Why wait – part I? Should your Ontario charitable corporation think about continuing under the new federal act now? 

publication 

November 2011

Corporate Bulletin

With the proclamation into force of the new Canada Not-for-profit Corporations Act last month (the " CNCA "), charitable corporations formed under the Part III of the Ontario Corporations Act (the " OCA ") now have a choice of whether to continue under the CNCA or to wait for the new Ontario Not-for-Profit Corporations Act, 2010 (the " ONCA ") to be proclaimed into force late in 2012.

Some Ontario corporations may not want to wait. They may want to look at the new federal option now. The OCA permits a Part III corporation to continue to the CNCA.

There are many factors to consider in deciding whether to continue as a federal corporation, and the relevancy and weight to be given to each of the various factors will vary from organization to organization. Nevertheless, some general observations can be made.

is there a choice?

In many cases, there will not be a choice. For example, universities, colleges, professional governing bodies and most hospitals must be incorporated under provincial law. In other cases, the primary funding agent may dictate the choice of incorporation jurisdiction.

For those that have a choice of incorporation jurisdiction (including existing OCA charitable corporations that for the first time will have the right to continue between to the federal jurisdiction), the factors differ depending on whether the corporation is, or will be, a public benefit corporation (i.e., generally, a corporation that is a registered charity under the Income Tax Act (Canada) (the " Tax Act ") or that receives > $10,000 a year in government grants or from donors who are not members, directors, officers or employees) or a mutual benefit corporation (i.e., all other corporations). To simplify the analysis that follows, a "PBC" means a soliciting corporation under the CNCA or a charitable corporation under the ONCA.

CNCA v. ONCA choice for a charitable corporation


factor

CNCA

ONCA

National Platform

The federal jurisdiction offers the distinct advantages of a national platform, which may be perceived to be more inclusive to members, donors and the general public.  The federal platform provides a common set of rules that are known to directors, lawyers and others conducting business with the corporation across the country.  As well, federal incorporation confers the right to carry on the corporation's activities across Canada under its federal corporate name.

For many large charitable corporations operating, or with aspirations to operate, on a Canada-wide basis, federal incorporation has these innate advantages that no province can match.  For these organizations, the analysis effectively stops there.  An ONCA corporation may find to its chagrin that, by the time that it seeks to register to operate in another province/territory, its name is no longer available for use in that jurisdiction.

Financial Transparency

A soliciting corporation is required to file annual financial statements with Corporations Canada where they are open to inspection by the public.  The greater degree of mandatory financial disclosure imposed on federal PBCs (including charities) provides a type of signalling to the marketplace not afforded by the ONCA.  Nevertheless, some charitable corporations may prefer to avoid mandatory disclosure of their annual financial statements.

The ONCA contains no equivalent filing requirement. To provide the same level of transparency, an Ontario charitable corporation could voluntarily post its financial statements on its website.  Anything less is likely to be perceived as less open than what is mandated by federal law.  Even here, however, voluntary financial disclosure may be perceived as less transparent than mandatory disclosure.

Waiving Appointment of Public Accountant ("PA") and Electing a Compilation Report Rather than an Audit or Review Engagement

A soliciting corporation is only eligible to waive the appointment of a PA and thereby opt for a compilation report where its annual revenues ("AR") ≤ $50,000 and all members entitled to vote at the annual meeting consent.

Under the ONCA, the AR threshold is ≤ $100,000 and unanimity of members entitled to vote is not required.  The approval of members casting 80% of the votes is sufficient, i.e., an extra-ordinary resolution.

Opting for a Review Engagement Instead of an Audit

A soliciting corporation whose AR is > $50,000 and ≤ $250,000 may elect to have a review engagement instead of an audit if its members entitled to vote consent by special resolution (i.e., not less than 2/3rds of the votes cast).  Where its AR > $250,000, an audit is mandatory.

Under the ONCA, the AR band within which members of a charitable may elect by extra-ordinary resolution to have a review engagement instead of an audit is > $100,000 and < $500,000.  Where its AR ≥ $500,000, an audit is mandatory.

Distribution of Residual Property on Liquidation/Dissolution

On liquidation, the residual assets of a soliciting corporation must be distributed to one or more "qualified donees" within the meaning of the Tax Act (as may be further specified in the corporation's articles).

On liquidation/dissolution of a charitable corporation, the residual assets must be distributed to another ONCA charitable corporation with similar purposes to its own (or to government) as specified in its articles. The CNCA is more flexible as to who may receive the residual assets on liquidation.
 

Directors

Must have a minimum of 3 directors, at least 2 of whom are not officers/employees.  No ex officio directors are permitted.

Must have a minimum of 3 directors. No more than 1/3rd of the directors can be employees.  By-laws may provide for ex officio directors.

By-laws

Under the CNCA, all corporations must file copies of their by-laws and by-law amendments with Corporations Canada with 12 months from confirmation by the members. 

Under the ONCA, a corporation never files its by-laws.  Indeed, an ONCA corporation does not even have to pass by-laws because, by the time the ONCA goes into effect, the Ministry will have developed a default set of by-laws that will apply to fill in any gap (if the corporation does not otherwise adopt by-laws within 60 days of incorporation).  The corporation can always replace its default by-laws.

Proxies

Proxies are not mandatory.  By-laws may provide for proxies or mail-in, telephonic or electronic balloting that meet prescribed requirements.  Members can also pass any ordinary or special resolution by unanimous written consent.

Proxy solicitation is mandatory for all meetings of members unless by-laws opt for mail, telephonic or electronic balloting.  Members can also pass any resolution by unanimous written consent.

Annual Return

Federal incorporation requires that an annual return be filed with Corporations Canada, the cost of which is small ($20 if filed online; $40 otherwise) but that nevertheless imposes an additional administrative burden on small charitable corporations. 

CNCA filing requirement and annual fee are avoided.

Immediacy

The CNCA is available now.

An OCA corporation must wait until late 2012 for the ONCA.


conclusion

We expect that, in the fullness of time, the CNCA should attract a disproportionate number of large national charitable organizations. The ONCA should appeal mainly to small, local charitable corporations operating in Ontario. Given that the CNCA is a reality and the ONCA has been passed (but not yet proclaimed), OCA charitable corporations should consider which regime is optimal for them now rather than delaying the decision for a year.

by Wayne D. Gray

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2011