Government Announces the Introduction of New Legislation Governing Federal Not-For-Profit OrganizationsOTTAWA, November 15, 2004 — The Honourable David L. Emerson, Minister of Industry, today introduced new legislation to govern federally incorporated not-for-profit corporations.
The proposed new Canada Not-for-Profit Corporations Act will replace Parts II and III of the Canada Corporations Act with a leading-edge, modern corporate governance framework for not-for-profit organizations incorporating at the federal level. The proposed legislative changes will strengthen and clarify the corporate governance rules so that not-for-profit corporations have the necessary tools to meet the challenges of the future.
"A new Canada Not-For-Profit Corporations Act will help ensure the long-term strength and vitality of voluntary organizations and social economy enterprises," said Minister Emerson. "The introduction of this legislation fulfills the government's commitment in the Speech from the Throne to foster the social economy, in particular the legion of not-for-profit activities and enterprises that harness civic energies to address social needs, whether they are international, national or local."
The new Act also follows on the government's commitment to a smart regulation agenda, which will simplify and streamline the regulatory burden on enterprises.
Two rounds of national consultations have yielded a strong endorsement for a new statute. The new Act will promote the development of well-governed federally incorporated organizations. It will be among the most modern statutes of its kind, demonstrating the government's continued commitment to world-class corporate law. The law will be flexible enough to meet the needs of large and small organizations while providing the accountability and transparency necessary to maintain public trust and confidence in the not-for-profit sector.
The proposed Canada Not-for-Profit Corporations Act will build on the well-developed standards of corporate governance that are found in the Canada Business Corporations Act. It will reduce regulatory burden on the not-for-profit sector and the government; improve financial accountability; clarify the roles and responsibilities of directors and officers; and enhance and protect the rights of members.
Some 18,000 not-for-profit corporations and corporations without share capital are incorporated federally. A broad range of corporations stand to benefit from the new Act, including health and community-based organizations, environmental organizations, cultural and heritage societies, national charities, major religious organizations, mutual benefit clubs, and some transportation service providers such as airports.
For additional information, please contact:
Stéphanie Leblanc
Office of the Honourable David L. Emerson
Minister of Industry
(613) 995-9001
Media Relations
Industry Canada
(613) 943-2502
Backgrounder
Government Announces the Introduction of New Legislation
Governing Federal Not-for-Profit Corporations
Not-for-profit corporations are essential to the Canadian life and economy. Canada's social and economic life is significantly influenced by the thousands of diverse not-for-profit and volunteer organizations that contribute to the vitality of communities across Canada. Indeed, many of these organizations are important governmental partners in the delivery of services and programs.
The Government of Canada has long acknowledged the importance of the "Third Pillar" of the economy — the not-for-profit and voluntary sectors. In light of this, the Voluntary Sector Initiative (VSI) was initiated in 1999 to build a stronger partnership with volunteer and not-for-profit organizations. One of the government's commitments to the VSI was to modernize the federal not-for-profit corporation legislation in order to improve governance and accountability, eliminate unnecessary regulation and offer flexibility to meet the sector's needs.
The 2004 Speech from the Throne and the recent budget also emphasized the importance of strengthening Canada's social foundations and reaffirmed the government's commitment to a strong partnership with community-based organizations to find solutions for problems such as poverty and social exclusion.
The importance of modernizing the governance of not-for-profit corporations is widely recognized. The current legislation, the Canada Corporations Act (CCA), under which more than 18,000 not-for-profit corporations and corporations without share capital are incorporated, has remained largely unchanged since 1917 and lacks modern governance rules. The new legislation, the Canada Not-for-Profit Corporations Act, will strengthen and clarify corporate governance rules for federally incorporated not-for-profit organizations. It will provide these organizations with the necessary governance tools to help ensure their strength and vitality.
Many of the provisions in the proposed legislation are modelled on corporate law statutes, but are modified to meet the needs of not-for-profit corporations. The legislation does not by itself play a determining role on whether a corporation qualifies as a charity or as a not-for-profit corporation under the Income Tax Act.
The new Act also follows on the government's commitment to a smart regulation agenda, which will simplify and streamline the regulatory burden on enterprises.
The proposed legislation would make it easier for Canadians to take advantage of the protections offered by incorporation and the predictability and accountability offered by a modern corporate governance framework. In doing so, the law will make the sector more viable and increase its potential as a governmental partner. The key elements of the proposed legislation are outlined below.
Streamlined Incorporation Process: The "letters patent" system of incorporation is replaced by an incorporation "as of right" system. This new streamlined incorporation process is a more efficient and less burdensome process. It eliminates the current requirement for Ministerial review of applications for incorporation. It no longer requires the filing of by-laws and by-law amendments by the corporation for Ministerial approval. Instead, incorporation would be granted upon the filing of specified forms and the payment of a fee. Incorporation would be faster, especially since the new act allows electronic filing.
Improve Financial Accountability: Not-for-profit corporations take many different forms: some are very large while others are quite small; some are privately funded while others solicit donations from the public or government. The new legislation recognizes these differences and applies its financial reporting requirements differently based upon an organization's annual revenues and sources of funding.
Not-for-profit organizations would be categorized as either a "soliciting corporation" (corporations which solicit public donations or receive government funding) or a "non-soliciting corporation". Low revenue soliciting corporations, for which an audit would be too expensive, would have the lowest requirements — a review engagement. These organizations could resolve, with the consent of all members, not to undertake the review engagement. Review engagements are distinguishable from audits in that the scope of the review is less than that of an audit and therefore, the level of assurance provided is somewhat lower.
Medium revenue soliciting corporations would be required to have an audit but could resolve, with the consent of two-thirds of its members, not to undertake an audit but, instead, to undergo a review engagement. High revenue soliciting corporations would be required to have an audit conducted. Low revenue non-soliciting organizations would be required to have a review engagement. However, these organizations could resolve, with the consent of all members, not to undertake the review engagement. High revenue non-soliciting organizations would be required to have an audit conducted. It should be noted that all corporations can choose to have an annual audit.
The new law would also require that all not-for-profit corporations make their financial statements available to their members, directors and officers. They would also have to be available to the Director appointed under the Act, who is the government official responsible for the administration of the Act. Moreover, soliciting corporations would be required to file their financial statements with the Director who would make these documents available to the public. Disclosure of financial statements is an important tool for ensuring that soliciting corporations are properly managed.
Rights and Responsibilities of Directors and Officers: One of the major shortcomings of the CCA is that it does not outline the standard of care that directors must meet. The new Act will have an explicit standard of care, which clarifies the parameters of a director's responsibilities and reduces uncertainty. The new Act will adopt a modern standard of care as is contained in the Canada Business Corporations Act and other modern corporate law statutes. Under the new standard of care directors will have to act honestly and in good faith with a view to the best interests of the corporation; exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances; and comply with the Act, articles, by-laws and any unanimous member agreements.
The new standard of care provides clear rules for the protection of directors from liability. When directors meet the standard of care, they will be protected from liability by a "due diligence" defence. The standard of care that directors must meet and the due diligence defence are measures that will reduce uncertainty for directors regarding their personal liability. This should help attract qualified individuals to act as directors of not-for-profit organizations.
Enhancement and Protection of Members' Rights: The new Act will also enhance and protect member rights. By doing so, it will promote active membership and encourage members to monitor the directors' activities. Members will have the power to enforce their rights and oversee the activities of their organizations. They will have the power to access corporate records (most importantly, the financial statements); access membership lists (subject to certain restrictions); request a meeting and to make proposals; use the oppression remedy and the compliance order to protect their rights; and use the derivative action remedy to enforce the rights of the corporation. The oppression remedy allows members to seek relief from a court if they believe their rights have been "oppressed". A derivative action allows members to launch a suit, in the name of the corporation itself, if they believe that directors or officers of the corporation have acted improperly.
The oppression remedy and derivative action would not be available to a member if the action in question was, in the view of the court, based upon a tenet of faith held by the members of the corporation. This means that a member of a religious organization would face restrictions on his or her ability to use the courts to overturn an action taken by a corporation on the basis of its religious doctrines or the tenents of its faith.
Transition and Fees: Corporations currently incorporated under the Canada Corporations Act will have three years to apply for corporate status (transition) under the new Act. There will be no fees for this process. If a corporation does not apply for transition within the three-year period, it may be dissolved by the Director appointed under the Act.
Incorporation fees for new corporations under the Canada Not-for-Profit Corporations Act will be set by regulation. Currently, it costs $200 to apply for incorporation status, plus an additional $30 to file mandatory annual summaries.
Role of the Director: The Director Appointed Under the Act (Director) functions primarily as a public registrar of corporations and exercises some regulatory powers under the Act. For example, the Director is responsible for the issuance of certificates of incorporation, amalgamation, or dissolution of a corporation. The Director can order a corporation to change its name if the name is prohibited or deceptively misdescriptive. The Director may also apply to a court to have a corporation dissolved or, under certain circumstances, dissolve it himself or herself. Previously, these powers were exercised under Ministerial discretion.
The Director is also provided with broad investigative powers in the event of a complaint. The Director may make an application to a court for a variety of actions, including: investigation of corporations or their affiliates; the appointment of inspectors; permission for inspectors to enter any necessary premises; require the production of documents; attendance at hearings; and all other powers that would be necessary for the investigation of a complaint.
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