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Statutory review of the Canada Not-for-profit Corporations Act Minister's Report October 2021

Table of contents

1.0 Introduction

The not-for-profit sector contributes significantly to Canada's economy and quality of life. It generates more than 8.7% of our gross domestic product, employs more than 2.5 million CanadiansFootnote 1 and inspires the active mobilization of over 12 million volunteers.Footnote 2

Over 39,000 not-for-profit corporations are regulated under the Canada Not-for-Profit Corporations Act (NFP Act or Act). This framework accommodates organizations of various sizes that serve a diversity of purposes, including education, the arts, sports, healthcare, the environment, political advocacy, social services, as well as religious activities.

The importance of not-for-profit organizations was brought in sharp focus by the ongoing pandemic, as they adapted to enormous disruption and found novel ways to protect their employees, fund their activities, and support communities and individuals across the country. This statutory review affords an opportunity to ensure the sector is supported by a sound legal framework as the country advances into recovery.

2.0 Canada's Not-For-Profit (NFP) Corporations Framework

2.1 History of the NFP Act

The concept of a not-for-profit corporation was first introduced in 1917 through the addition of section 7A to the Companies Act, the federal corporate statute then in force. Section 7A stated that the Secretary of State of Canada could use letters patent for the creation of corporations without pecuniary gain and with "objects of a national, patriotic, religious, philanthropic, charitable, scientific, artistic, social, professional or sporting character, or the likeFootnote 3". In 1934, amendments were made to the Companies Act to add a Part II for corporations without share capital.

The federal government made several attempts to replace Part II of the Canada Corporations ActFootnote 4 with a stand-alone federal not-for-profit corporate statute, beginning in the early 1970s. Between the 1970s and 2011, a total of seven bills were introduced in Parliament and died on the Order Paper. It was not until 2009 that the 8th attempt succeeded in the Parliamentary process, and the Canada Not-for-profit Corporations Act came into force on October 17, 2011.

2.2 Objectives of the NFP Act

The NFP Act and regulations set out the legal and regulatory framework for federally incorporated non-share capital corporations. This framework accommodates a wide range and variety of public and private organizations, including corporations that solicit public monies in support of societal objectives or that engage in commercial endeavours. The Act was designed to promote accountability, transparency and good corporate governance, while being flexible enough to meet the needs of organizations both small and large.

While the NFP Act provides the basic structure and standards for the governance of a not-for-profit organization, it does not prescribe in detail how the corporation is to be run or put any restrictions on the nature of its social, political or market activities. The Act sets out the rules and provides the mechanisms to facilitate interaction among directors, officers, members and other interested parties that affect decision making, but gives a significant latitude to organizations to tailor requirements to their needs based on their size and purpose.

Canada's NFP Act seeks to achieve its objectives through a combination of mandatory and default provisions. Mandatory provisions are compulsory for all not-for-profit corporations, whereas default provisions set out baseline rules of operation (e.g., quorum at meetings of members) that can be amended by the corporation in its articles, by-laws or by a unanimous agreement of members.

Not-for-profit corporations may develop their own by-laws or avail themselves of the models developed by Corporations Canada. Corporations Canada also provides multiple policies and guidance documents designed to help navigate the application and incorporation process, as well as eventual changes that may occur during the lifetime of the corporation.

A key feature of the NFP Act is the distinction made between soliciting and non-soliciting corporations. A corporation is considered soliciting when it has received more than $10,000 from public sources in a single financial year, which includes gifts or donations from non-members, financial assistance from a government, and gifts or donations from another corporation that received income from public sourcesFootnote 5 Given that soliciting corporations receive public funds, they are subject to more onerous corporate governance and financial accountability requirements than non-soliciting corporations. The majority of federally regulated not-for-profit organizations are non-soliciting organizations.Footnote 6 Importantly, the requirements under the NFP Act are distinct and separate from those that apply under the Income Tax Act. Not all soliciting corporations are registered charities for tax purposes, but those that are must abide by the governance and financial accountability standards established by both acts.

Also of note, responsibility for corporate law in Canada is a shared jurisdiction, with approximately 20% of the 170,000 not-for-profit organizations operating in Canada being regulated under the NFP Act and the rest under provincial or territorial legislation. A number of provinces and territories, including British Columbia, Yukon and Ontario, have also modernized their not-for-profit legislation over the past few years.

The statutory review provides the Government of Canada the opportunity to assess whether, after a decade of its coming into force, the Act continues to meet its objectives and remains a sufficiently flexible statutory vehicle for not-for-profit corporations.

3.0 The statutory review process

3.1 Statutory obligations

A provision of the NFP ActFootnote 7 requires that, ten years after its entry into force, the Minister of Innovation, Science and Industry shall report to Parliament on its provisions and operation. The Minister's Report is to be subsequently referred to a committee of the Senate, the House or both Houses of Parliament that is designated or established for that purpose, which shall (a) as soon as possible after the laying of the report, review the report; and (b) report to the Senate, the House of Commons or both Houses of Parliament, as the case may be, within one year after the laying of the report of the Minister, or any further time authorized by the Senate, the House of Commons or both Houses of Parliament.

3.2 Consultation process

In June 2021, Innovation, Science and Economic Development Canada (ISED) launched an online public consultation to seek feedback on the implementation of the NFP Act and whether it continued to meet its objectives. A discussion paperFootnote 8 was published online to set out issues that stakeholders had previously identified to the Department or that had otherwise emerged since 2011. The matters explored many aspects of the legislation, including audit and financial reporting obligations; board of directors appointments; hybrid and virtual decision-making; classes of membership; members' rights; and the permitted distribution of assets. Stakeholders' views were also sought on whether and how recent developments in business corporations legislation should be considered in the not-for-profit context, including with regards to diversity disclosure, corporate transparency requirements, and the fiduciary duty of directors.

The launch of the public consultation was supported by a press release and social media mentions. The discussion paper was further distributed to over 1,500 not-for-profit corporations subscribed to Corporation Canada's distribution list, and virtual roundtable invitations were sent to over 60 organizations.

3.3 Who we heard from

During the consultation period, officials from Innovation, Science and Economic Development (ISED) and Corporation Canada met virtually with 44 individuals and received 16 written submissions representing 29 organizations. A wide range of stakeholders provided input, including legal and governance professionals, national foundations and organizations, Indigenous, cultural and sports organizations as well as community organizations (see Annex A).

4.0 What canadians said

4.1 General comments about the provisions and operations of the NFP Act

Generally speaking, participants to the consultation agreed that the NFP Act remains a modern corporate statute and a legislative vehicle of choice for many not-for-profit organizations across the country. Corporations benefited from the streamlined incorporation process created by the Act and have, in most cases, been able to adapt to the Act's provisions to suit their needs. Notably, a number of stakeholders praised the work and assistance provided by the staff of Corporations Canada during the transition. They noted that, in addition to being a sound governing statute, the Director's response time, user interface and guidance documents all contribute to an effective and efficient corporate framework.

There was nonetheless a general agreement among participants that a number of targeted amendments to the NFP Act or its regulations could provide useful flexibilities and clarifications to the sector, helping reduce administrative costs and improving compliance. Many highlighted that the sector includes a large number of small, volunteer-run organizations that require legislation that is easy to understand and use. They explained how complexity in the current Act can sometimes be distracting and anxiety-inducing, with directors concerned that they may not meet their legal obligations if they fail to interpret provisions correctly. Complexity can also create an uneven playing field between those that can afford specialized legal counsel and those that cannot.

The provisions that received by far the most commentary and suggestions for reform relate to audit and reporting obligations, including their interactions with the distinction made in the Act between soliciting and non-soliciting corporations. Another frequent comment related to provisions regulating the conduct of meetings, with many noting that the in-person default had become outdated with the advancement of technologies. Several stakeholders also argued that reliance on provisions originally intended for business corporations had in some cases proven at odds with the traditions and practices of the not-for-profit sector.

At a more technical level, the Department heard a number of recurring comments on certain terms or concepts in the NFP Act that could benefit from being clarified or corrected, including with regards to the distribution of assets to members. There was also general interest – but not unanimity – among participants in exploring a codification of the responsibilities of directors, the collection and publication of more data on not-for-profit organizations, as well as for more guidance documents and educational outreach to the sector.

Other subjects raised in the consultation paper attracted strong responses but no consensus. These include certain issues related to the treatment of membership classes and director appointments, including ex officio directors. Similarly, while stakeholders generally agreed on the importance of encouraging diversity and preventing fraud, there was no consensus on whether the NFP Act was the best vehicle to advance these objectives or how it should go about it.

4.2 Specific comments about the provisions and operations of the NFP Act

4.2.1 Audit and reporting obligations

The audit and reporting obligations set out in the NFP Act and regulations are designed to ensure proper levels of transparency and accountability, while giving smaller not-for-profit organizations flexibility to adopt less onerous forms of financial review provided certain conditions are met. Maintaining public trust and confidence in the operations of the sector was considered essential to ensuring its continuous funding.

Under the current framework, a corporation's financial review obligations depend on whether it is a soliciting or non-soliciting corporation and on its gross annual revenues:

Once an organization becomes a soliciting corporation, it stays 'soliciting' for a period of three years. That is, it becomes a soliciting corporation at the first annual meeting following the financial year-end and stays that way until the third annual meeting following that first annual meeting. The rationale for this rule is that in most cases funding from public sources will have been completely distributed a few years after it has been received.

4.2.1.1 Period of applicability

Throughout the consultation, many participants raised concerns about the complexity of the rules and the challenges not-for-profit organizations encounter in trying to determine whether their organization is a soliciting or non-soliciting organization from one year to the next. Stakeholders notably explained that receiving a single, one-time emergency government grant during a crisis such as the COVID-19 pandemic could subject an organization to three years of more stringent obligations, and associated costs. A number of participants also explained that determining what constitutes public money can also, in and of itself, be resource-intensive, for example when a donation is received by a third party (e.g., a foundation). These stakeholders suggested that further clarifications be made through guidance documents if the soliciting/non-soliciting distinction is retained.

Several stakeholders suggested adjusting the applicability rules, for example by calculating applicability based on a three year rolling average, or more simply by having the requirements apply for only one year after a corporation has received sufficient public monies. Others recommended that the government remove the distinction between soliciting and non-soliciting organizations altogether. This proposal would see the NFP Act impose reporting obligations that are comparable for all not-for-profit organizations, but based on revenue thresholds or total number of transactions. As this is a cross-cutting recommendation, it is discussed separately at the end of this section.

4.2.1.2 Revenue thresholds and exemptions rules

More fundamentally, numerous stakeholders raised concerns with the cost/benefit of the current audit requirements for smaller organizations. Many shared their lived experience of having to pay anywhere from $9K-$20K for an audit,Footnote 15 which in some cases represented a significant percentage of their revenues for the year and sums that could have been put to better use in furthering the mission of the organization. They also noted that the level of member support required to be exempted from more onerous reporting was so high as to make these options impractical. This appears to be particularly the case where unanimous consent is required, with many organizations having too many members, including inactive ones, to realistically take advantage of these provisions.

Some stakeholders noted that many soliciting organizations may be required to produce audits through other accountability mechanisms, notably requirements of government programs and other funders. They argued that the thresholds established in the NFP Act should thus be conceived as a "floor" that is worth imposing on all types of corporations, rather than a rule for the average organization. Some also suggested that the requirements related to audits should be proportional to their general value, noting that while audits can be a useful tool for certain purposes (e.g., accounting for all the year's transactions), they are not a cure all to ensure transparency and prevent fraud (e.g., auditors do not judge whether the purpose of the transactions are in line with the mandate of the organization).Footnote 16

All in all, there was a general consensus that there should be more flexibility in determining means of accountability for smaller organizations. There was strong directional support in favour of raising the thresholds and relaxing the member voting threshold necessary to opt for less rigorous and expensive review mechanisms, even if specific proposals varied. Many suggested that the minimum threshold be raised from the current $50K to a minimum of $100K to align with the proposed legislation in Ontario and that subsequent thresholds be raised correspondingly. Still others suggested that the lowest threshold be raised to $150K or even $250K. Only a minority however proposed to leave corporations entirely free to decide the level of financial review, most seeing value in some form of minimal requirements.

4.2.2 Board of directors

The NFP Act provides that the board of directors is responsible for supervising the management of the activities and affairs of the corporation. The directors are elected at the members' annual general meeting. There are also rules that allow the board of directors to appoint other directors provided the articles allow it and that the number of directors appointed by the Board does not exceed one third of the directors elected at the previous annual meeting of members.Footnote 17 This "one third" rule exists to prevent the board from appointing a majority of the directors. For soliciting corporations, a minimum of three directors must be elected, two of whom cannot be officers or employees of the corporation.Footnote 18 All directors must be elected by the membership or appointed by the board within the authorities set out in the NFP Act. These provisions sought to balance the competing needs of operational flexibility for boards of directors with accountability to members.

4.2.2.1 Ex officio appointments

One issue that drew significant discussion during the consultation related to the ability to have ex officio board members. Ex officio are individuals that automatically become directors because they hold a particular office, such as the CEO of the organization. The NFP Act currently does not permit ex officio directors because the general rule is that the members must elect the directors. There was little consensus as to whether this should be changed moving forward. On the one hand, some participants argued that the appointment of ex officio directors is a long-standing tradition in the sector that should be permitted, provided it is set out in the by-laws and voted on by members. They maintained that appointing ex officio could be valuable in several circumstances, for example to retain the service of former presidents, to ensure input of management in decision-making, or to maintain formal relationships with a sister or parent organization. They also pointed out that organizations are making such appointments anyway, using a number of workarounds; they suggested this outcome was sub-optimal, forcing corporations to pay for counsel to achieve their objectives, creating legal uncertainty around the validity of the retained approach, and preventing the Act from providing safeguards and default mechanisms for the practice. These stakeholders also raised practical considerations, for example in the case of federated structures; whereas before the enactment of the NFP Act the head of each provincial/territorial chapter could be made ex officio director of the national board, members now have to "elect" the head of each chapter on the board of directors at each annual meeting of members, which they argued creates duplications and confusion.

On the other hand, some stakeholders argued that explicitly permitting ex officio directors is not good governance, and that organizations who sought to maintain the tradition have availed themselves of acceptable workarounds such as requiring distinct qualifications for certain board seats or making ex officio directors non-voting advisors. They pointed out that relationships with parent or sister organizations, oversight by Governments, and delegated voting can be better addressed in defining membership, which is the ultimate source of control under the Act. Good governance concerns include that ex officio directors a) can sometimes not be aware of their responsibilities and the personal liabilities that come with being a director or have a low level of participation; b) be in conflict of interest, i.e., feel they must represent the orientations of a past board of directors, the decisions of management, or the interest of a parent or sister organisation instead of the best interest of the corporation itself; and c) cannot be removed by any means, even in case of misconduct or behavior contrary to the interests of the organization.

4.2.2.2 One third rule and tying director appointments to annual meeting of members

The "one third rule"Footnote 19 was another area of concern, with several stakeholders arguing that it is unnecessarily constraining for organizations while only providing limited additional protections to members. They noted that the purpose of the provision seems to be to limit the number of directors that can be appointed by the board versus those elected by members. However, they pointed out that members already have the power to remove a director through an ordinary resolution.Footnote 20 They also argued that director appointment can be a useful recruitment tool, especially for small organizations, allowing for needed expertise or diversity to be brought in in a timely manner. Moreover, many stakeholders argued that the rule seems to have been drafted in a way that disproportionally limits organizations with multi-year mandates, a practice that has been adopted by many to ensure continuity of operations. The Board of an organization that replaces only half of its ten directors every year would indeed be entitled to only one director appointment, versus three for an organization that elects all directors on a yearly basis. One recommendation with some degree of support was to increase the threshold from one third to a majority; another recommendation with a larger consensus was to change the rule to a simple quorum (i.e., permit boards to appoint up to one third of the directors elected by members, regardless of when the election occurred).

4.2.2.3 Prohibition on appointing officers or employees

A third issue discussed by stakeholders relates to the obligation for soliciting organizations to have at least three directors "two of whom must not be officers or employees of the organization." Stakeholders noted that this restriction can be challenging for very small organizations, particularly when it requires them to find persons who may not be familiar with their organization or its history. They contended that while the rule was designed to promote independent directors on the Board, it may have resulted in a negative incentive to consolidate power in a single individual, who may play the role of Chair, Treasurer, and sole signing authority. As discussed at the end of the section, one recommendation put forward was to eliminate the distinction between soliciting and non-soliciting corporations. If the soliciting/non-soliciting distinction was to be maintained, another solution proposed was to maintain the requirement for a minimum of 3 directors and the prohibition on employees, but allow directors to be officers of the organization.

4.2.3 Hybrid and virtual decision making

The NFP Act currently provides that members can, by default, participate at a meeting via telephonic or electronic means, unless expressly prevented in its by-laws.Footnote 21 However, a not-for-profit corporation cannot hold a fully electronic or telephonic meeting unless it is expressly permitted in its by-laws.Footnote 22 While these provisions were intended to balance the need for flexible participation while allowing the corporation to prudently manage its resources, these provisions of the Act were drafted at a time when the technology facilities and costs to accommodate a virtual meeting were very different from what they are today. The Act further requires that votes for decisions on which members must have a say be taken at a meeting of the members, that notice of the meeting be provided to members entitled to vote in accordance with the by-laws and that the prescribed methods of voting by members be set out in the bylaws of the corporation. These measures were designed to ensure that members are informed and can meaningly participate and contribute to member meetings.

4.2.3.1 Permitting Fully Virtual Meetings

Stakeholders strongly supported amending the Act to allow for both virtual participation by members and virtual meetings of all members by default. They unanimously pointed to the recent pandemic as evidence of the necessity for such flexibility. The general availability of internet services at lower costs and ease of use were also cited as reasons for warranting the amendment. Some participants pointed to corresponding language and provisionsFootnote 23 that could be clarified to fully accommodate virtual meetings, such as that a meeting can be through a "means" not just at a "place"Footnote 24.

Importantly, a number of stakeholders mentioned the continued value of in-person meetings that gather members and give them the ability to connect informally outside of the formal structure of a member meeting. They noted the strategy of organizing their annual general meeting around a conference or event to provide opportunities for such member networking, and pointed out that hybrid forms that combine in-person and virtual participation would be facilitated by the alignment of defaults provisions provided by the Act.

4.2.3.2 Votes taken outside of meetings

There was a general interest – but no consensus – towards providing not-for-profit organizations greater flexibility to hold votes electronically outside of formal member meetings. Proponents noted that the technology necessary has long been available and reliable. They pointed that, in many cases, this practice is already commonly used for informal votes, that it provides the means to broadly consult members, and that its codification could be a tool to increase participation and streamline decision-making processes within corporations. Some proactively acknowledged that any change to the provisions of the Act should ensure the adoption of protections similar to those currently afforded to members for in-person meetings, including for example mandatory notice periods, information to submit with the notice, ability for members to submit written statements in support or in opposition to the vote, ability for members to ask and receive answers from the board of directors, and a minimum length of voting period. Most proponents of the change recommended that the ability to hold votes outside of meetings be enabled through a default rule and thus amendable in the organization's by-laws, since the flexibility may not be necessary or appropriate for all organizations.

On the other hand, some stakeholders felt that votes held electronically (outside of a member meeting) should continue to be limited to informal votes or decisions not governed by the NFP Act (e.g., annual programming), or be subject to a supra majority to compensate for the limited debate. In the same vein, some sought clarification regarding the types of decisions that could be taken electronically and the safeguards to put in place with many acknowledging that further discussion and guidance is warranted before such a change could be enacted.

4.2.4 Classes of memberships

The NFP Act allowsFootnote 25 corporations to set out classes of members (e.g., regional groups, types of stakeholders) and to attach different voting rights to each. This feature of the Act was intentionally non-prescriptive, in order to accommodate a large spectrum of corporate structures and decision-making processes. Notably, the Act has no default provisions on delegate voting, a decision that stemmed from the recognition that it would not be required by all types of corporations.

The subject of classes of membership elicited a significant response from stakeholders, but little consensus. Several stakeholders supported explicitly allowing delegate voting, arguing that some large, national not-for-profit organizations are organized in a manner that require means of conferring rights to delegates who represent different regions or types of members. They noted that while there is no explicit restriction on delegate voting, there are other provisions in the NFP Act that they felt prohibit or render it unworkable. Proponents pointed to legislation in provinces and territories such as BCFootnote 26 and YukonFootnote 27 as better enabling delegate voting.Footnote 28

On the other hand, some stakeholders noted that the absence of explicit delegate voting provisions in the NFP Act has not prevented many organizations from structuring their affairs in a manner that legally established delegate voting, for example by having members of the national organization be provincial and territorial corporations.

Worthy of note in this section, a number of stakeholders expressed confusion about the legal implications of the use of both "class" and "group" in the NFP Act. They mentioned that the current terminology was creating confusion, and suggested that there may be benefit in clarifying the intent, including if the terms are synonymous and interchangeable or otherwise.

4.2.5 Member rights

The NFP Act mandates that all votes for decisions on which members must have a say be taken at a meeting of the members. Such meetings have to be called at least once a year, and a notice of the time and place has to be provided to members entitled to vote in accordance with the by-laws.Footnote 29 The Act further stipulates that the by-laws of a corporation may provide for any prescribed methods of voting by members not in attendance at such meeting (absentee voting). Although the NFP Act does not require absentee voting, a corporation that chooses to allow it must follow the rules set out in the regulations. Also, while the Act permits corporations to create a class of "non-voting members" that does not have a say on its ordinary management, it preserves the ability for all members to vote before a corporation is dissolved, continued or fundamentally restructured, and where there are changes to the rights of members.Footnote 30 At a general level, these various provisions are intended to protect members and ensure sound democratic management of not for-profit corporations.

4.2.5.1 Rights of non-voting members

The "voting" rights for "non-voting" members is an issue that attracted significant commentary. Many stakeholders argued that the current situation is, on its face, counterintuitive, and an impediment to the not-for-profit organization's ability to gain the quorum necessary to formally hold restructuring votes. Non-voting members, as their name suggests, do not expect to have any voting rights and, as such, can be hard to reach or to convince to participate let alone vote in a decision that the corporation needs to function. In some cases, such as with sport clubs, non-voting members can even be minors.

Since the Act does not require corporations to have non-voting members, a number of organizations have adapted to the creation of the NFP Act by significantly reducing the number of their members and relying on alternative terminology such as "affiliates", "alumni", "partners", "friends" and others to identify their broader community. Because of a lack of jurisprudence, some stakeholders were of the view that there may be some legal uncertainty as to whether a court would nonetheless treat these individuals as members because of the attributes, rights and benefits attached to their affiliation. In any case, many organizations continue to have large membership bases as a result of their tradition; for mobilization purposes; because they are required to maintain their charity status under the Income Tax Act, for insurance purposes or other external requirement (e.g., an international sport federation); or more fundamentally to meet the expectations of their community.

Participants explained that there were different dimensions to being a "member" of a not-for-profit organization, one being to participate in governance, as per the current Act, but another being a mark of belonging and association. They advocated for non-voting members not having, in fact, any voting rights under any circumstances so as to preserve the ability of organization to continue to have large groups of "members" that legally belong to the organization without impeding the effectiveness of its governance. A variation was to make voting rights of non-voting members a default rather than a mandatory feature of the Act.

Creating a "true" non-voting member class could lead to a more extensive membership base and have an impact on organizations qualifying as soliciting or non-soliciting (i.e., more donors being non-voting members) if such distinction was to be maintained in the Act (see discussion at the end of the section).

Another issue raised by stakeholders was the notion of providing each class with a "veto" on structural changes. The idea of this protection is to ensure that, once different categories of members are established, one more populous category cannot unilaterally dismantle the rights of other classes, thus securing the original governance intent. In practice, some stakeholders seems to feel that the protection can prove too strong and could prevent re-organization when needed. The main proposal put forward was to no longer make these class protections mandatory under the Act.

4.2.5.2 Absentee voting (proxyholders)

Several stakeholders expressed concern that the regulations prevented corporations from limiting proxyholders to members of the corporation, despite the regulations permitting corporations that would not want non-members to attend meetings to rely on other methods for absentee voting, such as electronic voting. Among those who commented on this issue, a preference was expressed for flexibility within the Act or regulations that allows not-for-profit organizations to enact such a limitation in their by-laws.

In support of this position, many participants noted that the open proxy rule was derived from the business corporation context, where a shareholder has a proprietary interest in the governance of the organization. They argued that the situation is quite different in the context of mandate-driven not-for-profit corporations, where familiarity with the mission and objectives of the not-for-profit is the more relevant factor. Stakeholders argued that a person unrelated to the organization should not be entrusted with casting votes if it has not been previously privy to debates or, in some cases, met the condition for being accepted as a member of the organization. One stakeholder explained that many not-for-profits (e.g., a women's shelter, LGBTQ2 community organizations, ethno-specific serving organization) have a legitimate security and autonomy interest in limiting who can attend members' meetings in order to create a safe space, protect the privacy of individuals, or keep the governance of organizations within the community.

4.2.6 Distribution of property

The NFP Act prohibits the distribution of income or property to a member unless it is in furtherance of its activitiesFootnote 31 or otherwise permitted by the legislation. It also requires that the articles of a corporation set out how property is distributed upon liquidationFootnote 32. Restrictions apply to certain types of corporations that have received public monies (including soliciting corporations).Footnote 33

A few stakeholders commented on the appropriateness of the provisions related to the distribution of income or property to members during the life of a corporation to argue that the "furtherance of its activities" principle is too vague and should be clarified. For example, it is unclear that social clubs and other organizations are permitted to distribute funds such as refunding subscription fees upon resignation of a member. Refunds for services not provided was another situation cited, with one example brought forward being the COVID-19 pandemic resulting in some organizations that run daycares, extra-curricular activities, or summer camps for members being unable to provide the pre-paid programming.

Some stakeholders expressed caution against potential abuses in clarifying the disposition, as well as the limits of the current soliciting/non soliciting distinction with regards to liquidation, e.g., a soliciting corporation waiting to lose the soliciting designation and accompanying restrictions on distribution. There was some related discussion about the concept of "asset lock" and providing a means to more permanently distinguish between public benefit organizations and member benefit organizations than the current soliciting/non-soliciting distinction. This cross-cutting issue is further discussed below.

4.2.7 Soliciting/non-soliciting distinction

As noted in the introduction, the NFP Act is designed to provide a framework that accommodates a wide spectrum of organizations, from small, members-only local sports clubs to multi-billion dollar national foundations. Whether and how to treat different types of corporations differently was widely debated in the proceedings leading up to its enactment. Some participants opposed making any distinction, believing that it would unduly complicate matters or that organizations might inappropriately self-select. Others proposed treating corporations differently based on levels of revenue or number of members, or in a manner that distinguished between public benefit, members benefit, religious and, in some cases, political organizations.

Upon its enactment, the NFP Act was ultimately structured around a distinction between solicitingFootnote 34 and non-soliciting corporations, that is, organizations that receive a certain amount of money from public sources and those that receive monies mostly from their members. Soliciting corporations are treated differently than non-soliciting corporations in five ways under the Act.Footnote 35 They:

  1. must have a minimum of three directors, at least two of whom are not officers or employees of the corporation or its affiliates;
  2. must comply with stricter requirements for the use of public accountants and the production of financial review;
  3. must send financial statements and the report of the public accountant, if any, to Corporations Canada;
  4. must include a provision in their articles that any property remaining on liquidation of the corporation be distributed to a "qualified donee," as defined in the Income Tax Act; and
  5. cannot have unanimous member agreements.

Echoes of earlier debates were present throughout the consultation, but as now informed by the experience of the last ten years. Several stakeholders noted that, while the rationale for imposing stricter requirements for public organizations is understandable, the soliciting/non-soliciting distinction is not intuitive nor fully reflective of how the sector organizes itself.Footnote 36 They explained the confusion that many not-for-profits have in understanding whether and when they are soliciting or non-soliciting, as well as the disruptive and costly effects of oscillating between being soliciting or non-soliciting, including having to change their articles of incorporation. They argued that a change in status can be a phenomenon that happens inadvertently, especially given the low financial thresholds. Many pointed, for example, to the receipt of one-time COVID-related financial support from governments as potentially triggering a change to a non-soliciting designations, and therefore to obligations under the Act. Legal experts also commented on how the definition of soliciting corporation is open to significant interpretation for which there is a lack of caselaw to provide guidance.

This led several participants to recommend new bases for distinctions (e.g., permanent public benefits/members benefits designation) or the removal altogether of any category other than level of annual revenue. Either approach would require a reconsideration of the five requirements outlined above, and under which circumstances they would continue to apply. For example, some stakeholders commented that restricting two of the three directors to non-officers or employees can be very challenging for small not-for-profits, whereas others mentioned that the restriction should stay in place for all public benefit corporations. Requirements to conduct an audit or review engagement could be based solely on the level of annual revenues, or new distinctions could be drawn based on the nature of the corporation. With respect to the current requirement that soliciting organizations include provisions in their articles that property remaining on liquidation be distributed to "qualified donees", some stakeholders noted that corporations could instead make use of asset locks.Footnote 37 Others worried that this model would not effectively protect donors (e.g., organizations collecting public monies determining assets can be distributed among members). Finally, with respect to the requirement that soliciting organizations not have unanimous member agreements, one stakeholder noted that they are not widely used and that it may thus not be very be problematic if all not-for-profits were permitted to have them, provided that it be made publicly known.

4.2.8 Comments about applicability of new corporate governance measures to non-profit organizations

Since the enactment of the NFP Act in 2011, the Canada Business Corporations Act (CBCA) has been amended several times to give effect to new corporate governance requirements related to a) ensuring disclosure reporting of the diversity of boards of directors and senior management team , b) ensuring the collection and retention of corporate beneficial ownership information, and c) to codify the long standing jurisprudential interpretation and parameters of the fiduciary duty of directors of a corporation.

At the time the aforementioned corporate governance amendments were being considered for business corporations, parallel obligations were not transposed into the NFP Act, in part due to the significant differences between for-profit and not-for-profit sectors. However, at a general level, encouraging greater diversity, combatting illicit use of corporate structures and promoting responsible governance remain important priorities. The statutory review offered an opportunity to holistically examine the adequacy of the NFP Act in light of these objectives.

4.2.8.1 Diversity disclosures

In 2018 the Government introducedFootnote 38 a requirement that distributing CBCA corporationsFootnote 39 (typically those that are publicly-traded) report annually on a "comply or explain" basis on the diversity of their boards of directors and senior management, as well as their policies to promote diversity and any representation targets they may have. The requirements were intended to foster management-shareholder dialogue and encourage corporate Canada to recognize the benefits of diverse backgrounds in decision-making. The comply-or-explain approach was also designed to align easily with similar obligations that exist for most publicly-traded corporations under provincial securities regulation with respect to the representation of women. In extending such requirements, it was generally believed that large publicly-traded firms should be held to a higher standard of governance and accountability than other corporate entities.Footnote 40

During the consultation, stakeholders strongly supported the notion of encouraging diversity within the not-for-profit sector and of improving data collection to measure progress and inform policy. There was also a broad recognition of key differences between the business and not-for-profit sectors, where many organizations support specific populations (e.g., Indigenous, women, visible minorities). Diversity in not-for-profit organizations, argued a number of participants, may be less about society-wide demographics and the Employment Equity Act, and more about representativeness of the community served. Nonetheless, several participants argued that there is good policy rationale for extending the "comply or explain" diversity disclosure requirements currently in the CBCA to the NFP Act, since this approach is aimed at fostering dialogue and leaves flexibility to organizations in explaining their diversity policy. Others expressed reservations regarding the burden that new reporting requirements could disproportionately impose, particularly on smaller or revenue-constrained organizations. They also wondered if the NFP Act was the best approach for promoting dialogue and improving data collection; a number of potential alternatives were discussed, including the 50/30 challenge, tax returns for charities and new Statistics Canada surveys.

4.2.8.2 Individuals with significant control

With respect to corporate beneficial ownership information, the CBCA was amended in 2018 to requireFootnote 41 private corporations to create and maintain a register with information about "individuals with significant control" of their corporation. The objective is to counter bad actors seeking to conceal corporate ownership and control for illicit purposes, including money laundering, terrorist financing and tax evasion. When wrongdoers take advantage of the ability to create complex ownership structures and make use of nominee shareholders and directors, the identities of the natural persons or "beneficial owners" who own and control corporations can remain hidden from those who may need to know, such as law enforcement and tax authorities. To enhance the availability of beneficial ownership information to certain authorities, the CBCA was further amended in 2019Footnote 42to require that these same corporations make their registers available to certain investigative bodies upon request (subject to certain conditions).

Like business corporations, not-for-profit entities may also be vulnerable to abuse; they enjoy the public trust, can have access to considerable sources of funds, and sometimes have a global presence. That said, there are already safeguards in place in the NFP Act, the Income Tax Act as well as Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) to counter illicit activities. In the NFP Act more specifically, these include the requirement for corporations to prepare and maintain at its registered office records of a register of directors, officers and members as well as the articles and the by-laws, the minutes of meetings of members and the resolutions of members. Corporations are also required to maintain adequate accounting records, and provisions in the Act that require the use of a public accountant help ensure scrutiny of their activities. Further, not-for-profit corporations directors have a statutory duty to verify "the lawfulness of the articles and the purpose of the corporation".Footnote 43

Few stakeholders commented on the appropriateness of adopting a provision that would require not-for-profit organizations to collect and maintain information on those with significant control. Those that did, suggested that the current obligations to file articles, by-laws and annual returns with Corporations Canada and to maintain lists of members should be sufficient to enable law enforcement to identify any individual of significant control in the vast majority of cases. One stakeholder suggested that the requirement be added to the NFP Act, but apply only to not-for-profit organizations more susceptible to have controlling individuals, such as for example those with ten members or fewer.

Others recommended that, while the NFP Act may not need immediate amendments, the Government should continue to monitor effective practices in other jurisdictions and partner with public and private sector money-laundering and anti-terrorist financing regime experts regarding any developing trends involving NFPs. Several stakeholders also suggested that more data about the operations of each not-for-profit organization in the sector should be publicly available, albeit in a manner that does not create an unnecessary burden on corporations. One stakeholder recommended that amendments be made to the Form 4022Footnote 44 to request additional information such as the total revenue, total assets and total expenditures of a corporation in its most recent completed fiscal year. It was felt that the public interest would be more readily served by improving basic transparency, particularly given the relative absence of public information on not-for-profit organizations that are not registered charities. Proponents argued that such data would also have significant value in identifying trends and better tailoring policy in support of the sector.

4.2.8.3 Elaborating on fiduciary duty

The CBCA was amended in 2018 to codify the long standing jurisprudential interpretation of the fiduciary duty of directors, ensuring that when acting with a view to the best interests of the corporation, the directors and officers of the corporation may consider, but not be limited to, factors such as the interest of, shareholders, employees, retirees, pensioners, creditors, consumers and governments as well as the environment and the long term interests of the corporation.

The NFP Act currently requires that every director and officer of a corporation in exercising their powers and discharging their duties shall act honestly and in good faith, with a view to the best interests of the corporation. Directors shall also exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances"Footnote 45. Nothing in the NFP Act or regulations, however, specifies what the board of directors of a not-for-profit corporation should consider in its evaluation of said "best interests".

Stakeholders generally supported codifying into the NFP Act the language of the longstanding jurisprudential interpretation of the fiduciary duty, noting that Supreme Court of Canada decisions already provides referential guidance to not-for-profit organizations. They pointed out that the sector includes many small, volunteer-run organizations, and that plain language specifications could help directors understand their responsibilities. However, several stakeholders noted that further clarity may be warranted to ensure the interpretation aligns with the spectrum of stakeholders in a not-for-profit context (e.g., jurisprudence referring to notions such as "customers"), or to provide intelligible guidance to those that must interpret what is intended by the notion of "acting in best interest of the corporation". They reported that this notion is not always intuitive, particularly as many not-for-profit organizations act for the public good. A number of stakeholders also pointed to another section of the Act that may benefit from further clarification, namely the provisions dealing with conflicts of interest.Footnote 46 They explained that the notion of conflict of interest was intuitive when a financial quid pro quo was involved, but that there was little guidance for other forms of conflicts. Participants mentioned that, regardless of whether the Act itself is changed, the sector could benefit from additional education material and initiatives.

5.0 Conclusion

Canada's not-for-profit corporations are as varied in form as they are in focus. The Act is specifically designed to promote accountability, transparency and good corporate governance, while being flexible enough to accommodate this diversity. As a key marketplace framework legislation, the Act plays an important role in the country's economic performance and affects the lives of hundreds of thousands of Canadians every year. It is imperative that legislation of this significance be reviewed on a periodical basis to ensure it continues to meet its objectives.

The recent COVID pandemic and its economic consequences have tested the resolve of many organizations. While the not-for-profit sector has demonstrated incredible innovation and resilience, the crisis did highlight how certain requirements under the NFP Act could constrain organizations, especially smaller ones, in times of change. To this effect, stakeholders have put forward a number of legislative and regulatory proposals to increase operational flexibility and facilitate better comprehension of the NFP Act that are worthy of examination.

This report is an important milestone towards that goal. The next statutory step will be its review by a Parliamentary committee, which is set to produce its own report within the next year.

Annex 1

Not-For-Profit Act Statutory Review Consultations

In person and written submissions

In-person meetings

44 Individuals via Microsoft Teams from July 1-30th 2021

Written submissions

Total: 29 organizations

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