Since 1917, federally incorporated nonprofits had to rely on the Canada Corporations Act (CCA) to provide the legal framework for their creation and governance. But its vagueness and inability to reflect the modern reality of today’s nonprofit led to 20 years of talk, debate and cautious movement toward something new.

The Canada Not-for-profit Corporations Act (CNCA) finally received Royal Assent on June 23, 2009 and came into force on October 17, 2011. It was a big day. Cheering erupted, lawyers and nonprofits threw lavish parties and danced the night away, with paparazzi at every turn. Okay, that part’s not entirely true, but charity lawyers need dreams too, folks.

What is true is that, for approximately 19,000 federal nonprofit corporations, 8,000 of which are registered charities, it’s about time. All corporations incorporated under the old legislation must transition to the CNCA by October 17, 2014. Offering a host of clearly defined procedural and other rules, the new Act — with its overarching objectives of heightened transparency, efficiency and governance — is meant to be flexible and better suited to the modern nonprofit. Though still early for any far-reaching conclusions in terms of impact and implications, some changes are worth a preliminary mention.

To solicit or not to solicit

The CNCA makes a distinction between two types of nonprofits: soliciting and non-soliciting corporations. Determining which you fall under is important as each has unique ramifications to an organization’s governance and structure.

The CNCA defines a soliciting corporation in section 2(5.1) as one that receives more than $10,000 in gross revenue in one fiscal year from public sources, such as government grants and requests for donations and gifts (but watch for the exceptions). Soliciting corporations need to follow certain rules, including having three directors — whereas non-soliciting entities need only a minimum of one — at least two of whom cannot be officers or employees of the nonprofit, or its affiliates. The make-up of the board as defined in a corporation’s by-laws will thus be affected in potentially significant ways.

With such a small threshold of $10,000, one will assume many nonprofits will be designated soliciting corporations, taking on a number of new rules along with it. But small organizations may have to take special care as many have directors on their boards who adopt officer roles too. And, while the soliciting status technically continues for three years, with the tendency for revenues to change from year to year for many, they may find themselves oscillating between soliciting and non-soliciting designation. It’s an issue to be discussed for sure.

What do you see?

If you’re a soliciting corporation under the new Act, you also have to file your financial statements with Corporations Canada each year, where they’ll be made available to the public. “For a registered charity under the Income Tax Act, it makes no difference in terms of transparency,” explains charity lawyer Mark Blumberg, as that has always been an annual requirement. Others may have to get their papers in order. The increased level of transparency — while more cumbersome — is a good thing in the long run, affirms Blumberg. “When information is more freely available, it’s beneficial for everyone.”

I exempt thee

The new Act also brings with it a unique exemption for audit requirements for corporations with under $250,000 in revenue. In the old Act, an audit was essential regardless of income. Exemption or not, Blumberg is quick to point out the advantages of an audit for those who may be debating doing one anyway: funders may not want to fund a nonprofit without one. “But the question is whether it makes sense to have that level of scrutiny if you have such a small budget,” he offers. And, in what Blumberg refers to as a “weird” provision, the Act also provides the possibility for an organization making over $250,000 to be exempt with the consent of Industry Canada. “I’m not sure how this will be dealt with at this point,” he admits.

Membership has its privileges…

According to the CNCA, all nonprofits must be membership-based corporations. If an organization offers only one class of members, they all need to have the right to vote. Should there be more than one membership class, the articles of incorporation need to clearly set out voting rights, ensuring at least one class can vote. If the articles are silent on the issue, the assumption is that all members have the right to vote.

The new Act essentially provides members with a host of rights similar to those of shareholders in private corporations, including the potentially dangerous ability to force motions for a vote. Moreover, if a corporation wants to change the rights attached to a membership class or wants to make fundamental changes, a separate vote is required – even if the membership class is a non-voting one. Technically, a veto right is thus available to every member on certain issues. And when it comes to things like amalgamation and other major changes, the CNCA introduces separate class votes for approval.

…or its problems

The new membership rights have met with some controversy and concern by some in the sector. Smaller organizations may be in particularly more precarious positions, they say, as the Act allows those prejudicial to a group’s objectives to potentially become members only to undermine or overthrow it completely.

Blumberg, for one, believes the fears are overblown. Many of the potential issues, he explains, could be proactively dealt with if nonprofits were clearer and more restrictive about their definition of membership. In fact, this is not a new issue, he says. It’s something organizations should have been taking more seriously even under the old Act. “I don’t think it really changes the situation because in the end if you have an open organization where anyone can join for ten bucks, then your organization may get taken over.”

Organizations looking to become stricter on their membership designations could simply recruit some people as supporters or affiliates instead of as members, avoiding voting rights of any kind — and potential takeovers.

Overall, Blumberg is optimistic. “I think this act is very helpful for small nonprofits in that it makes it a lot easier for them to work out their legal landscape, whereas under the old act it was very difficult.” Plus, the CNCA helps organizations tackle head-on the key issue facing many: the public’s increasing questioning of their legitimacy. “To the extent that this offers better transparency and makes the sector more open in terms of information, in the long run it will be good for people with good intentions who want to do a good job.”

Mark Blumberg offers these additional tips

1. First things first: determine whether you’re a federal corporation under the old Act (vs. incorporated provincially). If not, the new CNCA will have no real applicability.

2. If you need to make changes, you need to understand where you’re coming from. Do you have a record of minutes? Are all your documents — letters patent, bylaws etc. — in order?

3. Are you updated in your corporate filings? If they are out of date, they should get updated before you make the transition.

4. It’s time to think about objects and whether you want to update them. Because if they’re very old, they no longer reflect what you’re doing and it may be a good idea to change them. The good news is, with a range of online options, it’s easy to make changes under the new Act, whereas the old one is a lot more complicated and cumbersome.

5. Make sure your membership structure is clearly written out and reflects the new realities.

6. Take care of governance issues now. If the organization has a structure that doesn’t effectively mirror what it’s doing, make changes to ensure it does.

7. Don’t jump into the transition. Keep in mind you have some time and you’re better off waiting a few months to see how the Act works its way through procedural discussions and Q & As. Lawyers and the government are still figuring out some practical details. “Don’t become obsessive and ignore your mission just because there’s a conversion,” says Blumberg. “There’s a point of diminishing return on the changeover and one gets to it very quickly.”

8. Take advantage of the online forms, By-law Builder and Transition Guide at Industry Canada’s Corporations Canada website.

9. For additional assistance, take a look at Mark Blumberg’s CNCA Suitcase, which takes Industry Canada’s over 200 pages of information and 70 different documents and amalgamates them into one PDF document.

Elisa Birnbaum is a freelance journalist, producer and communications consultant living in Toronto. She is also president of Elle Communications and can be reached at: info@ellecommunications.ca.

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