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Virtually all existing federal non-profit corporations are incorporated under, and subject to, PartII of the Canada Corporations Act. This legislation has not been significantly amended for many years and does not reflect modern standards regarding corporate operations and corporate governance.

On November15, 2004 the federal government introduced new legislation in the House of Commons which will eventually replace the Canada Corporations Act and apply to most federal non-profit corporations.

In its introductory material, Industry Canada states that An Act respecting not-for-profit corporations and other corporations without shareholders will "promote the development of well governed federally incorporated organizations" and stresses the changes that the legislation will make to corporate governance for non-profit corporations.

The proposed legislation is of course subject to the normal requirements of the legislative process and therefore the timing of its passage by the House of Commons and Senate is uncertain. In addition, before the new legislation can come into force, the government will have to publish regulations to fill in many matters of detail. Draft regulations are now available on the Industry Canada website.

TRANSITIONAL PERIOD

When the legislation has been passed and proclaimed in force, it will give each existing federal non-profit corporation (with certain relatively minor exceptions) a period of three years within which to comply with the new legislation (by way of a "continuance"). As a result existing non-profit corporations will have a significant period of time to adapt their legal practices to the requirements of the new law. Unfortunately, if history is any guide, most corporations will not begin the process of complying with the new legislation until relatively late in the three-year period. (A similar arrangement for business corporations in the 1970s gave those corporations five years to make the transition to the new legislation and led to a flood of continuance applications at the last moment).

TWO TYPES OF CORPORATIONS

The legislation will divide non-profit corporations into two basic types and various provisions of the legislation will apply to one or other of the two types. The two types of corporation are "soliciting corporations" and "non-soliciting corporations". A soliciting corporation is one that during the current year (or a longer time period that the government may set by regulation) has requested donations from the public or received financial assistance from any level of government. A non-soliciting corporation is simply any other non-profit corporation.

The federal government clearly considers that the funding mechanisms used by soliciting corporations give the public a right to know about these corporations. As a result the government filing requirements for these corporations will be expanded.

POWERS OF THE CORPORATION

Traditionally non-profit corporations have had only those powers that are set out in PartII of the Canada Corporations Act, as those powers may be limited by their Letters Patent (the current incorporating document). The more modern concept is to give corporations all the powers of a natural person (except as those powers may be limited by their Articles - the new form of incorporating document). This more modern concept will be applied to non-profit corporations and should lead to fewer questions about whether they have the corporate power to take certain actions.

CORPORATE RECORDS

The legislation will specifically require each federal non-profit corporation to maintain records that will include the minutes of its members' meetings, a list of its directors, a list of its officers and a list of its members as well as adequate accounting records and minutes of the meetings of its directors and committees of directors. Depending on the record involved, either members or directors will have access to individual records subject to certain conditions set out in the legislation.

DEBT OBLIGATIONS

The legislation contains an elaborate set of provisions to deal with debt obligations of non-profit corporations. These have been modelled on the provisions that apply to business corporations with regard to their shares. The provisions appear to be directed toward corporations that have borrowed money from their members and will be of interest and relevance to corporations that may solicit loans from their members.

BY-LAWS

At the moment the Canada Corporations Act requires that the by-laws of a corporation cover certain specific matters and provides that the by-laws must be approved by Industry Canada before they come into force. Under the new legislation, no approval by Industry Canada will be required for a by-law to come into force. The by-laws will be required to deal with the conditions of membership and with the voting rights of members (unless specifically provided for in the by-laws, each member will have one vote). The by-laws may also deal with a wide variety of other matters but that will be up to the corporation in question.

By-laws will be required to be passed by the directors (and will come into force at the time of such passage) and then be ratified by the members.

ANNUAL AND OTHER MEETINGS

Corporations will be required to hold annual meetings of their voting members and may hold other meetings from time to time. The legislation will be much more flexible than the existing legislation as to how a meeting may be held. It will specifically permit electronic meetings and also permit resolutions signed by all members to replace a meeting. In addition, absentee voting by members who are unable to be at a meeting will be permitted and decision-making by consensus will be authorized.

These changes should greatly simplify the holding of meetings (both of directors and members) and will regularize practices that have been followed by many corporations in any event.

FINANCIAL DISCLOSURE

Corporations will be required to maintain appropriate financial statements and will be required to send them to each member. For corporations that do not wish to mail these financial statements, the by-laws may provide that the corporation may publish a notice that such statements are available for inspection by the members. It will be important for non-profit corporations with numerous members to amend their by-laws to deal with this matter when they become subject to the Act (i.e., when they are continued) in order to avoid the expense of forwarding financial statements to each member.

Soliciting corporations will be required to provide their financial statements to Industry Canada so that they may be available for public inspection.

AUDIT OF FINANCIAL STATEMENTS

Proposals to amend federal non-profit legislation have sparked serious concern with respect to whether or not all corporations should be required to retain an accountant to review or audit their financial statements. The legislation adopts a compromise on this issue by providing that only soliciting corporations and non-soliciting corporations with annual revenues above levels to be set by regulation must appoint a public accountant.

The proposed rules as to whether or not an actual audit is required are subject to detailed provisions in the draft regulations, but in a nutshell, the audit requirement will be dependent on the size of the corporation and whether or not it is a soliciting corporation.

UNANIMOUS MEMBER AGREEMENT

Non-profit corporations with a very small number of members may be interested in a new provision which will permit what is called a Unanimous Member Agreement. Such agreements can be used where the members wish to control or limit the powers of directors or agree among themselves as to a particular way in which the non-profit corporation should be operated. Because such agreements must be signed by all members, they are unlikely to be of any practical use to corporations with more than a few members.

FUNDAMENTAL CHANGES TO THE CORPORATION

The new legislation will expressly deal with the ability of a non-profit corporation to amalgamate with another non-profit corporation and with the ability of a non-profit corporation to transfer to the laws of another jurisdiction.

One portion of the proposed legislation that may concern some corporations is the requirement that a sale of all or substantially all of the assets of the corporation must be approved by a resolution of the members on which all members (whether normally voting or not) will be entitled to vote. This might make significant transfers of assets difficult to accomplish for non-profit corporations which have large numbers of non-voting members.

DIRECTORS' DUTIES

In introducing the new legislation the government has stated that one of its most significant effects and benefits will be to establish a modern code of conduct and responsibility for directors.

The legislation will specifically provide that the directors are to manage or supervise the management of the activities and affairs of the corporation. Each corporation will be required to have one or more directors (and a soliciting corporation shall be required to have at least three directors of whom at least two must be independent, i.e., not officers or employees of the corporation). Directors will be elected by the members (and therefore other methods of selecting directors which have been common for non-profit corporations will have to be discontinued or modified to meet the requirement).

Lengthy provisions have been placed in the new legislation to require that directors disclose all conflicts of interest.

The legislation provides a number of duties and responsibilities for directors. Consistent with the standards now applied to business corporations, each director is required to act honestly and in good faith with a view to the best interests of the corporation and each director must exercise the care, diligence and skill of a reasonably prudent person.

To offer some protection for directors, the legislation entitles a corporation to indemnify a director and officer against liability as long as he or she acts honestly and in good faith. In addition a director will be protected if he or she relies in good faith on financial statements of the corporation or on the report of a professional person (such as an accountant or a lawyer). Corporations will also be specifically authorized to purchase insurance to protect their directors and officers against any liability.

Directors will, however, be liable for up to six months' wages owing to employees of the corporation if the corporation should fail to pay those wages. Directors who authorize, permit or acquiesce in the commission of an offence by a corporation under the new Act will be equally guilty of the offence. Directors may defend themselves against the latter provision by demonstrating that they exercised due diligence to prevent the commission of the offence. This type of provision and the existence of this type of defence may be expected to encourage directors to pay proper attention to the affairs of the corporation and to regularly attend meetings of the board and obtain information on the operations of the corporation.

THE FUTURE

Federal non-profit corporations should carefully observe the progress of this legislation through Parliament. When draft regulations become available, corporations should review them to ensure they have no adverse consequences.

Once the legislation comes into force, corporations should adopt an action plan to prepare necessary changes to their by-laws and to ensure that they can be continued within the three-year time limit.

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the Firm on the points of law discussed.

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