel, the general manager or a managing director of a corporation, or any other individual who performs functions for a corporation similar to those normally performed by an individual occupying any of those offices. 89 Directors duties in the CNCA are modelled on those found in the CBCA. Notably, these same duties are absent from provisions in the CCA relating to corporations without share capital. The inclusion of these duties in the CNCA marks a shift from a common law regime to a statutory one. This shift implies greater protections for directors, such as indemnification and the availability of defences. Directors and officers are also required to act honestly and in good faith with a view to the best interests of the corporation; and to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances. 90 These duties are judged on an objective standard of care. In other words, in determining whether a director or officer has breached his or her duty to the corporation, the court will test the person s actions against that of a reasonably prudent person. This standard is lower than the common law subjective standard of care, assessing a person s actions against what may reasonably be expected from a person of his or her knowledge and experience. 86 Ibid., section Ibid., section Ibid., section Ibid., section 2(1). 90 Ibid., section 148(1). 24

71 As well, directors and officers are required to comply with the CNCA and its regulations, the articles, the by-laws and any unanimous member agreement. 91 Directors (but not officers) are subject to additional duties under the CNCA. For example, directors must be informed about the corporation s activities and to ensure the lawfulness of the articles and the purpose of the corporation. 92 Directors who vote for or consent to a resolution authorizing any payment or distribution or any payment of an indemnity contrary to the CNCA are liable to repay the corporation any money or property so paid or distributed. 93 Directors are also liable to employees of the corporation for up to six months unpaid wages while they are directors and for two years after leaving the board. 94 In meeting their duties, directors and officers would not be liable if they have exercised the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances, including reliance in good faith on reports prepared by professionals. Directors (but not officers) may also rely on the corporation s financial statements prepared by the corporation s public accountant. 95 Both current and former directors and officers may be advanced defence costs and indemnified by the corporation. However, indemnification is only permitted where a director or officer fulfilled his or her duty to act honestly and in good faith with a view to the best interests of the corporation, and in the case of a criminal or administrative matter that is enforced by a monetary penalty, there is reasonable grounds for believing that the conduct of the director/officer in question was lawful. In these circumstances, there is a right to indemnification provided that the director or officer in question has not been found by a court to have committed any fault or omitted to do anything they ought to have done. The CNCA also permits corporations, should they choose to do so, to insure individuals for any liability incurred in their capacity as directors or officers Ibid., section 148(2). 92 Ibid., section 148(3). 93 Ibid., section Ibid., section Ibid., sections 149(1) and (2), 150(1) and (2). 96 Ibid., section

72 Directors and officers must also disclose any personal interest they may have in a material contract with the corporation. If a director or an officer fails to make such a disclosure, the corporation or a member may apply to a court to request the contract be set aside and the director repay any profits or gain realized on the contract. 97 However, directors of an NFP corporation that is also a registered charity are not only required to disclose their conflict of interest, but also to resign from the board should the charity decide to proceed with the contract resulting in a personal benefit of the director. This is because at common law, directors of incorporated charities cannot place their personal interests in conflict with their duty to the corporation Members All NFP corporations must be membership-based corporations. The articles must set out the classes, regional or other groups of members that the corporation is authorized to have. The bylaws must set out the conditions required for being a member of the classes that are described in the articles. Membership is not restricted to individuals, and may be open to corporations and other entities as provided for in the by-laws. 99 In terms of voting rights, if there is only one class of members, then all the members must have the right to vote at meetings of members; if there are more than one class, the articles must set out any voting rights attached to the classes, and at least one class must have the right to vote; and unless the articles state otherwise, all members have the right to vote. 100 The articles and by-laws may provide how membership may be issued. 101 Unless the by-laws or articles provide otherwise, a member will cease to hold membership in a corporation if the member dies, resigns, is expelled, or the term of membership expires, or if the corporation is liquidated and dissolved. 102 Unless the by-laws provide otherwise, a membership may only be 97 Ibid., section Supra note Supra note 1, sections 7(1) and 154(1) to (4). 100 Ibid., sections 154(3)-(5). 101 Ibid., section Ibid., section

73 transferred back to the corporation. 103 Upon the termination of membership, the member s rights, including any right to the corporation s property, cease to exist. 104 It is important to be aware that a separate vote by class or group of members is required under the CNCA if the corporation wants to change the rights attached to a class or group of members or for certain fundamental changes, regardless of whether the membership class is a voting class or non-voting class. This means that each class of members (including non-voting members) will have a de facto veto rights for those matters. Specifically, the CNCA provides that members of each class are entitled to vote separately as a class on a proposal to make certain amendments to the articles and by-laws (regardless of whether they otherwise may have the right to vote). 105 The amendments are: (a) effect an exchange, reclassification or cancellation of all or part of the memberships of the class or group; (b) add, change or remove the rights or conditions attached to the memberships of the class or group, including (i) to reduce or remove a liquidation preference, or (ii) to add, remove or change prejudicially voting or transfer rights of the class or group; (c) increase the rights of any other class or group of members having rights equal or superior to those of the class or group; (d) increase the rights of a class or group of members having rights inferior to those of the class or group to make them equal or superior to those of the class or group; (e) create a new class or group of members having rights equal or superior to those of the class or group; or (f) effect an exchange or create a right of exchange of all or part of the memberships of another class or group into the memberships of the class or group. 103 Ibid., section 154(8). 104 Ibid., section Ibid., sections 199(1) and (2). 27

74 The only exception to the requirement of a separate class vote is if the corporation s articles provide that a certain membership class does not have the right to vote in respect of changes referred to in (a) and/or (e) above, i.e., changes that effect an exchange, reclassification or cancellation of all or part of the memberships of the class or group; and changes that create a new class or group of members having rights equal or superior to those of the class or group. If the amendments are in relation to (b) to (d) or (f), then a separate class vote will be mandatory, with no exceptions. As well, separate class votes are also provided in the CNCA with respect to approval of certain fundamental changes, such as amalgamation; continuance; or the sale, lease or exchange of all or substantially all of the property of a corporation other than in the ordinary course of its activities. 106 For this reason, where it is not desirable to seek approval by class votes in the manner provided for in the CNCA resulting in a de facto class veto mechanism, it will be necessary to have only one class of members and to develop workarounds on how to involve other individuals in the corporation. For example, if a corporation wants to involve broad-based community support of its NFP purposes, consideration may be given to enlist them in some capacity in the corporation, but not as members, whether voting or non-voting. It is important to ensure that they are not referred to as members. Possible alternatives may include affiliates, associates, supporters, volunteers, etc. A mechanism in the CNCA that addresses the needs of the NFP sector is that the articles or bylaws may give the directors, the members, or a committee the power to discipline a member or terminate his or her membership. This provision is a statutory response to the courts reluctance to intervene in the affairs of a voluntary relationship, and inadequate provisions in organizations by-laws addressing this issue. If such a power is provided for, then the articles or by-laws must also set out the circumstances and the manner in which a member may be disciplined or membership terminated. 107 The CNCA does not set out any minimum procedural threshold, though the case law suggests that organizations have the duty of fairness, including advising the 106 Ibid., sections 206(4), 212(4) and (5), 214 (5) and (6). 107 Ibid., section

75 affected member about the case and the process, and providing him/her an opportunity to be heard. 108 Upon request, members and their personal representatives may access corporate records and, at a reasonable fee, take extracts from certain records during the corporation s usual business hours. They are also entitled to a free copy of the articles, by-laws and any unanimous member agreement Members meetings An annual members meeting must be held within 18 months after incorporation. Thereafter, an annual members meeting must be held within 15 months after the previous annual members meeting but no later than 6 months after the fiscal year end. The annual meetings must be called by the directors. Directors may also call special members meeting at any time. 110 Corporations Canada may authorize the corporation to delay holding the annual meeting as long as members will not be prejudiced. Meetings of members must be held in Canada at the place provided in the by-laws, or where no such provision exists, at the place chosen by the directors. It is possible to hold meetings outside of Canada, but that place must be specified in the articles or agreed by all of the members. 111 In lieu of holding a meeting to pass a resolution, a resolution in writing may be validly passed if signed by all of the voting members. 112 Notice of a members meeting must be given in accordance with the by-laws to members who are entitled to vote, the directors and the public accountant of the corporation. The notice provisions in the by-laws must comply with the detailed requirements in the regulations of the CNCA. The regulations provide minimum and maximum notice periods and specific means of how notice may be provided. If the by-laws do not comply with these requirements, or if no 108 See Jane Burke-Robertson, Countdown To The Canada Not-For-Profit Corporations Act Practice Tip #4: Discipline Of Members And New Remedies Under CNCA, Charity Law Bulletin No. 213, May 27, 2010 (online: Supra note 1, section Ibid., section Ibid., sections 159(1)-(2). 112 Ibid., section

76 method is provided for in the by-laws, the notice has to be mailed or personally delivered to the members by mail 21 to 60 days before the day on which the meeting is to be held. 113 Notice may be waived by attending the meeting, though a member who attends for the purpose of objecting to the transacting of any business on the grounds that the meeting was not lawfully called does not waive notice. 114 Members who are entitled to notice are those who appear in the members register on the record date. The directors may, by resolution, fix a record date that is not more than 60 days and not less than 21 days before the meeting. If the directors do not do so, then the record date shall be the close of business on the day immediately preceding the day on which notice is given or, if no notice is given, the day on which the meeting is held. 115 Unless the by-laws otherwise provide, a person may participate in a members meeting by means of a telephonic, an electronic or other communication facility that permits all participants to communicate adequately. As well, the by-laws may allow a members meeting be held entirely by means of a telephonic, an electronic or other communication facility that permits all participants to communicate adequately. How these meetings may be held will also need to comply with requirements set out in the regulations to be made under the CNCA in the future. 116 The general rule is that members must vote when in attendance at the meeting. However, the bylaws may permit members to vote at meetings of members without being present at the meeting by using one or more of the absentee voting methods set out in the regulations under the CNCA, i.e., proxy, mail-in ballot, and vote by means of telephonic or other electronic communication facility. If a corporation wishes to permit its members to vote by absentee voting, the by-laws must set out which of the permitted option(s) may be used. 117 The directors are responsible for calling annual and special meetings of members, but members who hold at least 5% of the voting rights (or a lower percentage set out in the by-laws) may requisition a members meeting be called. The directors must call a meeting within 21 days of 113 Ibid., sections 162(1) to (3) and section 272(1). 114 Ibid., section 162(4). 115 Ibid., section Ibid., sections 159(4) and (5). 117 Ibid., section 171(1). 30

77 the requisition, failing which any member who signed the requisition may call the meeting. However, the directors do not have to call a meeting if the directors have already established a record date for determining members entitled to receive notice of a meeting of members; the directors have already called a meeting, or the business stated in the requisition is improper. 118 As well any member entitled to vote at an annual members meeting may submit a proposal to the corporation on any matter that the member proposes to raise at the meeting, including to make, amend or repeal a by-law. 119 A proposal may include nominations for the election of directors, but such a proposal must be signed by at least 5% (or a lower percentage set out in the by-laws) of the members entitled to vote at the annual meeting. The directors are not obliged to include the proposal if: the submission of the proposal does not meet the requirements explained above; the proposal is to enforce a personal claim or redress a personal grievance; the proposal does not relate in a significant way to the activities or affairs of the corporation; not more than two years before the receipt of the proposal and at another meeting, the member failed to raise the matter covered by the proposal; substantially the same proposal was previously submitted to members less than five years ago and did not receive the minimum required support at the meeting; or the rights to submit proposals are being abused to secure publicity. It is possible for the by-laws to include a provision allowing the directors to make decisions by consensus (in lieu of a vote) for matters other than a decision of a designated corporation not to appoint a public accountant or situations where a special resolution is required. It is possible for the by-laws to include a provision allowing the members to make decisions by consensus, but not in relation to a vote of a designated corporation not to appoint a public accountant or matters where a special resolution is required. Such by-laws would need to clearly define what is meant by consensus, how to determine when a consensus cannot be reached, and how to refer to a vote any matter on which consensus cannot be reached Ibid., section Ibid., sections 163 and 152(6). 120 Ibid., section

78 9. Members remedies The CNCA provides special rights for members to seek remedy and recourse against an NFP corporation as discussed below. A derivative action is the ability of a complainant to apply to a court for an order granting it leave to bring an action in the name of and on behalf of the corporation, or to intervene in an action to which the corporation is party. 121 The complainant must satisfy the court that it is bringing the derivative action in good faith and that the action is in the interests of the corporation. 122 This remedy is not available to religious corporations where the decision of the directors in question is based on a tenet of faith held by the members of the corporation, and it was reasonable to base the decision on a tenet of faith, having regard to the activities of the corporation. 123 An oppression remedy is the ability of a complainant to apply for a remedy on the basis that any act or omission of the corporation, or the exercise of the powers of the directors or officers of the corporation, is oppressive or unfairly prejudicial or unfairly disregards the interests of the member. 124 The court may make any order it thinks fit, including compliance, restraining and compensation orders. This remedy is also not available to a religious corporation for similar grounds of faith-based defence against a derivative action explained above. 125 A compliance or restraining order is available to a member who applies to a court for an order directing the corporation or any director, officer, employee, agent or mandatary, public accountant, trustee, receiver, receiver-manager, sequestrator or liquidator or a corporation to comply with the CNCA, the regulations, the corporation s articles, by-laws or a unanimous member agreement, or restraining any person from acting in breach of them Ibid., sections 251 and Ibid., sections 251(1)-(2). 123 Ibid., section 251(3). 124 Ibid., section Ibid., section 253(2). 126 Ibid., section

79 Aside from those three major remedies, there are various remedies that can be employed to enforce specific rights enumerated in the CNCA. For example, if a corporation fails to comply with the requirements regarding the holding of annual members meetings, then an interested person may apply for an order dissolving the corporation. A member may apply for an order to liquidate and dissolve a corporation if: the corporation oppressed the member; a unanimous member agreement entitles the member to demand dissolution upon the occurrence of a condition precedent; or it is just and equitable to do so. 127 An additional remedy is available for a member who is aggrieved by a corporation s refusal to include his or her proposal by applying for a court order to restrain the holding of the meeting at which the proposal is sought to be presented Amalgamations, import and export The CNCA permits two or more CNCA corporations to amalgamate with each other. 129 Depending on the circumstances, a long form and short form amalgamation may be used. If corporations proposing to amalgamate have different members, a long form amalgamation is required. In that case, the amalgamating corporations will enter into an amalgamation agreement. The membership must approve the amalgamation agreement by special resolution. 130 A vertical short form amalgamation involves the amalgamation of a parent holding corporation and one or more of its subsidiaries. A horizontal short form amalgamation involves the amalgamation of two or more wholly-owned subsidiaries of a corporation. Vertical and horizontal amalgamations do not require an amalgamation agreement or membership approval. The approval of the board of each amalgamating corporation is sufficient to proceed with amalgamation. 131 The CCA currently does not permit CCA Part II corporations to be continued under another jurisdiction, or a corporation from another jurisdiction to continue under the CCA. A welcome change brought about by the CNCA is that it permits CNCA corporations to leave the CNCA and 127 Ibid., section Ibid., section 163(9). 129 See Jane Burke-Robertson and Theresa L.M. Man, Countdown to the Canada Not-For-Profit Corporations Act Practice Tip #7: Importing, Exporting, And Amalgamation Charity Law Bulletin No. 231, October 27, 2010 (online: Supra note 1, sections 205 and Ibid., section

80 be continued under the laws of another jurisdiction (export), and permits corporations formed under other jurisdictions to be continued under and be governed by the CNCA (import) By-laws Soon after incorporation, by-laws should be passed which contain the rules concerning the governance and operations of the corporation. For CCA Part II corporations, by-laws that comply with the CNCA should be prepared at the same time as the articles of continuance so that the new by-laws can kick into effect to govern the corporation as soon as a certificate of continuance has been issued. It is necessary to send copies of any new by-laws, amendments or repeal of by-laws to Corporations Canada within 12 months of such changes being confirmed or approved by members. Corporations Canada will not review or approve the new by-laws, but they will be available for public viewing through Corporations Canada. The CNCA provides two ways for corporations to amend their by-laws, depending on the subject matter of the changes. In general, the directors may, by resolution, make, amend or repeal any by-laws that regulate the activities or affairs of the corporation, unless the articles, the by-laws or a unanimous member agreement otherwise provides. However, the directors must submit the by-law, amendment or repeal to the members at the next meeting of members. At that meeting, the members may, by ordinary resolution, confirm, reject or amend the by-law, amendment or repeal. The effective date of the by-law, amendment or repeal is the date when the directors approved it, not when the members confirmed it. If the members reject the by-law, it will immediately cease to have effect on the date of the members meeting. If the directors fail to submit the by-law to the members, it will also cease to have effect on the date of the members meeting when it should have been submitted to the members. If a by-law, an amendment or a repeal ceases to have effect, a 132 Ibid., sections 211, 212, 213. See Jane Burke-Robertson and Theresa L.M. Man, Countdown to the Canada Not- For-Profit Corporations Act Practice Tip #7: Importing, Exporting, And Amalgamation Charity Law Bulletin No. 231, October 27, 2010 (online: for details. 34

81 subsequent resolution of the directors that has substantially the same purpose or effect must be confirmed or confirmed as amended by the members before it can be effective. 133 The above mechanism does not apply to by-law amendments for matters referred to in subsection 197(1) of the CNCA. These provisions are in relation to membership of the corporation that are to be set out in the by-laws. 134 These by-law amendments must be approved by special resolution of the members and these changes are effective only upon members approval. If any of these matters also relate to those membership issues set out in subsection 199(1), approval of these bylaw amendments will require a separate class vote (regardless of whether the class is a voting or non-voting) as explained above. 135 It is therefore important that by-laws clearly indicate that these types of changes require a special resolution of the members and are not effective until the members have approved them. Examples of options include: adopt two by-laws, one would contain all by-law provisions that require a special resolution to change and all remaining provisions would be included in another by-law which requires only an ordinary resolution to amend; adopt one by-law, and group all matters requiring a special resolution into one clearly marked section which would require a special resolution to change, with the balance requiring an ordinary resolution; adopt one by-law, but clearly mark throughout the by-laws which provisions require special resolution to amend; or 133 Supra note 1, section These provisions are 197(e) change a condition required for being a member; (f) change the designation of any class or group of members or add, change or remove any rights and conditions of any such class or group; (g) divide any class or group of members into two or more classes or groups and fix the rights and conditions of each class or group; (h) add, change or remove a provision respecting the transfer of a membership; (l) change the manner of giving notice to members entitled to vote at a meeting of members; and (m) change the method of voting by members not in attendance at a meeting of members. 135 Supra note 1, section 199(1). 35

82 adopt one by-law, but include a provision in the articles requiring by-law changes be subject to a special resolution of members (in other words, remove the general default mechanism for by-law amendments). 136 E. FEDERAL SPECIAL ACT CORPORATIONS Instead of being incorporated under the CCA, some federal non-share capital corporations are incorporated by special legislation of the Parliament of Canada. A special act corporation is subject to its own special legislation which, together with any by-laws that may have been passed, governs the corporation. In addition, there are a few provisions under the existing Part III of the CCA which apply to special act corporations that are incorporated for the purpose of carrying on objects, to which the legislative authority of the Parliament of Canada extends, of a national, patriotic, religious, philanthropic, charitable, scientific, artistic, social, professional or sporting character or the like objects. 137 Part III of the CCA was repealed by Part 19 of the CNCA (i.e., sections 294, 295 and 296), which automatically apples to special act corporations. 138 No continuance process or any steps will need to be taken by special act corporations. Similar to the mechanism in the CCA allowing special act corporations to continue under Part II of the CCA and become letters patent corporations, 139 CNCA also permits special act corporations to continue under the CNCA. Once a special act corporation has continued under the CNCA, it will be subject to Parts 1 through 18 of the CNCA, and will no longer be governed by its own special legislation. Any special act corporations desiring to be continued under the CNCA in this manner will need to complete a continuance process under subsections 212(2) and 212(6) of the CNCA, The continuance process is essentially the same as that for CCA Part II corporations reviewed in this paper. 136 Ibid., section 7(4). 137 Ibid., section For an overview of the rules in sections in Part 19 that apply to special act corporations, see Jane Burke- Robertson and Theresa L.M. Man, Charity Law Bulletin No. 247, Countdown To The Canada Not-For-Profit Corporations Act Practice Tip #9: Special Act Corporations, March 31, 2011 (online: Supra note 1, section

83 F. DRAFTING ARTICLES OF INCORPORATION/CONTINUANCE As part of the incorporation process, articles of incorporation will need to be filed. The articles of incorporation will be attached to the certificate of incorporation issued by Corporations Canada. In the case of a continuance, articles of continuance will need to be filed. The articles of continuance will be attached to the certificate of continuance issued by Corporations Canada. The certificate of continuance and the articles of continuance together replace the corporation s letters patent and supplementary letters patent. The articles of incorporation and articles of continuance are almost the same. Both forms are available on Corporations Canada s website. When preparing the articles, it is prudent for new by-laws to be prepared at the same time, because: it is necessary to coordinate the provisions set out in these two documents (e.g., membership classes and board size); it is necessary to decide what default provisions in the CNCA to override and whether the overriding provision should be included in the articles or the by-laws; and even if the CNCA requires certain provisions to be set out in the by-laws, it is possible to include them in the articles instead. The following information must be included in the articles. 1. Corporate name For an incorporation, the proposed corporate name must be set out in the articles of incorporation, accompanied by a NUANS Name Search Report. The proposed corporate name must meet the requirements in the CNCA and the regulations Ibid., sections 11 and 13 and Part 3 of the regulations. 37

84 In the case of a continuance, the current corporate name must be inserted in the articles. Note that if the corporate name had previously been changed, the revised corporate name as shown in the supplementary letters patent will need to be inserted, rather than the original corporate name shown on the letters patent. If the corporate name includes the French form of the name, the French name will also need to be included. It is possible to change the corporate name as part of the continuance process. If no changes are desired, this item will need to be left blank. To change the corporate name, the proposed corporate name will need to be inserted, accompanied by a NUANS Name Search Report. The proposed corporate name must meet the requirements in the CNCA and the regulations. 141 Under the CNCA, it is possible to use a numbered name. 142 In a continuance, it is possible to change the corporate name into a numbered name as part of the continuance process. If this is desired, then a blank space will be left in lieu of a corporate name, and Corporations Canada will assign a number to the corporation. The space will need to be followed by the word Canada and one of the following words Association, Center, Centre, Fondation, Foundation, Institut, Institute or Society Corporation number In the case of existing CCA Part II corporations applying for continuance, the number assigned by Corporations Canada when the corporation was incorporated will need to be inserted. This number can be found on the letters patent, supplementary letters patent, correspondence from Corporations Canada, and Corporations Canada s website database for federal corporations Province or territory in Canada where registered office is located The province or territory in which the registered office is/will be situated will need to be inserted. Under the CCA, the municipality and province in which the head office is located is to be included in the letters patent. Under the CNCA, the municipality and street address for the registered office is not to be included in the articles, but to be included in the notice of initial 141 Ibid., sections 11 and 13 and Part 3 of the regulations. 142 Ibid., section 12(2). 143 Section 58(2) of the regulations

85 registered office address and first board of directors, which is a separate document to be completed and filed with the articles. 4. Number of directors The number of directors on the board will need to be inserted in the articles. It is possible to set out a fixed number of directors or a maximum and minimum range of directors. For existing CCA Part II corporations applying for continuance, this information is contained in the by-laws. It is important to keep in mind that if it is anticipated that the corporation will become a soliciting corporation under the CNCA, then it must have at least three directors, so the minimum number to be set out in the articles must be at least three. If it is anticipated that the corporation will become a non-soliciting corporation, then it is possible for the board to have a few as one director. However, if the articles specified that there shall only be 1 or 2 directors on the board or if the maximum number is 2 directors, then in the event that the corporation is to become a soliciting corporation in a particular year, this change of status will require a change to its articles. To avoid the need to change its articles in the future in that scenario, it might be prudent not to have the articles restrict the board to 1 or 2 directors. An example would be a minimum of 1 and a maximum of 10 directors, and then the precise number of directors to be elected may be determined from time to time by ordinary resolution of the members. 145 This power may also be delegated to the directors Statement of purpose The purposes of the corporation will need to be inserted in the articles. For existing CCA Part II corporations applying for continuance, the objects are set out in its letters patent or as amended by supplementary letters patent. If no changes to the objects are desired, then the same objects can be inserted in the articles. If the corporation desires to change its objects, the new objects should be inserted in the articles. 145 Supra note 1, section 133(3). 146 Ibid. 39

86 6. Restrictions on activities of the corporation If there will be any restrictions on the activities of the corporation, those restrictions will need to be set out in the articles. If there are no such restrictions, insert none. 7. Classes, or regional or other groups of members that the corporation is authorized to establish Under the CCA, membership classes are set out in the by-laws. Under the CNCA, the classes, regional or other groups of members that the corporation is authorized to establish must be set out in the articles. 147 If there are more than one class or group of members, then the articles must set out what the classes or groups are, and any voting rights attached to each class or group, provided that the members of at least one class or group must have voting rights. 148 In both cases, the by-laws must set out the conditions required to be admitted into membership, including whether a corporation or other entity may be a member. 149 If there are more than one class or group of members, the by-laws must set out: (a) the conditions for membership in each class or group; (b) the manner of withdrawing from a class or group or transferring membership to another class or group and any conditions of transfer; and (c) the conditions on which membership in a class or group ends Statement regarding distribution of property on dissolution The articles must state how the net assets of a corporation on dissolution would be distributed. As explained above, all soliciting corporations and registered charities (regardless of whether they are soliciting or non-soliciting corporations) must provide in their articles that any property remaining on liquidation after the discharge of any liabilities of the corporation shall be distributed to one or more qualified donees, as defined in subsection 248(1) of the Income Tax Act. 151 For existing CCA Part II corporations applying for continuance, since this provision is already an existing requirement for registered charities, the dissolution clause can be the same as the one that is in the corporation s letters patent or supplementary letters patent. For soliciting 147 Ibid., section 7(1)(c). 148 Ibid., section 7(1)(c) and section 154(4). 149 Ibid., section 154(1). 150 Ibid., section 154(2). 151 Supra note

87 corporations that are not registered charities, their existing dissolution clause likely does not comply with this requirement and a revised clause that complies with this new requirement will need to be inserted into the articles. 9. Additional provisions It is permissible to include other provisions that the corporation may want included in the articles. If more space is needed to insert the provisions, schedules may be attached to the articles. These provisions may be: provisions required by any other Act of Parliament to be set out in the articles; 152 provisions to override default provisions contained in the CNCA as explained above; or any other provision that may be set out in the by-laws 153 (and any requirement in the CNCA for provisions to be set out in the by-laws is deemed met by setting them out in the articles 154 ). Examples of these provisions include: requiring a different membership approval majority greater than the statutory required majority (e.g., requiring 75% approval where the CNCA requires a special resolution, or requiring a special resolution where the CNCA requires an ordinary resolution), except to require a higher level of approval than an ordinary resolution to remove directors 155 (such a provision is a very helpful way of addressing the CNCA requirements that amendments to certain provisions in the by-laws require a special resolution, while others require an ordinary resolution, as explained below; 152 Ibid., section 7(2). 153 Ibid., section 7(3). 154 Ibid., section 7(3.1). 155 Ibid., sections 7(4) and (5). 41

88 setting out a foreign form of corporate name in any language to be used outside of Canada (other than English and French forms of the name); 156 allowing the board to appoint additional directors to hold office until the end of the next annual meeting of members, provided that the number of such appointed directors may not exceed one-third of the directors elected at the previous annual meeting of members; 157 specifying a place outside of Canada where members meetings may be held; 158 and requiring the board to obtain members approval in order to borrow funds. 159 For registered charities, the Charities Directorate of CRA recommends that the following two provisions be inserted: 160 The corporation shall be carried on without the purpose of gain for its members, and any profits or other accretions to the corporation shall be used in furtherance of its purposes. Directors shall serve without remuneration, and no director shall directly or indirectly receive any profit from his or her position as such, provided that a director may be reimbursed for reasonable expenses incurred in performing his or her duties. A director shall not be prohibited from receiving compensation for services provided to the corporation in another capacity. Once the articles of incorporation have been prepared, it can be signed by the incorporators and filed with Corporations Canada. Once the articles of continuance have been prepared, it must be approved by the members of the corporation before it can be signed by a director or officer of the corporation and then filed with Corporations Canada. 156 Ibid., section 11(2). 157 Ibid., section 128(8). 158 Ibid., section Ibid., section 28(1). 160 Canada Revenue Agency, online: 42

89 G. DRAFTING BY-LAWS Other than the articles, by-laws that comply with the rules in the CNCA must also be prepared. Providing a clause by clause commentary on provisions to be included in the new by-laws or how by-laws made under the CCA (in the case of a continuance) will need to be revised to bring them into compliance with the CNCA is outside the scope of this paper. 161 Instead, this section of the paper reviews key concepts and issues that will need to be addressed when preparing the new by-laws. 1. General issues In the case of existing CCA Part II corporations applying for continuance, the corporation will be governed by the CNCA once the certificate of continuance has been issued. Therefore, before the articles of continuance are filed with Corporations Canada, the corporation must have new bylaws that comply with the requirements of the CNCA prepared in advance, so that these new bylaws will be ready for the governance of the corporation as soon as the certificate of continuance has been issued. Due to the many differences between the CCA and the CNCA, it is anticipated that simply amending the current by-laws to conform to the CNCA rules will involve amendments to many sections of the by-laws and make the by-laws difficult to work with on a go-forward basis. As such, it would likely be simpler and more cost efficient to have new bylaws prepared. Under the CCA, all by-laws (including amending by-laws) must be filed with Corporations Canada for Ministerial approval before they come effective. This will lead to a delay in the effective date of by-laws after they have been approved by the members, having to take into account the time required by Corporations Canada to process the approval request. There is no longer any requirement under the CNCA to file by-laws with Corporations Canada for approval. Under the CNCA, by-laws will become effective as soon as they are adopted according to the requirements of the CNCA. As such, new by-laws prepared as part of the continuance process are not required to be filed with Corporations Canada with the articles of continuance, but it is possible to file them with the continuance package if desired. If the new by-laws are not filed with the continuance package, they must be filed with Corporations Canada within 12 months of 161 For a commentary in this regard, see Burke-Robertson and Godel, supra note

90 its adoption. However, failure to file by-laws with Corporations Canada will not affect their validity. 2. Mandatory provisions that must be included in the by-laws The CNCA contains very detailed rules that apply to NFP corporations. As explained above, some of the provisions are mandatory provisions which must be complied with by all NFP corporations and cannot be overridden. The CNCA also contains default rules, which would apply to NFP corporations if their articles, by-laws and any unanimous member agreement are silent on those issues. In order to override the default provisions, the overriding provisions must be set out in the document(s) specified by the CNCA (i.e., articles, by-laws or unanimous member agreement). Where it is possible to override the default rules, some of the overriding provisions are limited to certain choices (alternate rules) set out in the regulations. Under the CNCA, there are two provisions that are required to be included in the by-laws. Namely: Conditions of membership Under the CNCA, the by-laws must set out the conditions required to be admitted into membership, including whether a corporation or other entity may be a member. 162 If there is more than one class or group of members, the by-laws must set out (a) the conditions for membership in each class or group; (b) the manner of withdrawing from a class or group or transferring membership to another class or group and any conditions of transfer; and (c) the conditions on which membership in a class or group ends. 163 Notice of meeting of members Under the CNCA, the by-laws must set out the manner in which notice of meetings of members is to be given as prescribed in the regulations. 164 Four options are provided in the regulations and a corporation may choose one or more of the options. The options are: 1. sent by mail, courier or personal delivery, between 21 and 60 days before the meeting; 162 Supra note 1, section 154(1). 163 Ibid., section 154(2). 164 Ibid., section 162(1). 44

91 2. communicated by telephone or other electronic communication means, between 21 and 35 days before the meeting (provided that the by-laws also include one or more means from options 1, 3 and 4 to allow members to request receiving notice by a non-electronic means, and if no alternative is provided in the by-laws, the corporation must send a copy of the notice to the member that requests a copy 165 ); 3. affixed to a notice board not less than 30 days before the meeting; and 4. if a corporation has more than 250 members, communicated via a publication (a) at least once a week for three weeks prior to the meeting if using a newspaper, or (b) between 21 and 60 days if using a publication of the corporation that is distributed to members. 166 If the by-laws do not include a valid option or does not contain any provision in relation to the manner in which notice is to be given, it will be required to give notice by option It is permissible to include these provisions in the articles instead and the requirement that these provisions are to be set out in the by-laws will be deemed met Other provisions to be included in the by-laws As explained above, the CNCA contains a set of default rules that apply to NFP corporations. Some of the default rules may be overridden, provided that the appropriate overriding provisions are contained in the document specified by the CNCA. Some of the overriding provisions are required to be included in the by-laws, as opposed to in the articles or unanimous member agreement. If desired by the corporation, these overriding provisions may be included in the articles instead and the requirement for these provisions to be included in the by-laws is deemed met. 169 The CNCA offers a choice for some other overriding provisions for the corporation to decide whether to include them in the articles or the by-laws; or in the articles or by-laws or 165 Section 63(2) of the regulations. 166 Ibid., section 63(1). 167 Supra note 1, section 162(1) of the CNA and section 63(3) of the regulations. 168 Ibid., section 7(3.1). 169 Ibid., section 7(3.1). 45

92 unanimous member agreement. When drafting the new by-laws, care must be taken to ensure that the by-laws are the appropriate document to include the desired overriding provisions. When drafting the overriding provisions, it is necessary to ensure that these mechanisms are in compliance with the CNCA. For example, some of the overriding provisions are limited to certain choices (alternate rules) set out in the regulations. In these cases, care must be taken that the overriding provisions reflect the available alternate rules in compliance with the CNCA. There are other provisions in the CNCA that provide certain requirements if the corporation was to adopt certain mechanisms. These types of mechanisms may be set out in the by-laws. For example: Audit committee - A corporation may have an audit committee. If so, the committee must consist of not less than three directors, a majority of whom are not officers or employees of the corporation or any of its affiliates, the committee must review the financial statements before they are approved by the board, and the public accountant is entitled to receive notice of and attend and speak at committee meetings, the public accountant must attend committee meetings if requested by any committee members, and the public accountant has the right to call a meeting of the committee. 170 Consensus decision-making by members - The by-laws may allow the members to make decisions by consensus, including where the CNCA requires a vote to be taken. However, this manner of decision-making cannot be used for the required unanimous resolution for a designated corporation to dispense with the appointment of a public accountant referred to in subsection 182(1) of the CNCA, cannot be used where a special resolution is required under the CNCA, and cannot be used if consensus cannot be reached. If the bylaws allow consensus decision making, they must also include the following information: define the meaning of consensus; provide how to determine when consensus cannot be 170 Ibid., section 194. Although the CNCA does not specify whether the provision establishing the audit committee must be included in the articles or by-laws, it is common practice to include such provisions in the by-laws, although it is possible to include them in the articles. 46

93 reached; and establish a manner of referring any matter on which consensus cannot be reached to a vote. 171 Discipline of members - The CNCA allows the articles or by-laws of a corporation to provide the directors, the members or any committee of directors or members with the power to discipline a member or to terminate their membership. However, if the articles or by-laws provide for this power, they must also set out the circumstances and the manner in which the power may be exercised. This means that either the articles or bylaws should set out the process to be followed to terminate a membership or discipline a member. Examples include notice to the member; whether the member will be given the right to be heard or provide submissions; how the decision is made by the corporation; and whether the decision is final and binding on the member or subject to appeal. Finally, where the CNCA is silent on a particular issue, a corporation may include provisions in the by-laws to govern that issue, provided that the provisions included do not contravene the CNCA and its regulations. Examples include dispute resolution mechanisms to resolve disputes between members, stewardship provisions dealing with charitable property of the corporation (where it is a registered charity), statement of faith subscribed to by a faith-based corporation, etc. Although these provisions may be set out in policies of the corporation, some corporations may find it helpful or necessary to include them in the by-laws. 4. Detailed by-laws or simple by-laws There are in general two approaches for drafting the new by-laws under the CNCA, i.e., the minimalist approach and the comprehensive approach. a) Minimalist approach The rationale for the minimalist approach is based on the fact the CNCA provides for a very detailed set of rules. As a result, there is no need to duplicate all of the mandatory rules in the bylaws, neither is there any need to duplicate any of the default rules in the by-laws if they are consistent with the governance structure and practice of the corporation. As such, the by-laws 171 Ibid., section

94 could be a very simple one, containing only the two mandatory provisions as required by the CNCA to be included in the by-laws as explained above; overriding provisions that the corporation wants included to override default provisions in the CNCA; and important procedural matters of importance to the corporation. The minimalist approach also contemplates the corporation adopting the use of a governance policy manual as much as possible by moving provisions into the governance policy manual that do not need to be included in the by-laws. It is thought that this is an effective way of simplifying the by-laws. However, it is not intended that the governance policy manual would duplicate any of the mandatory or default rules either. This means that the only place that those rules would be set out are in the CNCA and the regulations themselves. Proponents of this approach acknowledge that the initial process of the corporation having to develop some familiarity with the CNCA and the challenge of learning and re-learning the CNCA and the regulations as staff and volunteers come and go may be a daunting one, but the benefits in the long run outweigh the disadvantages of working with detailed by-laws. One of the advantages with the minimalist approach is that the corporation will end up having a simple bylaw. The other intended advantage of this approach is that by not duplicating the mandatory CNCA requirements and default rules (those that the corporation does not wish to override), it will avoid the corporation running the risk of amending them in the future, not knowing that they cannot be changed. It should be noted that the model by-laws prepared by Corporations Canada adopts the minimalist approach. Corporations wanting to adopt the model by-laws will need to be aware of the pros and cons of such an approach. As well, as noted above, many corporations, especially the smaller ones, adopted Corporation s Canada s CCA model by-laws at the time of incorporation often as an expedient means to complete the incorporation process, without much thought to whether the provisions set out in the model by-laws actually reflect the desired corporate governance structure and practice. This time, if corporations were to adopt the model by-laws as an expedient means to undergo the continuance process, they will have to operate under the minimalist approach. 48

95 While this approach may be a workable one for large organizations, it may not be an effective approach for small and medium size volunteer organizations for the following reasons: The corporation will have to constantly work with 4 to 5 documents, namely the CNCA, regulations, articles, by-laws, and governance policy manual, if any. For a non-soliciting corporation, it may also need to work with a sixth document, i.e., the unanimous member agreement if the members choose to enter into one. The task of being able to work with so many legal documents in order to determine the governance procedure for a corporation is not easy. In working with the various documents, the corporation will have to have a clear understanding of what the mandatory and default rules are under the CNCA; what information is prescribed in the regulation when reference is made to it in the CNCA; what default rules have been overridden by the corporation and whether the overridden provisions are contained in the articles, by-laws or unanimous member agreement; what provisions in the articles, by-laws and unanimous member agreement are intended to override which provisions in the CNCA, and what provisions are intended to adopt non-mandatory mechanisms set out in the CNCA, and what provisions are intended to address issues that the CNCA is silent on; and what to do in the event of a conflict between these documents. With the charitable and non-profit sector having a high turnover rate of directors, officers, members and volunteers, it will be difficult for them to be able to develop and maintain a sufficient level of proficiency in working with these documents. Even if a corporation has developed the necessary proficiency in working with these documents, the need to constantly refer to all these documents whenever it needs to address a governance procedural issue may be difficult to work with. For example, if a corporation wants to do the simple task of holding an annual members meeting, it will have to refer to the CNCA to determine when an annual meeting has to be called; refer to the regulations to determine the prescribed periods for calling such a meeting; refer to the by-laws to determine how notice to members is to be given; refer to the regulations on what to do if the by-laws only provide for electronic means of giving notice and a member requests to receive notice by non-electronic means; refer to the articles to determine if they can hold a members meeting outside of Canada; refer to the CNCA to 49

96 determine the quorum requirements for members meetings if both the articles and the by-laws are silent on that issue; refer to the CNCA to see if electronic participation at meetings is permitted if the by-laws are silent; refer to the by-laws to determine if absentee voting is permitted; refer to the CNCA to see if a notice of meeting is required if the meeting was adjourned (if the by-law is silent) and refer to the regulation to see what the prescribed period is that may require a notice of the adjourned meeting; etc. When a particular issue is silent in the by-laws, the corporation will have to review the CNCA, regulations, the articles, unanimous member agreement and governance policy manual before it can decide if it is an issue that is outside the CNCA that the corporation can adopt by-laws to address them. It may not be possible to fully prevent the corporation from amending mandatory rules that apply to them by not duplicating them in the by-laws. A corporation adopting this approach will still be required to set out in its by-law certain provisions in compliance with the CNCA. For example, it must set out in the by-laws one or more of the prescribed manners of giving notice of members meetings, and one of the prescribed means of absentee voting. These provisions also cannot be changed, other than choosing another option prescribed in the regulations for these issues. As such, the corporation will continue to run the risk of amending the option set out in their by-laws in a manner that is not permitted under the CNCA, and they will have to seek legal advice in order to ensure what they intend to do is permissible under the CNCA. The use of a governance policy manual would not be of help to ease the complicated process explained above, since it is intended that that this approach will not have the mandatory or default rules duplicated in the manual. As such, the manual is only intended to provide for other matters not regulated by the CNCA. b) Comprehensive approach The comprehensive approach, on the other hand, is intended to have the by-laws as the main document for all of the governance rules of the corporation where possible. This approach is familiar to CCA Part II corporations, since it has been necessary for those corporations to have 50

97 comprehensive by-laws under the CCA, because the CCA only has a few rules that govern CCA corporations. The comprehensive by-laws will be a consolidation of all of the mandatory rules and default rules (that are not to be overridden) that apply to the corporation; overriding provisions that are permitted to be set out in the by-laws, and any other provisions that the corporation desires to be included in the by-laws. Of course, the comprehensive by-laws will only include provisions that are relevant to the day-to-day governance issues (such as the conduct of members and board meetings; membership issues, qualification requirements, admission procedure, term, termination criteria, etc.; directors qualification requirements, term, election, termination, filling of vacancies, etc.), but not other issues regulated by the CNCA (such as maintenance of corporate records, access to records by members, fundamental changes, etc.) Since the CNCA now requires many more provisions (as compared to the CCA) to be included in the articles, the corporation will nevertheless have to work with the articles as well. It is also possible to use a governance policy manual for matters that do not have to be included in the bylaws, such as committee structure (except audit committee due to the requirement to comply with the specific rules in the CNCA 172 ), directors nominations procedure, etc. The end result is that the corporation will have to work with the articles, the by-laws, and governance policy manual, as well as unanimous member agreement in the case of a non-soliciting corporation. But they will not need to also review the CNCA and the regulations for most governance issues. In order to avoid the corporation unintentionally changing by-law provisions that cannot be changed, or to ensure that by-law changes desired are permissible under the CNCA, safeguards will need to be put in place. One way is to clearly mark in the by-law what provisions can be amended and what provisions cannot. In addition, the corporation can seek legal advice before it amends the by-laws in order to ensure what the corporation intends to do is permissible under the CNCA, which is also a necessary step for corporations that adopt the minimalist approach. Obviously, such by-laws will require careful drafting and the assistance of legal advisors in preparing it is necessary, which in turn means additional cost for the corporation at the outset. However, once prepared, it will be a very helpful tool for the corporation and will ease the 172 Supra note

98 administrative burden in that it will not need to struggle with 5 or 6 documents every time a governance issue arises. 5. By-law approval As explained above, the CNCA provides two ways for corporations to amend their by-laws, depending on the subject matter of the changes. In general, the directors may, by resolution, make, amend or repeal any by-laws that regulate the activities or affairs of the corporation, subject to subsequent confirmation by the members. However, this mechanism does not apply to by-law amendments for matters referred to in subsection 197(1) of the CNCA. These provisions are in relation to membership of the corporation that are to be set out in the by-laws. 173 These bylaw amendments must be approved by special resolution of the members and these changes are effective only upon members approval. If any of these matters also relate to those membership issues set out in subsection 199(1), approval of these by-law amendments will require a separate class vote, (regardless of whether the class is a voting or non-voting), as explained above. 174 It is therefore important that by-laws clearly indicate that these types of changes require a special resolution of the members and are not effective until the members have approved them. Examples of different options are explained above, including adopt two by-laws, one for matters requiring a special resolution to amend and one for other matters; adopting one by-law grouping all matters requiring a special resolution into one section; adopting one by-law marking throughout the by-laws which provisions require special resolution to amend; and adopting one by-law but including a provision in the articles requiring all by-law changes be subject to a special resolution. 173 These provisions are: subsection 197(e) change a condition required for being a member; (f) change the designation of any class or group of members or add, change or remove any rights and conditions of any such class or group; (g) divide any class or group of members into two or more classes or groups and fix the rights and conditions of each class or group; (h) add, change or remove a provision respecting the transfer of a membership; (l) change the manner of giving notice to members entitled to vote at a meeting of members; and (m) change the method of voting by members not in attendance at a meeting of members. 174 Supra note 1, section 199(1). 52

99 H. SPECIAL CONSIDERATIONS FOR CONTINUANCE For CCA Part II corporations, there are special issues that should be considered before preparing documents for the continuance process. The following is an overview of some of the key considerations. 1. Gather and review current governance structure and practice Before drafting the continuance documents, it is necessary for corporations to collect and review all of the governing documents for the corporation. These documents include the letters patent and all supplementary letters patent and by-laws. If a corporation is not able to locate these documents or is not sure if it has located all supplementary letters patent and by-laws, then it can contact Corporations Canada to obtain copies. For CCA corporations, by-laws are not effective until they have been filed with Corporations Canada and received Ministerial approval. For the charitable and non-profit sector, it is not uncommon to find corporations that have by-laws approved by the board and members, but have not been filed with Corporations Canada. As well, some corporations may attempt to amend their by-laws by board and/or members resolution, rather than by means of adopting an amending bylaw. Such by-laws and by-law amendments are not effective, although the corporation may have been under the erroneous perception that they are and have been operating under them. Even though these by-laws and amendments are not valid, they should be taken into account when preparing the continuance documents, since they reflect how the corporations had intended to modify their by-laws. As well, some charities and non-profit organizations have set out their objects in their by-laws. This practice is often used to allow members to have easy access to the objects of the corporation in the by-laws, a document that members are more familiar with than the letters patent or supplementary letters patent. However, it is not uncommon to find that the objects set out in the by-laws are not the same as those contained in their letters patent or supplementary letters patent, because the objects may have been amended and updated from time to time as part of the by-law amendment process in the past, without the corporation being aware of the need to change their official objects in their letters patent or supplementary letters patent. In those situations, the 53

100 objects contained in their by-laws should also be taken into account when preparing the articles of continuance. Once all of these documents have been located, they should be reviewed in detail to understand the current governance structure and practice as provided for in these documents. Consideration must also be given to whether these documents accurately reflect the current governance structure and practice of the corporation. It may be that the corporation has evolved over time since its incorporation and the by-laws no longer reflect the desired governance structure. It may also be that the model by-laws prepared by Corporations Canada was adopted as an expedient means to complete the incorporation process, without much thought as to whether the provisions set out in the model by-laws actually reflect the desired corporate governance structure and practice. After incorporation, it is also not uncommon that the by-laws became one of the documents retained in their corporate records, without ever being followed. This is especially the case in the charitable and non-profit sector, which often lacks the means to engage legal advisors for the incorporation process or to retain legal advisors to assist in their corporate proceedings. In these situations, it may be necessary to also review various operational documents, including governance policies, organization charts, etc. These documents may reveal the governance structure and practices that are being followed by the corporation, which should be reflected in the new by-laws to be prepared. Upon the completion of that review, it would be helpful to draw up a list of the changes that depart from the current by-laws. This exercise will assist in the preparation of the documents for continuance. 2. Review key features of the CNCA The next step is for the corporation to have a clear understanding of the overall framework of the CNCA (explained above) and the rules contained in the CNCA under which the corporation will be required to operate after continuance. This understanding will help the corporation in determining how the new rules will impact the governance of the corporation and what provisions to include in the articles of continuance and new by-laws. 54

101 3. Compare the CNCA rules with current governance structure and practice Once a corporation has determined its current or desired governance structure and practice and has reviewed the rules in the CNCA, the corporation will then need to review and determine how the new rules will impact how the corporation is to be governed. Examples of questions to be considered include: Are the current by-laws or the desired governance structure and process inconsistent with CNCA requirements? If inconsistent with a CNCA mandatory requirement, how will the corporation adjust its governance structure and process in order to ensure compliance? If inconsistent with a CNCA default requirement, is the preferred alternative mechanism permitted under the CNCA? Should the overriding provision be set out in the articles, bylaws or a unanimous member agreement? If different options are prescribed in the regulations, 175 which one should the corporation choose? Should the preferred option be set out in the articles, by-laws or a unanimous member agreement? Are there provisions that the corporation would like to include in its governing documents and the CNCA is silent on those issues? If so, should the provisions be set out in the articles, by-laws or a unanimous member agreement? 4. Determine whether changes should be made prior to continuance Another issue to consider is whether changes should be made to the corporation s governing documents under the CCA prior to continuance under the CNCA. Although it is possible to make amendments to the existing letters patent or supplementary letters patent at the time of applying for continuance, 176 some corporations may wish to make certain changes first under the CCA, 175 Such as different means of absentee voting. 176 Supra note 1, section 211(2). 55

102 such as applying for supplementary letters patent or amending their by-laws even though it will mean additional cost and time. There may be different reasons why a corporation may wish to do so. The following are some examples. a) Changes affecting membership rights As explained above, if a corporation currently has more than one class of members, it is important to be aware that a separate vote by class or group of members will be required under the CNCA if, in the future, the corporation wants to change the rights attached to a class or group of members or for certain fundamental changes, regardless of whether the membership class is a voting class or non-voting class. This means that each class of members (including non-voting members) will have a de facto veto right for those matters as explained above. For this reason, a corporation may wish to collapse all of the membership classes into one class in order to avoid the requirement of having a separate class vote or include provisions to take advantage of the exceptions referred to in (a) and (e) above. However, if the corporation was to make this change as part of the continuance process by having the articles and new by-laws provide for only one class of members, the approval of the articles of continuance and new bylaws will itself require a separate class vote. This is because subsection 212(3) provides that voting members may, by special resolution, authorize the directors of the corporation to apply under section 211 for a certificate of continuance; and, by the same resolution, make any amendment to its letters patent and supplementary letters patent that a corporation incorporated under the CNCA may make to its articles. However, if the corporation has more than one class of members, subsection 212(4) of the CNCA provides that changes to the letters patent, supplementary letters patent or by-laws as part of the continuance process that affects the rights of a class or group of members in the nature referred to in subsection 199(1) explained above of the CNCA will also require separate class vote of each class of members (regardless of whether they have the right to vote). 177 The only exception to the requirement of a separate class vote is if the corporation s existing governing documents provide that a certain membership class does not have the right to vote in respect of changes referred to in (a) and/or (e) above. If the amendments are in relation to (b), (c), (d) or (f), then a separate class vote will be necessary. 177 Ibid., sections 199 and 197(1). 56

103 If a corporation wants to avoid votes by separate classes or allowing the membership classes to have a de facto class veto right (including non-voting classes), the corporation may want to amend its by-laws to collapse membership classes, change membership rights, etc. under the CCA first, prior to continuance under the CNCA. b) Change of corporate objects There may also be situations where a corporation may wish to change its corporate objects for various reasons, such as updating the objects to better reflect and align with current activities or future activities. It is permissible to amend the objects of the corporation as part of the continuance process by including the new objects as purposes in the articles of continuance and seeking approval by the members by a special resolution. For those corporations that are registered charities, changes of their corporate objects may have an impact on their charitable status if the objects are not exclusively charitable. As such, it would be prudent for all registered charities to seek approval from CRA for their amended objects. In practice, there are two ways to seek CRA approval. First, some charities may want to revise their objects by applying for supplementary letters patent from Corporations Canada, and then provide a copy of the issued supplementary letters patent to CRA for approval. Upon reviewing the new objects, CRA may require the objects further revised, if they find that the new objects do not meet their requirements. In that case, the charity would need to apply for a further supplementary letters patent to revise their objects in accordance with CRA s request, which means additional time and cost for the charity. Second, the other way to seek approval is to submit a draft application for supplementary letters patent to CRA for pre-approval. The charity will then be able to revise the draft objects that meet CRA s requirements before submitting them to Corporations Canada. As such, if a corporation was to amend their objects as part of the continuance process using the second way by seeking pre-approval from CRA in order to avoid the possibility of applying for articles of amendments to further revise the objects, it will need to factor in the time required by CRA to process the pre-approval procedure so that it would not miss the three-year time frame for the continuance. 57

104 Alternatively, a charity may wish to amend its objects under the CCA prior to the continuance process on a parallel basis when the corporation prepares documents for the continuance. Once approval from CRA is obtained, the approved objects can then be inserted in the articles of continuance for filing. 5. Obtaining membership approval and filing application of continuance Prior to filing the articles of continuance with Corporations Canada, they must be approved by the members of the corporation. Subsections 212(3) and 212(7) of the CNCA provide CCA Part II corporations with two mechanisms to approve the continuance process. Subsection 213(3) of the CNCA provides that voting members may, by special resolution, authorize the directors of the corporation to apply under section 211 for a certificate of continuance; and, by the same resolution, make any amendment to its letters patent and supplementary letters patent that a corporation incorporated under the CNCA may make to its articles. As explained above, if the corporation has more than one class of members, subsection 212(4) of the CNCA provides that changes to the letters patent, supplementary letters patent or by-laws as part of the continuance process that affects the rights of a class or group of members in the nature referred to in subsection 199(1) of the CNCA must be approved by separate class vote of each class of members (regardless of whether they have the right to vote). 178 The changes may include changes that: (a) effect an exchange, reclassification or cancellation of all or part of the memberships of the class or group; (b) add, change or remove the rights or conditions attached to the memberships of the class or group, including (i) to reduce or remove a liquidation preference, or (ii) to add, remove or change prejudicially voting or transfer rights of the class or group; 178 Ibid., section 199 and 197(1). 58

105 (c) increase the rights of any other class or group of members having rights equal or superior to those of the class or group; (d) increase the rights of a class or group of members having rights inferior to those of the class or group to make them equal or superior to those of the class or group; (e) create a new class or group of members having rights equal or superior to those of the class or group; or (f) effect an exchange or create a right of exchange of all or part of the membership of another class or group into the membership of the class or group. The only exception to the requirement of a separate class vote is if the corporation s existing governing documents provide that a certain membership class does not have the right to vote in respect of changes referred to in (a) and/or (e) above, i.e., changes that effect an exchange, reclassification or cancellation of all or part of the memberships of the class or group; and changes that create a new class or group of members having rights equal or superior to those of the class or group. If the amendments are in relation to (b) to (d) or (f), then a separate class vote will be necessary. Alternatively, instead of a special resolution of the members, section 212(7) provides that the directors of the corporation may apply under section 211 for a certificate of continuance if the articles of continuance do not make any amendment to the charter of the body corporate other than an amendment required to conform to the CNCA. Once the articles of continuance and new by-laws have been approved by the members, the application for continuance will need to be filed with Corporations Canada for processing. 59

106 6. Consequential Filings and Records Up-dates After Continuance Following the issuance of the certificate of continuance, the corporation will be governed by the CNCA. There will be a number of follow-up matters to attend to. a) Canada Revenue Agency After continuance, registered charities must file with the Charities Directorate of CRA a copy of the certificate of continuance, articles of continuance and new by-laws. If the directors have changed, an up-dated list must also be filed with CRA. In addition, if the purposes of the charity have been changed, a statement of current activities describing all of the activities of the charity in furtherance of the revised purposes must also be filed. A checklist (available on CRA s website) must also be filed. 179 CRA also indicates that if a registered charity is dissolved by Corporations Canada for failure to apply for continuance by October 17, 2014, its registered charity status will also be revoked by CRA. More information is available on CRA s website, including list of questions and answers. 180 b) Provincial and territorial filings Once a corporation has been incorporated federally, it may have obtained different registrations in the province(s) or territory(ies) where the corporation carries on activities. There are different types of registrations, such as extra-provincial corporate registrations, business name registrations, fund-raising registrations, etc. If so, a review of the requirements of each registration is necessary in order to determine whether the corporation is required to file the certificate of continuance, articles of continuance and/or the new by-laws with the applicable government offices. For example, federal corporations that are registered charities that operate in Ontario are subject to the oversight of the Ontario Public Guardian and Trustee. Upon commencing operations in Ontario, they are required under the Charities Accounting Act (Ontario) 181 to notify the Public Guardian and Trustee by providing them with, inter alia, a copy of their letters patent and 179 Canada Revenue Agency, online: Canada Revenue Agency, online: R.S.O. 1990, Chapter C.10 60

107 supplementary letters patent. Thereafter, the Public Guardian and Trustee will also need to be provided with a copy of any issued supplementary letters patent. Therefore, upon the issuance of the certificate of continuance, registered charities in Ontario will need to provide the Public Guardian and Trustee with a copy of the certificate of continuance and articles of continuance. The new by-laws do not need to be filed. c) Others filings Depending on the operations of a particular corporation, it may be required to provide copies of the certificate of continuance, articles of continuance and/or the new by-laws to third parties. For example: a corporation that receives funding from another organization may be required to provide the funding organization with the new governance documents; a corporation that operates in subordination to an umbrella organization may need to provide these new documents to the umbrella organization; the financial or banking institution with which the corporation is negotiating a loan may want to be provided with copies of these new documents, etc. As such, it will be necessary to review the operations of the corporation to determine whether any filings in this regard are required. d) Updating corporate records and procedures After continuance, the corporation will need to update its corporate minute book by inserting the certificate of continuance, articles of continuance and the new by-laws in the minute book. Correspondence with CRA will also need to be filed with the corporate records, including letters to CRA providing them with copies of the new governance documents, letter from CRA granting pre-approval of the documents; letter from CRA approving the draft purposes, etc. Other corporate documents should also be up-dated. The type of documents that will need to be up-dated will vary, depending on their operations. These documents may include updating corporate governance policies, manuals, etc. Staff and volunteers will also need to be trained and become familiar with the new governance documents. 61

108 7. Managing the Continuance Process CCA Part II corporations should keep track of the three year time frame to ensure that the continuance process can be completed within this time. Engaging a legal advisor to conduct a bylaw review and to prepare new by-laws will likely be helpful and time efficient. It would also be a good idea for corporations to designate a particular person or a committee to be in charge of the continuance process, to ensure that the project would not get lost among the day-to-day activities of the corporations. It would also be necessary for the board of directors to be engaged early on, such as having the directors attend seminars and presentations on the CNCA continuance requirements; having the person/committee of the corporation in charge of the continuance process report to the board on a regular basis; setting target dates to complete various steps; and have the members engaged early as well, especially if key governance structure and/or procedures need to be changed. With only 763 of approximately 17,000 corporations having continued under the CNCA up to March 12, 2013, it is anticipated that Corporations Canada will likely be swamped with continuance applications as we draw close to the deadline of October 17, With less than two years before the deadline, time is already of the essence for some corporations, especially those that need to implement major governance changes, such as collapsing membership classes or restructuring board composition. It would be prudent for all remaining CCA Part II corporations to start taking steps to ensure they do not run out of time in completing the continuance process. I. CONCLUSION Modernization of the corporate legislation for the NFP sector is long overdue. Many of the rules in the CNCA are welcome changes, including incorporation as of right, a corporation having the powers of a natural person, providing a set of default rules where the by-laws are inadequate, holding the directors and officers to an objective standard of care of a reasonably prudent person. That being said, the rules in the CNCA are not without concerns for the NFP sector. The application of many provisions in the CNCA is unclear in many respects. As well, the 62

109 complicated rules in the CNCA and the inter-play between the CNCA and the regulations may be difficult for the NFP sector to comprehend. Furthermore, modelling the CNCA after the CBCA may not be suitable for the NFP sector. For example, while it is understandable why minority shareholders are given rights under the CBCA because of their investment in the shares of a company, it is difficult to justify giving non-voting members the right to vote under certain circumstances. As well, while it is understandable why it is not desirable to have ex officio directors on the boards of share capital companies, it is difficult to understand why this is not a desirable feature for non-share capital membership based corporations. As such, the impact of the CNCA on the NFP sector will remain to be seen. 63

110 Theresa L.M. Man ONTARIO BAR ASSOCIATION Not-for-Profit and Charitable Organizations in the Health Sector: Evolving Governance & Compliance Issues April 8, 2013 WORKING WITH THE CNCA: INCORPORATION AND CONTINUANCE By Theresa L.M. Man Carters Professional Corporation 2 OVERVIEW Status of the Canada Not-For-Profit Corporations Act (CNCA) Overview of Incorporation Process Overview of Continuance Process Key Features of the CNCA Drafting Articles Drafting By-laws Special Considerations for Continuance A. STATUS OF THE CNCA Canada Corporations Act (CCA) not updated since 1917 New CNCA enacted on June 23, 2009 In force on October 17, 2011 Replaced Part II of CCA As of March 12, 2013, only 763 of approximately 17,000 corporations had continued

111 Theresa L.M. Man B. OVERVIEW OF INCORPORATION PROCESS Replaces the letters patent system with a statutory regime similar to Canada Business Corporations Act Incorporation as of right - removes Ministerial discretion to incorporate Faster File articles of incorporation to obtain certificate of incorporation, not letters patent Only one incorporator Corporation has capacity, rights, powers and privileges of a natural person Ultra vires doctrine no longer applies May carry on activities outside Canada to the extent that the laws of that jurisdiction permit C. OVERVIEW OF CONTINUANCE PROCESS The new rules do not apply automatically to CCA corporations Existing CCA corporations will be required to continue under the CNCA within 3 years of proclamation i.e., by October 17, 2014 Failure to continue will result in dissolution of the corporation Can amend letters patent and by-laws prior to continuance under CCA All CCA corporations will need to Review letters patent and by-laws Prepare articles of continuance, notice and new by-law Get membership approval File articles and notice with Corporations Canada, no filing fee Certificate of continuance will be issued File approved new by-law within 12 months of adoption Charities send certificate of continuance, articles of continuance and new by-law to CRA

112 Theresa L.M. Man 7 D. KEY FEATURES OF THE CNCA 1. Understand the CNCA Framework Rules in the Act Details in the Regulations prescribed regulations Need to refer back and forth between the Act and the Regulations Articles By-laws Unanimous member agreement Soliciting and Non-Soliciting Corporations All corporations categorized into soliciting and nonsoliciting corporations Becomes a soliciting corporation if it receives more than $10,000 in its last financial period from Public donations Federal, provincial and municipal governments Conduit entities Status starts at the AGM in the following fiscal year for 3 years Low threshold means many corporations will become soliciting corporations, some may move in and out Need to monitor their funding sources and track their soliciting status Implications of being a soliciting corporation Minimum 3 directors, at least 2 directors must not be officers or employees of the corporation or its affiliates No material effect on registered charities because directors cannot receive remuneration Articles must provide for the distribution of remaining property on dissolution to qualified donees No unanimous member agreement File annual financial statements with Corporations Canada Audit and public accountant rules more stringent

113 Theresa L.M. Man If a corporation is concerned about oscillation, it can voluntarily be structured as a soliciting corporation At least 3 directors and at least 2 are not employees (no employees for charities) Articles to provide that property will be paid to qualified donees on dissolution No unanimous member agreement Then, for those years when it exceeds $10,000 threshold File annual financial statements with Corporations Canada Follow audit and public accountant rules for soliciting corporations Public Accountant and Financial Review CNCA divides corporations into two categories for purpose of determining obligation to appoint a public accountant and level of financial review Designated corporations A soliciting corporation with $50,000 or less in gross annual revenues for its last financial year A non-soliciting corporation with $1 million or less in gross annual revenues for its last financial year Non-designated corporations are soliciting and nonsoliciting corporations with annual revenues in excess of these amounts

114 Theresa L.M. Man 12 Type of Corporation (Gross Annual Revenues) Appointment of Public Accountant (PA) Review Engagement or Audit Soliciting Designated $50,000 or less Members must appoint a PA by ordinary resolution at each annual meeting. Exception Members may waive appointment by annual unanimous resolution PA must conduct review engagement, but members may pass an ordinary resolution to require an audit instead. (If no PA is appointed, then compilation only) Non- Designated More than $50,000 and up to $250,000 Members must appoint a PA by ordinary resolution at each annual meeting PA must conduct an audit, but members can pass a special resolution to require a review engagement instead Non- Designated more than $250,000 Members must appoint a PA by ordinary resolution at each annual meeting PA must conduct an audit Type of Corporation (Gross Annual Revenues) Appointment of Public Accountant (PA) Review Engagement or Audit Non- Soliciting Designated $1 million or less Members must appoint a PA by ordinary resolution at each annual meeting. Exception Members may waive appointment by annual unanimous resolution PA must conduct review engagement, but members may pass an ordinary resolution to require an audit instead. (If no PA is appointed, then compilation only) Non- Designated more than $1 million Members must appoint a PA by ordinary resolution at each annual meeting PA must conduct an audit

115 Theresa L.M. Man 4. Directors Number, Change and Term Non-soliciting corporations - minimum 1 director Soliciting corporations - minimum 3 directors, at least 2 of whom are not officers or employees of the corporation or its affiliates But common law rule overrides CNCA - charities cannot have employees as directors Articles must specify a fixed number of directors or a minimum and maximum number of directors File notice of change within 15 days of any change or of a change in a director s address Maximum length of term 4 years (but no limit on number of maximum terms) Election, Appointment and Removal of Directors Members elect directors by ordinary resolution at an annual meeting Directors are not required to be members Exception #1 - Board may appoint a person to fill vacancy as long as there is a quorum Exception #2 - Articles may permit directors to appoint additional directors up to 1/3 of the number of directors elected at the previous AGM Directors can be removed by majority vote of members Ex Officio Directors Cannot have ex officio directors Examples of possible workarounds Establish in by-law a special membership class that permits the class to elect a director Have articles provide for the appointment of a director by the board and have a board policy that certain office holders will be appointed as directors Include special qualification requirements for a particular seat on the board What would work will depend on the governance of the corporation

116 Theresa L.M. Man 7. Directors and Officers Duties and Defence Directors and officers have duties to act honestly and in good faith with a view to the best interests of the corporation and to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances Objective standard of care, replaced common law subjective standard of care Directors and officers also have duty to comply with the CNCA, the regulations, and the articles, by-laws, and any unanimous member agreement Members Must have members Articles to set out the classes of members If only one class of members, all are voting If two or more classes, articles must provide voting right to at least 1 class By-laws must set out the conditions for membership Separate class votes Fundamental changes, such as amalgamation, continuance, sale of all or substantially all of the property of a corporation other than in the ordinary course of its activities Changes of the rights attached to a class or group of members Class votes regardless of whether the membership class is a voting class or non-voting class de facto veto rights (limited opt-out available) The treatment of members mirrors that in the Canada Business Corporations Act in relation to shareholder s rights In most circumstances, giving non-voting members the right to vote on fundamental changes may not be desirable

117 Theresa L.M. Man 20 If corporation wants broad-based community support, may enlist them in some capacity in the corporation, but do not refer to them as members Some corporations may want to collapse all membership classes into one class and remove nonvoting membership classes Change them into a non-membership category, such as affiliates, associates, supporters May set out their rights and duties as nonmembers Consider timing for such change But their donations will not be exempt from the $10,000 threshold Members Rights Requisition a meeting of members (5% of voting right) Submit proposals to amend by-laws or require any matter to be discussed at annual meetings (any one member) Submit proposal to nominate directors (5% of voting right) Access corporate records, including membership list Availability of unanimous members agreement (except for soliciting corporations) Members Remedies Oppression remedy against the corporation Court order to commence a derivative action Compliance and restraining orders Court ordered wind-up and liquidation Special exemption of remedies for religious corporations if all of the following are met The corporation is a religious corporation The act or omission, conduct or exercise of powers is based on a tenet of faith held by the members of the corporation It was reasonable to base the decision on a tenet of faith, having regard to the activities of the corporation

118 Theresa L.M. Man 11. By-laws No Ministerial approval of by-laws needed by-laws are effective as soon as they are adopted according to the requirements of the CNCA Must be filed with Corporations Canada within 12 months of their adoption 12. Special Act Corporations Part 19 of the CNCA automatically applies No continuance process or any steps needed May continue under the CNCA After continuance, special act will cease to apply Continuance process is essentially the same as that for Part II CCA corporations E. DRAFTING ARTICLES Articles of Incorporation (Form 4001) Articles of Continuance (Form 4031) will replace LP and SLPs When preparing the articles, should prepare new bylaws at the same time because Coordinate the provisions set out in articles and by-laws Decide what default provisions in the CNCA to override and whether the overriding provisions should be included in the articles or the by-laws Even if CNCA requires certain provisions to be set out in the by-laws, it is possible to include them in the articles instead Information to be included in the articles Corporation s name Province or territory where the registered office is situated Minimum and maximum number of directors or fixed number Statement of purpose Restrictions on activities (optional) The classes, or regional or other groups of members that the corporation is authorized to establish not condition of membership Statement regarding distribution of property on dissolution Additional provisions (optional)

119 Theresa L.M. Man 26 F. DRAFTING BY-LAWS By-laws will need to be prepared for incorporation Continuance - by-laws will need to be replaced or substantially revised Some changes may only be administrative Some changes may require detailed considerations and consultation with members By-law Amendment Mechanism CNCA provides two ways to amend by-laws, depending on the subject matter of the changes Default mechanism Board may adopt by-laws, effective upon passage by the board Must be confirmed by members at next meeting to remain in force Special approval For matters affecting members rights, e.g., notice of members meetings, membership transferability and conditions, absentee voting Effective when confirmed by members by special resolution (no need for board approval) By-laws drafted under the CNCA must be very clear about which amending formula applies to various provisions (or risk certain by-law provisions not being legally in force) for example: Have 2 by-laws with all by-law provisions requiring special resolution in a separate by-law Have 1 by-law, and place all provisions requiring special resolution in one clearly marked section Have 1 by-law, and clearly mark throughout by-law which provisions require special resolution to amend Have 1 by-law, and provide in articles that all bylaw amendments require a special resolution

120 Theresa L.M. Man 2. Approaches to By-law Drafting By-laws will need to be replaced or substantially revised because the old and new rules are very different Minimalist approach by-laws Rationale: CNCA contains detailed rules, so bylaws not to duplicate mandatory rules or default rules that are not to be overridden Comprehensive approach by-laws One stop approach - consolidation of all applicable rules Can have governance policy manuals to address other matters, e.g., committee structures Two Mandatory Provisions that Must be Included in By-laws Conditions of membership Notice of meeting of members By-laws must set out the manner in which notice of meeting of members is to be given as prescribed in the regulations Four options are prescribed in the regulations May choose one or more of the options May include these provisions in the articles instead Types of CNCA Rules CNCA provides both a general framework and sets of rules for corporations to operate Three types of rules in CNCA Mandatory Rules - Cannot be overridden by the articles or by-laws Default Rules - By-laws or articles can override Alternate Rules - Articles/by-laws can include certain optional rules provided by CNCA

121 Theresa L.M. Man G. SPECIAL CONSIDERATIONS FOR CONTINUANCE 1. Gather Current Governance Structure and Procedure Collect governing documents Letters patent, supplementary letters patent All current by-laws, including amendments Amending by-laws Members and board resolutions? Are by-laws valid? Were they previously filed with and approved by Corporations Canada? Contact Corporations Canada to obtain copies Collect other governance related documents, e.g., organizational charts, policies, manuals Review Governing Documents and Consider Do they reflect current governance structure/process? If not, what is current governance structure/process? Are changes desired? What are they? Are there new provisions to be inserted? Write them down 3. Review the Key Features of the CNCA This understanding will help the corporation determine how its governance structure and the content of the articles of continuance and by-laws will be impacted Compare CNCA Rules with Current Governance Structure and Practice Are the current by-laws or the desired governance structure and process inconsistent with CNCA requirements? If inconsistent with a CNCA mandatory rule, how will the corporation adjust its governance structure and process in order to ensure compliance? If inconsistent with a CNCA default rule, is the preferred alternative mechanism permitted under the CNCA? Should the overriding provision be set out in the articles, by-laws or unanimous member agreement?

122 Theresa L.M. Man 35 If different options are prescribed in the regulations, which one should the corporation choose? Should the preferred option be set out in the articles, by-laws or unanimous member agreement? Are there provisions that the corporation would like to include in its governing document and the CNCA is silent on those issues? If so, should the provisions be set out in the articles, by-laws or unanimous member agreement? Determine Whether Changes Should be Made Prior to Continuance Changes to membership rights Some corporations may want to collapse classes into 1 voting class If change membership rights as part of the continuance, then articles of continuance and bylaws also require separate class vote Consider changing membership classes and rights by amending the by-laws under the CCA first, prior to continuance under the CNCA i.e., 2 step process Changes to corporate objects Obtain Membership Approval and Filing Need special resolution to approve articles of continuance May require separate class vote of the articles and bylaws if certain membership rights are amended File articles of continuance and notice with Corporations Canada Certificate of Continuance will be issued May file approved by-laws at the same time, or file them later within 12 months

123 Theresa L.M. Man Other Consequential Filings and Records Updates CRA Complete checklist File certificate of continuance, articles of continuance and new by-laws with CRA If purposes have been changed as part of the continuance process, need to file statement of activities If dissolved due to failure to continue, its registered charity status will also be revoked Provincial and territorial filings - e.g., corporate registrations, business name registrations, fund-raising registrations Ontario charities - provide Public Guardian and Trustee with certificate of continuance and articles of continuance, but not new by-laws Other filings - may need to provide continuance documents with third parties, e.g., funding organization, umbrella organization Updating corporate records and procedures - e.g., minute book, corporate governance policies, manuals Training - staff and volunteers will need to be trained and become familiar with the new governance documents Managing the Continuance Process Prepare early Have someone or a committee be responsible for the process Have the board engaged early on Seek legal help, conduct legal review, prepare draft by-laws Do not miss the 3 year time frame for continuance Meet the October 17, 2014 deadline!

124 Theresa L.M. Man Disclaimer This handout is provided as an information service by Carters Professional Corporation. It is current only as of the date of the handout and does not reflect subsequent changes in the law. This handout is distributed with the understanding that it does not constitute legal advice or establish a solicitor/client relationship by way of any information contained herein. The contents are intended for general information purposes only and under no circumstances can be relied upon for legal decision-making. Readers are advised to consult with a qualified lawyer and obtain a written opinion concerning the specifics of their particular situation Carters Professional Corporation

125 Not-for-Profit & Charitable Organizations in the Health Sector: Evolving Governance & Compliance Issues Canadian Charity Legal Checklist Mark Blumberg Blumberg Segal LLP April 8, 2013 Ontario Bar Association Continuing Professional Development

126 CANADIAN CHARITY LEGAL CHECKLIST by Mark Blumberg April 8, 2013 Prepared for the Ontario Bar Association (OBA) Not-for-Profit and Charitable Organizations in the Health Sector: Evolving Governance & Compliance Issues Measure Yes No Not Sure N/A For More Information 1 Filing Your T3010 Registered Charity Information Return a. You have checked that you are a registered charity on the CRA s Charities Listing CRA s Charities Listing b. You know the date of your fiscal year end See previous T3010 or CRA listing at c. You know when to file your T3010 d. You know who is responsible for filing the T3010 in your organization e. You always file your T3010 on time f. You are up to date with your T3010 filings See CRA listing g. CRA has your correct contact information On the Form TF725, Registered Charity Basic Information Sheet (BIS), which is the same form with the labels attached, make sure that you file that form and verify all the information on the form. In addition to updating your contact information you should also update your program areas on the TF725. File name -Canadian Charity Legal Checklist - April by Mark Blumberg last saved -03-Apr-13 10:27 AM PUBLIC page 1 of 16 created by M. Blumberg

127 CANADIAN CHARITY LEGAL CHECKLIST by Mark Blumberg, April 8, Measure Yes No Not Sure N/A For More Information 2 Ensuring Your T3010 is Correct and Complete a. You are using the correct form You might want to try the QuickPrep T3010 form at b. You complete all required information on the T3010 View CRA s page on the T c. You attach all required documentation when you file your T3010 such as financial statements See CRA checklist on pg. 3 in the T3010 guide at d. e. f. g. If you are having trouble with the T3010 you have checked CRA resources or called the CRA You have checked that you have not made some of the most common mistakes with the T3010 You had your lawyer, accountant and/or board members check the T3010 before it was filed After filing the T3010 you have checked your T3010 online to ensure accuracy See Sample T3010 at This is not required but it is a good practice to increase the likelihood of the T3010 being accurate. Changes in the 2012 Federal Budget allow CRA to suspend receipting privileges of a charity if their T3010 filing is incomplete. This is a best practice for larger organizations. See CRA Charities Listing at Also 3 Ensuring Your Donation Receipts Are Correct a. b. c. You only provide official donation receipts for gifts when appropriate You only provide receipts for donations to your organization (you do not act as a conduit or lend your registration to another organization such as non-profit or foreign charity) You understand the split receipting rules and ensure that any advantage is subtracted from the amount of the donation to determine the eligible amount of the official donation receipt. See definition of gift See also P113 Gifts and Income Tax or ew_guidance_for_canadian_registered_charities_carrying_out_activi ties/ Example of split receipting someone pays $100 to go to gala dinner, you subtract advantage (food, door prizes etc) and issue receipt for donation minus advantage. File name -Canadian Charity Legal Checklist - April by Mark Blumberg last saved -03-Apr-13 10:27 AM PUBLIC page 2 of 16 created by M. Blumberg

128 CANADIAN CHARITY LEGAL CHECKLIST by Mark Blumberg, April 8, Measure Yes No Not Sure N/A For More Information d. You understand that the definition of advantage or benefit is what a donor may receive in return for his or her donation (for example, a meal, tickets to a show), and it must be taken into consideration when determining the eligible amount of a gift for receipting purposes. e. You understand that advantage is very broad and some of the many possible advantages include property (for example, cash, non-cash gifts also called gifts-in-kind), the use of or enjoyment of property; the provision of services; and other benefits including but not limited to assumption of debt by charity, sponsorship, non-recourse loans, etc. f. All mandatory fields are included on your receipts You can review CRA s checklist Issuing complete and accurate donation receipts g. h. i. j. k. You always ensure that you have the correct donor on the receipt You understand the definition of fair market value namely: Fair market value is normally the highest price, expressed in dollars, that property would bring in an open and unrestricted market, between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other. You understand that in certain circumstances under the deemed fair market value rules a charity must issue a receipt for the lesser of fair market value or the cost to the donor You understand that if either the fair market value of a gift in kind or an advantage cannot be determined, an official donation receipt cannot be issued. You understand that the onus is on the charity to determine fair market value and that a charity cannot rely on a donor s valuation or view of fair market value. or review CRA s sample receipts. eng.html File name -Canadian Charity Legal Checklist - April by Mark Blumberg last saved -03-Apr-13 10:27 AM PUBLIC page 3 of 16 created by M. Blumberg

129 CANADIAN CHARITY LEGAL CHECKLIST by Mark Blumberg, April 8, Measure Yes No Not Sure N/A For More Information l. You are aware of the transaction that generally do not qualify as gifts and therefore no tax receipt is issued? For example: A court ordered transfer of property to a charity; The payment of a basic fee for admission to an event or to a program; The payment of membership fees that convey the right to attend events, receive literature, receive services, or be eligible for entitlements of any material value that exceeds 80% of the value of the payment; A payment for a lottery ticket or other chance to win a prize; The purchase of goods or services from a charity; A donation for which the fair market value of the advantage or consideration provided to the donor exceeds 80% of the value of the donation; A gift in kind for which the fair market value cannot be determined; Donations provided in exchange for advertising/sponsorship; Gifts of services (for example: donated time, labour); Gifts or promises (for example: gift certificates donated by the issuer, hotel accommodation); Pledges; Loans of property; Use of a timeshare; and The lease of premises. For more information on receipting and Canadian charities see: egory/receipting_by_charities/ Check out the free Receipting Kit with information on receipting and relevant CRA policies: ing_kit_for_canadian_registered_charities_launched_by_the_charity _la/ or at 4 Religious School Tuition Receipts a. If your charity is a religious school and is issuing receipts for the religious portion of tuition, it is in compliance with CRA s circular IC Fraudulent Tax Receipts a. b. Your charity locks away your receipting book or uses a secure password on any computer or program that produces official donation receipts Your charity maintains tight controls over who can issue receipts in order to avoid the issuance of fraudulent or improper tax receipts File name -Canadian Charity Legal Checklist - April by Mark Blumberg last saved -03-Apr-13 10:27 AM PUBLIC page 4 of 16 created by M. Blumberg

130 CANADIAN CHARITY LEGAL CHECKLIST by Mark Blumberg, April 8, Measure Yes No Not Sure N/A For More Information 6 Charity Gifting Tax Shelters a. Your charity avoids any involvement with abusive tax shelter gifting arrangements 7 Acting Outside Legal Objects a. b. c. d. You periodically review the legal objects in your charity s letters patent/articles of incorporation, trust deed or constitution to ensure all the activities of your charity are within your legal objects If activities are outside the scope of your objects you have discontinued those activities or decided to modify your objects If you are modifying your legal objects you have first obtained CRA s approvals for the changes and secondly provided CRA with a copy of the supplementary letters patent or articles of amendment after they have been filed If you are a Federal non-profit Corporation under the Canada Corporations Act (CNCA) you have a plan to move ( continue ) from the old act to the new CNCA which includes review of the appropriateness of your objects. If you are an Ontario nonprofit Corporation under the Ontario Corporations Act you have a plan to bring your corporation into compliance with the new Ontario act targeted to be brought into force in ada_not-for-profit_corporations_act_federal_corporations/ See sections below on the new non-profit corporate acts. 8 Non-Charitable Activities a. b. All your charitable activities are charitable under Canadian law, i.e. have purposes namely: The relief of poverty; The advancement of education; The advancement of religion, or Other purposes beneficial to the community in a way the law regards as charitable. You only conduct fundraising, administration, political, business, and social activities within the limits prescribed by law See CRA Checklist Engaging in Allowable Charitable Activities Other acceptable activities permitted within certain limits File name -Canadian Charity Legal Checklist - April by Mark Blumberg last saved -03-Apr-13 10:27 AM PUBLIC page 5 of 16 created by M. Blumberg

131 CANADIAN CHARITY LEGAL CHECKLIST by Mark Blumberg, April 8, Measure Yes No Not Sure N/A For More Information 9 Avoiding Gifts to Non-Qualified Donees See the CRA s Guidance for Canadian Registered Charities Carrying out Activities Outside Canada a. You understand the rules relating to Canadian charities working with non-qualified donees or CRA s Guidance Using an Intermediary to Carry Out Charitable Activities within Canada b. You know what a qualified donee is For a definition see c. You only grant funds or gift resources to qualified donees d. If your charity provides resources to organizations or individuals that are not qualified donees (such as foreign charities or Canadian organizations that are not registered charities), your charity has a structured arrangement that maintains direction and control by: See and gement_versus_conduit_for_canadian_charities_and_foreign_activ ities.pdf. Also see the CRA s Guidance for Canadian Registered Charities Carrying out Activities Outside Canada e. Conducting appropriate due diligence on intermediaries f. g. Entering into appropriate written agreement with intermediaries with all necessary elements Agreeing on a detailed description of activities before sending funds or resources h. Monitoring and supervising the activities i. Maintaining a real, ongoing, active relationship with your intermediary See the CRA s Guidance for Canadian Registered Charities Carrying out Activities Outside Canada j. Providing periodic payments for larger projects k. Segregating funds in the case of agency agreements l. Maintaining Books and Records of the activities m. You properly categorize foreign activities on the T3010 Registered Charity Information Return File name -Canadian Charity Legal Checklist - April by Mark Blumberg last saved -03-Apr-13 10:27 AM PUBLIC page 6 of 16 created by M. Blumberg

132 CANADIAN CHARITY LEGAL CHECKLIST by Mark Blumberg, April 8, Measure Yes No Not Sure N/A For More Information 10 Fundraising Costs and Practices a. b. c. d. If your charity fundraises then you, or someone else in your organization, has read and understands the CRA s Guidance Fundraising by Registered Charities (CG-013)(April 20, 2012) You are aware that CRA in its Guidance on Fundraising by Registered Charities considers fundraising to be acceptable unless the fundraising is: a purpose of the charity (a collateral, non-charitable purpose); delivering a more than incidental private benefit (a benefit that is not necessary, reasonable, or proportionate in relation to the resulting public benefit); illegal or contrary to public policy; deceptive; or an unrelated business. None of the indicators of concern apply to your charity, such as: 1. Sole-source fundraising contracts without proof of fair market value. 2. Non-arm's length fundraising contracts without proof of fair market value. 3. Fundraising initiatives or arrangements that are not welldocumented. 4. Fundraising merchandise purchases that are not at arm's length, not at fair market value, or not purchased to increase fundraising revenue. 5. Activities where most of the gross revenues go to contracted non-charitable parties. 6. Commission-based fundraiser remuneration or payment of fundraisers based on amount or number of donations. 7. Total resources devoted to fundraising exceeding total resources devoted to program activities. 8. Misrepresentations in fundraising solicitations or in disclosures about fundraising or financial performance. You appropriately allocate fundraising expenditures according to the CRA s Guidance Fundraising by Registered Charities CRA s Guidance Fundraising by Registered Charities For additional information on Canadian charities and fundraising see: ing_guidance_for_registered_charities/ CRA s Guidance Fundraising by Registered Charities File name -Canadian Charity Legal Checklist - April by Mark Blumberg last saved -03-Apr-13 10:27 AM PUBLIC page 7 of 16 created by M. Blumberg

133 CANADIAN CHARITY LEGAL CHECKLIST by Mark Blumberg, April 8, Measure Yes No Not Sure N/A For More Information e. You know your charity s ratios of cost to revenue, and the ratios are in line with CRA expectations f. You provide adequate disclosure and transparency of fundraising activities and costs g. You are following best practices as outlined in the CRA s Guidance Fundraising by Registered Charities, including: 1. Prudent planning processes 2. Appropriate procurement processes 3. Good staffing processes 4. Ongoing management and supervision of fundraising practice 5. Adequate evaluation processes 6. Use made of volunteer time and volunteered services or resources 7. Disclosure of fundraising costs, revenues, and practice (including cause-related or social marketing arrangements) h. You are taking steps to reduce your fundraising costs i. When third parties, whether paid fundraisers or volunteers, are conducting fundraising on behalf of your charity you have an appropriate written agreement with such third party 11 Failure to Meet Disbursement Quota a. b. You understand that changes in the March 2010 Federal budget removed part of the disbursement quota, namely the 80/20 expenditure rule. Now charitable organizations will need to expend on charitable activities 3.5 per cent of all assets not currently used in charitable programs or administration, if these assets exceed $100,000 for charitable organizations or $25,000 for public or private foundations. This for example covers reserves, endowments, investment, buildings owned by a charity but not used in charitable programs or administration. You review your Registered Charity Information Return Summary received from CRA after filing your T3010 See CRA s note on disbursement quota reform at Also see article Canadian Budget 2010 announces disbursement quota reform for Canadian charities at _2010_disbursement_quota_changes_and_antiavoidance_provisions/ c. Do you have surplus in your disbursement quota? File name -Canadian Charity Legal Checklist - April by Mark Blumberg last saved -03-Apr-13 10:27 AM PUBLIC page 8 of 16 created by M. Blumberg

134 CANADIAN CHARITY LEGAL CHECKLIST by Mark Blumberg, April 8, Measure Yes No Not Sure N/A For More Information 12 Political Activities a. You understand that: Registered charities may conduct limited, non-partisan political activities that further their stated charitable purposes. However, registered charities may not have political purposes, may not conduct partisan political activities and may not be involved in political activities that are unrelated to their objects. You understand that CRA presumes an activity to be political if the activty: CRA s Policy Statement on Political Activities (CPS-022) eng.html recently updated to reflect changes in the 2012 Federal Budget. The CRA has in 2013 placed certain resources for charities relating to political activities at b. 1) explicitly communicates a call to political action (that is, encourages the public to contact an elected representative or public official and urges them to retain, oppose, or change the law, policy, or decision of any level of government in Canada or a foreign country); 2) explicitly communicates to the public that the law, policy, or decision of any level of government in Canada or a foreign country should be retained (if the retention of the law, policy, or decision is being reconsidered by a government), opposed, or changed; CRA s Policy Statement on Political Activities (CPS-022) eng.html For further information on Canadian charities and political activities see Blumbergs directory on political activities: egory/political_activities_and_canadian_charities/ 3) explicitly indicates in its materials (whether internal or external) that the intention of the activity is to incite, or organize to put pressure on, an elected representative or public official to retain, oppose, or change the law, policy, or decision of any level of government in Canada or a foreign country; or See also CRA s Upholding Human Rights and Charitable Registration 4) makes a gift to another qualified donee to support political activities. c. If your organization engages in political activities: 1. Those political activities are reported on the T3010 CRA s Policy Statement on Political Activities (CPS-022) eng.html See changes to the reporting requirements for charities that conduct political activities File name -Canadian Charity Legal Checklist - April by Mark Blumberg last saved -03-Apr-13 10:27 AM PUBLIC page 9 of 16 created by M. Blumberg

135 CANADIAN CHARITY LEGAL CHECKLIST by Mark Blumberg, April 8, Measure Yes No Not Sure N/A For More Information 2. Those activities are connected and subordinate to your legal objects Your legal objects are in your articles of incorporation (or letters patent), articles of amendment (or supplementary letters patent) or if you are a trust in your trust deed or if you are an unincorporated association in your constitution 3. The political activities are non-partisan See CRA s note on What is a partisan political activity? at See Political Parties use of charity s premises: 4. The political information or views are not false, inaccurate or misleading 5. Your percentage of resources spent on political activities is 10% or less or as outlined in CPS-022 for smaller charities 6. You have a disbursement quota excess even after conducting political activities 13 Unrelated Business Activities a. You have read CPS-019 What is a Related Business on the CRA website eng.html b. If your charity is carrying on a business (i.e. activity commercial in nature), then: 1. Are all goods donated? 2. Are the business activities conducted infrequently? c. 3. Are business activities related business (i.e. 90% volunteers) or linked AND subordinate to charity s purpose? If your charity is conducting business activities in order to advance community economic development then you have read CRA s bulletin Community Economic Development Activities and Charitable Registration (CG-014) eng.html File name -Canadian Charity Legal Checklist - April by Mark Blumberg last saved -03-Apr-13 10:27 AM PUBLIC page 10 of 16 created by M. Blumberg

136 CANADIAN CHARITY LEGAL CHECKLIST by Mark Blumberg, April 8, Measure Yes No Not Sure N/A For More Information 14 Transactions with Directors a. If your charity operates in Ontario, it does not have any transactions with directors or pay any amounts to directors except for reimbursement of reasonable out-of-pocket expenses related to the work of the charity, unless authorized by court order See 5. Duty to Act Gratuitously at ullet/bullet3.asp b. If your charity operates in Canada, but outside of Ontario, it is careful about any transactions that it enters into with directors to ensure that there is no undue benefit eng.html 15 Employment Issues a. Your independent contractors really are independent contractors and not employees See CRA publication Employee or Self-employed? b. Your charity is deducting appropriate amounts of CPP, EI, and income tax and remitting to CRA c. You have agreements with all employees and independent contractors d. Compensation is appropriate 16 Keeping Adequate Books and Records a. Your charity maintains adequate books and records as defined by CRA Books and Records Checklist at b. You keep records in either English or French c. d. e. f. g. You keep records for at least the prescribed period of time for each record You keep books and records at an address in Canada that is on file with CRA You maintain copies or backups of all key documents at a separate site Electronic documents are backed up regularly and also stored off site You have easy access to governing documents (incorporating documents, constitution, trust document), bylaws, financial statements, copies of official donation receipts, copies of T3010, written agreements, board and staff meeting minutes, annual reports, ledgers, bank statements, expense accounts, inventories, payroll records, promotional materials, and fundraising materials File name -Canadian Charity Legal Checklist - April by Mark Blumberg last saved -03-Apr-13 10:27 AM PUBLIC page 11 of 16 created by M. Blumberg

137 CANADIAN CHARITY LEGAL CHECKLIST by Mark Blumberg, April 8, Measure Yes No Not Sure N/A For More Information h. You keep source documents (e.g. invoices, vouchers, work orders, delivery slips, purchase orders, and bank deposit slips) 17 Maintaining Legal Status a. If your charity is a federal corporation, it is in good standing with Industry Canada and if it is provincial it is in good standing with the appropriate provincial corporate registrar b. Your charity files necessary corporate returns c. If you are an Ontario non-profit Corporation under the Ontario Corporations Act or a Federal non-profit Corporation under the Canada Corporations Act you are aware of the corporate changes and have a plan to either continue (for Federal corporations) or to modify your governance documents to conform to the ONCA (for Ontario corporations) ada_not-for-profit_corporations_act_federal_corporations/ 18 Provincial Charitable Registration a. For charities operating in Ontario, you have made necessary filings with the Public Guardian and Trustee es/ b. For charities fundraising in Alberta, you have registered with the Alberta government under the Charitable Fundraising Act, if required c. For charities operating in Quebec, or providing receipts to Quebec residents, you have made necessary filings with Revenu Quebec s_operating_in_quebec_or_issuing_receipts_to_quebec_reside/ 19 Internal Financial Controls a. Your charity is aware of the many ways that some entities may try to take advantage of the charity, including for fraud, money laundering, terrorism, private benefit, etc. rnance Ethical_Standards_and_Financial_Controls_ pd f (see slides 63-78) b. You have adequate internal financial controls in place to prevent misuse of charitable assets rnance Ethical_Standards_and_Financial_Controls_ pd f (see slides ) or CC8 - Internal Financial Controls for Charities (UK Charity Commission) c. You are aware of financial management resources for Canadian charities Understanding Financial Responsibilities of Canadian Charities comments/understanding_financial_responsibilities_of_canadian_ch arities/ d. You assist your partners and intermediary, if necessary, with basic financial management Building Capacity through Financial Management: A Practical Guide File name -Canadian Charity Legal Checklist - April by Mark Blumberg last saved -03-Apr-13 10:27 AM PUBLIC page 12 of 16 created by M. Blumberg

138 CANADIAN CHARITY LEGAL CHECKLIST by Mark Blumberg, April 8, Measure Yes No Not Sure N/A For More Information 20 Basic Risk Management a. Your charity is aware of its governance risks, operational risks, financial risks, external risks, and the importance of complying with the law b. Your charity has assessed and analyzed the risk that it faces and has an informal or formal risk management plan which considers what risks will be assumed, what will be eliminated, how to reduce risk associated with certain activities and transference of risk by insurance or outsourcing c. Your charity avoids any involvement either directly or indirectly with criminal enterprises or terrorism d. If your charity deals with children or vulnerable adults, it has policies and procedures to prevent abuse of beneficiaries and such policies and procedures are being enforced e. Your charity maintains appropriate insurance coverage f. You attempt to ensure that your directors and officers are appropriate and are not ineligible individuals under the Income Tax Act (Canada) ntation_to_the_law_society_annual_estate_and_trust_summit/ 21 Governance a. Your board of directors is aware of its basic responsibilities rnance Ethical_Standards_and_Financial_Controls_ pd f (see slides 30-44) b. You run an effective and efficient charity You might find this UK publication helpful CC10 - Hallmarks of an Effective Charity c. Is your non-profit s governance structure appropriate? If your current board is ineffective and uncooperative, it would be useful to consider looking into governance training and advice so that the new board can be more successful, strategic and effective. 22 New Federal and Ontario corporate acts a. Do you know whether you are a corporation? File name -Canadian Charity Legal Checklist - April by Mark Blumberg last saved -03-Apr-13 10:27 AM PUBLIC page 13 of 16 created by M. Blumberg

139 CANADIAN CHARITY LEGAL CHECKLIST by Mark Blumberg, April 8, Measure Yes No Not Sure N/A For More Information Check out your letters patent (articles of incorporation) for this information, but if you don t have these, then try searching the free Industry Canada database to at least eliminate the possibility you are a federal corporation. b. If you are a corporation, are you a Federal non-profit or an Ontario non-profit? ml?locale=en_ca Some organizations that are trusts or unincorporated associations will not be affected by either the CNCA or ONCA. c. If you are a Federal non-profit Corporation under the Canada Corporations Act (CNCA) you have a plan to move ( continue ) from the old Canada Corporations Act to the new CNCA by October See Blumbergs CNCA Suitcase: nca_suitcase_for_documents_relating_to_canada_not-forprofit_corporati/ d. If you are an Ontario non-profit Corporation under the Ontario Corporations Act you have a plan to bring your corporation into compliance with the new Ontario act targeted to be brought into force in If you are an Ontario corporation, you may want to consider continuing into the Federal jurisdiction under the Canada Not-forprofit Corporations Act (CNCA). Here is an article on the ONCA at the Ontario Trillium Foundation website: Knocks If you are a Federal corporation you can request copies of articles and by-laws from Industry Canada. e. Do you have copies of the letters patent, supplementary letters patent and by-laws for the organization? If you are an Ontario corporation you can request the letters patent and supplementary letters patent from the Ontario government. They will provide you with a microfiche. The Ontario government does not keep copies of the by-laws. Also, if you are a registered charity, the Canada Revenue Agency may have copies of some of these documents, but they could be outdated. f. Are the objects/purposes of your organization up-to-date and relevant for the current work of your non-profit? In some cases, it may make sense to update the organization s objects as part of the corporate changes. It is important to remember that all registered charities will need to ask CRA for preapproval of these revised objects, which can take months, so this is an example of something that you may wish to start sooner rather than later. File name -Canadian Charity Legal Checklist - April by Mark Blumberg last saved -03-Apr-13 10:27 AM PUBLIC page 14 of 16 created by M. Blumberg

140 CANADIAN CHARITY LEGAL CHECKLIST by Mark Blumberg, April 8, Measure Yes No Not Sure N/A For More Information Federal for most organizations it is best to start with a new by-law based on the Industry Canada model by-law or something similar to that. g. Do you have a copy of your most recent by-law? Ontario - until you are able to review the Ontario government s draft default by-law, it probably does not make much sense to start making revisions to your existing by-law or begin drafting a new bylaw. h. Do you know who your members are and do you have an updated list? If there is more than one membership class, do you know the attributes of each class? (ie name, notice, vote, etc)? Members are like shareholders in a for-profit company, except that members don t own the corporation, they control it. Under both the ONCA and CNCA members will have more rights. In some cases non-voting members will even get to vote. Because of this, your organization may wish to clarify who will be the members in the future. i. Does the organization want to maintain its current name or change its name? If you want to change your name you will need to have a NUANS search prepared j. Do you have a current list of directors and officers? k. What address do you want to use for your corporation under the new act? l. Are you up-to-date in the corporate filings for your organization If not, you may want to do arrears in filings. 22 Other a. If your charity has accepted a gift with a restriction, such restriction is complied with File name -Canadian Charity Legal Checklist - April by Mark Blumberg last saved -03-Apr-13 10:27 AM PUBLIC page 15 of 16 created by M. Blumberg

141 CANADIAN CHARITY LEGAL CHECKLIST by Mark Blumberg, April 8, Measure Yes No Not Sure N/A For More Information b. Whenever entering into a major agreement between the charity and a third party, the charity understands the content of the agreement and if necessary obtains appropriate professional advice c. You occasionally check the CRA website for new developments d. You are aware of various resources for charities For example, and archived webinars on compliance issues at rs_on_canadian_charity_law_- _charity_law_information_program_clip_by_/ e. You are signed up to the CRA s free newsletter f. You are signed up to non-profit and private sector providers of news and legal information For example, Mark Blumberg s CharityLaw.ca newsletters at g. Your charity obtains appropriate professional advice (from lawyers, accountants, insurance agents etc) when required This Charity Legal Checklist was prepared by Mark Blumberg, a lawyer at Blumberg Segal LLP in Toronto. To find out more about legal services that Blumbergs provides to Canadian charities and non-profits please visit or This Canadian Charity Legal Checklist is for information purposes only. It is not intended to be or provide legal advice. You should not act or abstain from acting based upon such information without first consulting a legal professional. File name -Canadian Charity Legal Checklist - April by Mark Blumberg last saved -03-Apr-13 10:27 AM PUBLIC page 16 of 16 created by M. Blumberg

142 Tax issues CRA s new fundraising guidance, receipting and inter charity transfers Presentation to the OBA program Not for Profit and Charitable Organizations in the Health Sector: Evolving Governance & Compliance Issues April 8, 2013 Mark Blumberg (mark@blumbergs.ca) Blumberg Segal LLP 1 Blumberg Segal LLP Blumberg Segal LLP is a law firm based in Toronto, Ontario Mark kblumberg is a partner at Blumbergs who focuses on nonprofit and charity law Assists charities from across Canada with Canadian and international operations and foreign charities fundraising here and Free Canadian Charity Law Newsletter. Sign up at: (416) or mark@blumbergs.ca *legal information, not legal advice 2 GlobalPhilanthropy.ca 1

143 Incorrect Receipts Charities are not required to issue official donation receipts, but if they do issue them they must do it properly. Some receipts: Lack required information Have mistakes Include improper fair market value (FMV) 3 GlobalPhilanthropy.ca What is a Gift Charities can only issue receipts for a gift. A gift must be: 1. Voluntary given of free will (not compelled) 2. Transferred from donor to charity/qualified donee 3. Property cash or gifts in kinds (not services) 4. Donative Intent on the part of the donor (advantage must be less than 80% of amount unless Minister agrees) 4 GlobalPhilanthropy.ca 2

144 Don t Issue a Receipt When You cannot determine the value of the donation or the benefit Donation of services (donated time, labour, skills) to charity or loans of property, use of a timeshare or lease of premises Donation is intended for another organization that is not a registered it charity or qualified donee ( lending registration ) it ti 5 GlobalPhilanthropy.ca Don t Issue a Receipt When Tuition (except IC private religious schools) Business advertising expenses/sponsorship Gifts of promises (for example, gift certificates donated by the issuer, hotel accommodation) or pledges Payment of basic fee for event (eg. concert) Payment for program (eg. daycare) 6 GlobalPhilanthropy.ca 3

145 Don t Issue a Receipt When Membership fees that convey the right to attend events, receive literature, receive services, or be eligible for entitlements of any material value that exceeds 80% of the value of the payment Lottery tickets Purchase of goods or services from charity Donation for which the fair market value of the advantage or consideration provided to the donor exceeds 80% of the value of the donation 7 GlobalPhilanthropy.ca Don t Issue a Receipt When Funds or gift in kind from another qualified donee (for example Canadian private foundation gifts or transfers funds to registered Canadian charitable organization) Cannot determine the name of the true donor Gift directed to specific person or family unless charity has already decided that person or family is recipient of its charitable program and charity has full discretion to reallocate and person or family is arms length from donor 8 GlobalPhilanthropy.ca 4

146 Mandatory Elements of Receipts For gifts of cash: (Regulation 3501 of the Income Tax Act) A statement that it is an official receipt for income tax purposes; The name and address of the charity as on file with the CRA; The charity s registration number; The serial ilnumber of the receipt; The place or locality where the receipt was issued; The day or year the donation was received; 9 GlobalPhilanthropy.ca Mandatory Elements of Receipts The day on which the receipt was issued if it differs from the day of donation; The full name and address of the donor; The amount of the gift; The value and description of any advantage received by the donor (under proposed legislation); The signature of an individual authorized by the charity to acknowledge donations; and The name and Web site address of the Canadian Revenue Agency ( 10 GlobalPhilanthropy.ca 5

147 Mandatory Elements for Gifts in Kind For non cash gifts (gifts in kind), these additional elements: The day on which the donation was received (if not already indicated); A brief description of the property transferred to the charity; The name and address of the appraiser (if property was appraised); and In place paceof the eamount tof the egift mentioned to edabove, the deemed fair market value of the property (under proposed legislation). 11 GlobalPhilanthropy.ca Sample Official Donation Receipts 12 GlobalPhilanthropy.ca 6

148 CRA s Fundraising Guidance Fundraising is important for charities but it is not a charitable activity Lots of media and donor concern about costs and practices CRA Guidance on Fundraising recently updated 13 GlobalPhilanthropy.ca Fundraising by Registered Charities CRA s Guidance onfundraising (CG 013): arc.gc.ca/chrts gvng/chrts/plcy/cgd/fndrsngeng.html My page on the fundraising guidance: PDF Version of Guidance aising_guidance_april_20,_2012_ _final.pdf 14 7

149 CRA Fundraising Guidance Consultation draft in 2008 Published guidance on June 11, 2009 Revised guidance in April 2012 ( Guidance ) 15 Organization of Guidance Fundraising by Registered Charities A. Introduction B. Summary C. Application and jurisdiction D. What is fundraising? E. Definitions F. When is fundraising not acceptable? G. Evaluating a charity's fundraising H. Factors that may influence the CRA s evaluation of a charity s fundraising AppendixA A Examplesof fundraisingactivitiesactivities Appendix B Allocating fundraising expenditures Appendix C Best practices Appendix D Questions and answers Footnotes 16 8

150 Summary indicators and factors 7. When evaluating a charity s fundraising activities, the CRA will consider a range of indicators and factors, including the following: resources devoted to fundraising relative to resources devoted to charitable programs; fundraising without an identifiable use or need for the proceeds; the charity s fundraising expenses to fundraising revenue ratio; 17 Summary indicators and factors inappropriate purchasing or staffing practices, including purchases of fundraising merchandise or services that do not increase fundraising revenue, paying more than fair market value for fundraising merchandise or services, and sole source or not at arm s length contracts with suppliers or service providers; activities where most of the gross revenues go to contracted t non charitable parties; commission based fundraiser remuneration or payment of fundraisers based on the amount or number of donations; 18 9

151 Summary indicators and factors misrepresentations in fundraising solicitations or in disclosure about fundraising costs, revenues or practices; fundraising initiative or arrangements that are not well documented; and the size of the charity, causes with limited appeal, donor development programs, and involvement in gaming activities. 19 Fundraising Ratio Ratio of costs to revenue over fiscal period under 35% This ratio is unlikely to generate questions or concerns by the CRA. Ratio of costs to revenue over fiscal period 35% and above The CRA will examine the average ratio over recent years to determine if there is a trend of high fundraising costs. The higher the ratio, the more likely it is the CRA will be concerned the charity is engaged in fundraising that is not acceptable, requiring a more detailed assessment of expenditures. Ratio of costs to revenue over fiscal period above 70% This level will raise concerns with the CRA. The charity must be able to provide an explanation and rationale for this level of expenditure to show that it is not engaged in unacceptable fundraising

152 Questions on Ratio What are your total fundraising expenditures? What are your total fundraising revenues? What is the ratio of expenditures to revenue? Is the ratio high? What are doing to reduce ratio? Is your board and senior staff aware of ratio? Are you disclosing to public accurately ratio? What other steps are you taking to be more transparent and provide more disclosure? Do you report regularly to your board about compliance with the Guidance? 21 Definition of fundraising As a general rule, fundraising is any activity that includes a solicitation of present or future donations of cash or gifts in kind, or the sale of goods or services to raise funds, whether explicit or implied

153 Exclusions from fundraising Fundraising does not include: seeking grants, gifts, contributions, or other funding from other charities or government, recruiting volunteers to carry out the general operations of the charity, or related business activities. (See CPS 019, What is a Related Business?) 23 Allocation how much is fundraising If 10% FR If 10 90% FR If 90% 100% FR Activity would have been undertaken without fundraising Exclusively, or almost exclusively to fundraise if content to assist charitable or admin they are incidental and ancillary Allocate nothing to FR Pro rated allocation to fundraising and other (charitable, admin, political, etc) Allocate 100% to fundraising Report 0 Report % Report 100% 12

154 Understating Fundraising Revenue Where a charity knowingly or negligently understates its fundraising expenses on line 5020 of Form T3010 or elsewhere, this is taken into account in assessing whether the charity has acted reasonably. Inaccurate reporting is grounds for compliance action under the Income Tax Act. 25 Reserve Fund Policy The size of a justifiable reserve fund will depend on a charity s particularsituation. For example, when establishingaa reserve fund, the charity could show it has taken into account factors such as: its typical annual expenditures; its size; its long term plans; its donor base; its projected revenue; its current and projected economic conditions; anticipated changes to the environment in which the charity operates; contingencies; and known risks being faced. Review policy periodically to take into account the changing needs of the charity

155 Disbursement Quota 27 GlobalPhilanthropy.ca Disbursement Quota Changes The Disbursement Quota (DQ) is the amount that a registered charity must spend each year on its charitable activities or as gifts to qualified donees. Used to be 80% of receipted donations plus 3.5% of assets not used in charitable activities Budget removed 80% expenditure requirement. 28 GlobalPhilanthropy.ca 14

156 Background March 4, 2010 Budget changes to the disbursement quota 1) repealed the charitable expenditure rule (the 80% requirement); 2) modify the capital accumulation rule (the 3.5% requirement); 3) strengthen the related anti avoidance rules for charities. arc.gc.ca/gncy/bdgt/2010/chrt eng.html 29 GlobalPhilanthropy.ca Background Complaints about complexity of disbursement quota Repealed "enduring property," "capital gains reduction," "capital gains pool," and "specified gift.". CRA has other tools to curb inappropriate spending such as fundraising arc.gc.ca/gncy/bdgt/2010/chrt eng.html 30 GlobalPhilanthropy.ca 15

157 Current Disbursement Quota Each year, registered charities must spend on charitable activities 3.5% of the average value of any assets the registered charity owned over the previous 24 months that were not used directly in charitable activities or in the administration of the registered charity E.g. 3.5% of endowments, investments, reserve fund, building owned by charity not used by charity at the moment for charitable or administrative i i activities iii If 1 million dollar endowment then $35, GlobalPhilanthropy.ca Inter Charity Transfers Anti Avoidance and Designated Gifts 32 GlobalPhilanthropy.ca 16

158 Strengthened Anti Avoidance Rules The 2010 Federal Budget strengthened the anti avoidance rules. Now the CRA can revoke the registration of a registered charity if the charity has entered into any transaction where any purpose of that transaction was to unduly delay the expenditure of amounts on charitable activities. This rule nolonger only applies to gifts but covers a much broaderconcept of transaction and it no longer needs to be the main purpose, just a purpose. 33 GlobalPhilanthropy.ca Designated Gifts Applies after March h4, 2010 Type of gift made between registered charities that are not at arm's length to each other Donor charity must identify gift as designated gift in its T3010 filing for the year the gift is made 34 GlobalPhilanthropy.ca 17

159 2010 Anti Avoidance Rule A registered charity that receives a gift from another registered charity that is not at arm's length must spend 100% of the fair market value of the gift (determined at the time of the gift): on its own charitable activities; or on gifts to qualified donees that are at arm's length. must meet this anti avoidance spending requirement in the fiscal period the gift was received, or in the following fiscal period. 35 GlobalPhilanthropy.ca 2010 Anti Avoidance Rule Subject tto a penalty of 110% of the amount that t it failed fildto spend, or to revocation of its registered status. The anti avoidance spending requirement is in addition to a charity's disbursement quota requirement. If the donor charity designates gift, the recipient charity will not be subject to this additional spending requirement. 36 GlobalPhilanthropy.ca 18

160 4 Scenarios 1) Gift between arms length charities 2) Gift between non arms length charities 3) Gift Between non arms length charities (Designated by Donor charity) 4) Transfer from Charity to intermediary (need direction and control) 37 GlobalPhilanthropy.ca Designated Gift Type of gift made between registered charities that are not at arm's length. To designate a gift, the donor charity must indicate the gift is a designated gift in its T3010 annual return for the fiscal period in which the gift is made. Reported on Form T1236, Qualified Donees Worksheet / Amounts Provided to Other Organizations. Write designated gift on blank line if amount is designated. 38 GlobalPhilanthropy.ca 19

161 Designated Gift DESIGNATED GIFT 39 GlobalPhilanthropy.ca Designated Gift A donor charity cannot use the designated gift to satisfy its disbursement quota. Therefore, the amount of designated gifts included at line 5050 (gifts made to qualified donees) must be subtracted when a charity calculates if it has met its disbursement quota. CRA recommends that the donor charity inform the recipient charity that a gift is a designated gift to allow the recipient charity to adequately track its own spending requirement for the fiscal period. 40 GlobalPhilanthropy.ca 20