What You Need to Know about Continuing under the New

A. INTRODUCTION

The Canada Not-for-profit Corporations Act (the CNCA or the Act) received Royal Assent on June 23, 2009, but has not yet been proclaimed into force. Before the CNCA can come into force, the proposed regulations need to go through the regulatory approval process. Corporations Canada has indicated that the regulations will be approved in the Spring of 2011, which will allow the CNCA to come into force.

In the meantime, not-for-profit organizations incorporated federally, provincially, territorially, or internationally that are contemplating a continuance under the CNCA (hereinafter referred to as NPOs) should be familiar with the continuance requirements prescribed by the new Act.

B. CONTINUANCE REQUIREMENTS

1. Who Can Continue under the CNCA?

The following corporations may continue under the CNCA: i) corporations incorporated under Part II of the Canada Corporations Act (the CCA); ii) Canadian Special Act Corporations (except departmental and parent Crown corporations); and iii) corporations formed under provincial, territorial or foreign law (if so authorized by the laws of their jurisdiction). Corporations incorporated under Part II of the CCA will have three (3) years from the date of coming into force of the CNCA to apply for a certificate of continuance. Those corporations that do not apply for continuance under the new Act within the three-year period, may be dissolved by the Director.

Canadian Special Act Corporations may, but are not required to, continue under the CNCA even if the Special Act does not allow it. Those who decide not to file for continuance under the new Act will continue to be governed by their Special Act, but will also be subject to certain sections of the CNCA (e.g. calling annual meetings, court-ordered meetings, amendment of charter, continuance, liquidation and dissolution, filing annual return). However, for those Special Act Corporations that do choose to continue, the Special Act will cease to apply upon issuance of the certificate of continuance. Unlike CCA corporations who only have three (3) years to apply for continuance, Special Act Corporations are not subject to any prescribed transition period.

2. Approvals to Continue under the CNCA

NPOs intending to continue under the CNCA, but not making any amendments to their charter (other than an amendment required to conform to the CNCA) need only the approval of the board of directors to apply for a certificate of continuance. A special resolution of members authorizing the directors to apply for a certificate of continuance will however be required where the NPO makes any amendment to its charter that is permitted under the CNCA (e.g. a change of name or of objects). The Act provides further that the members may not, by such a special resolution, make any amendment that affects a particular class or group of members unless the NPO's charter (e.g. letters patent) provides otherwise or the members of the class or group (whether or not they are entitled to vote under the current regime) approve the amendment by way of a separate class vote.

3. Articles and Certificate of Continuance

A NPO may apply for a certificate of continuance if it is so authorized and if the NPO satisfies the requirements for incorporation under the CNCA. In addition to the articles of continuance, a NPO must file a notice of registered office and a notice of directors. There is no requirement to file the by-laws of the NPO with the articles of continuance and there will be no fee for filing the articles. On receipt of the articles of continuance, Corporations Canada will issue a certificate of continuance.

The information required in the articles of continuance, as set out below, mirrors that of the articles of incorporation:

The name of the corporation;
The province where the registered office is to be situated;
The classes, or regional or other groups, of members that the corporation is authorized to establish and, if there are two or more classes or groups, any voting rights attaching to each of those classes or groups;
The number of directors or the minimum and maximum number of directors;
Any restrictions on the activities that the corporation may carry on;
A statement of the purpose of the corporation; and
A statement concerning the distribution of property remaining on dissolution.

While some NPOs will carry most of the content of their letters patent over to the articles of incorporation, others will want to take the opportunity to implement corporate or governance changes that are long overdue.

3.1. Considerations for Membership

The Act requires that the articles set out the classes, or regional or other groups of members of the NPO. If there are two (2) or more classes or groups of members, any voting rights attached to each class or group must be set out in the articles. NPOs that currently have one or more classes of non-voting members, will want to give careful consideration to how they structure and describe their membership and classes under the CNCA since the new Act allows all members (even those described as nonvoting) to vote on certain fundamental corporate matters, such as: proposed amendments to membership classes, conditions and rights, the amalgamation of the corporation, the sale or lease of all or substantially all of the corporation's assets, and the voluntary liquidation and dissolution of the corporation.

NPOs that are particularly concerned with control of the corporation or that want to avoid having non-voting members vote on such fundamental changes, may want to eliminate their non-voting membership class(es) and have only one (1) class of members. Former non-voting members can still be recognized and given the right to attend meetings of members (or such other rights as the NPO deems appropriate), but they should not be described in the by-laws as "members" if the NPO does not want such persons to have the right to vote on selected fundamental corporate matters. Arguably, the use of terms such as "friends" or "supporters" of the organization would achieve the desired result.

3.2. Considerations for the Number of Directors

The articles of continuance must set out the number of directors or the minimum and maximum number of directors of the CNCA corporation. This differs from the CCA, which does not require the letters patent to set out the number of directors on the board. In deciding whether the number of directors should be fixed in the articles or whether a broader range should be set out instead, NPOs should consider the CNCA requirements in respect of how the number of directors may be amended from time to time.

If a minimum and maximum number of directors is provided for in the articles (e.g. "The Board shall be comprised of no less than three (3) and no more than ten (10) directors."), the members may, by ordinary resolution, fix the number of directors (within the minimum and maximum number) or delegate that power to the directors. If however the articles provide for a fixed number of directors (e.g. "The Board shall be comprised of ten (10) directors."), then that number cannot be changed unless articles of amendment are filed. Under the CNCA, the articles of amendment must be approved by a "special resolution" of the members (i.e. a resolution passed by at least two-thirds (2/3) of the votes cast on that resolution). NPOs may find that setting out a minimum and maximum number of directors in the articles provides more flexibility, since articles of amendment are not required to increase or decrease the number of directors within the range authorized by the articles; an ordinary resolution of the members or of the directors, as the case may be, is sufficient.

A new feature of the CNCA, which allows the directors (if the articles so provide) to appoint up to one-third (1/3) of the number of directors elected at the previous annual meeting of members may also be attractive to many NPOs. Directors so appointed may only hold office from the time of their appointment until the close of the next annual meeting of members. The directors of a NPO that has included this right in its articles will be entitled to appoint a limited number of additional directors between annual meetings. This option might be useful in circumstances where, in a particular year, the organization is involved in a unique project where special skill or expertise on the board could be of great value.

3.3. Restrictions and Statement of Purpose

Although the CNCA provides that corporations have the capacity and the rights, powers and privileges of a natural person, not-for-profit and charitable organizations continuing under the Act will want to include in their articles limitations on the activities they may carry on for the purpose of evidencing their non-profit status or maintaining their charitable registration under the Income Tax Act. There has been some discussion as to whether such limitations should be drafted in the articles of continuance as restrictions or in the statement of purpose. As mentioned above, the articles must set out any restrictions on the activities that the corporation may carry on and a statement of the purpose of the corporation.

It is conceivable that non-charitable NPOs continuing under the CNCA will need only to reproduce their existing objects in the statement of purpose section of the articles, without including anything in the "restrictions" section. However, it is our understanding that the current objects of registered charities (as approved by the Canada Revenue Agency (CRA)) should be included in the articles as restrictions on the activities that the corporation may carry on, unless a change in objects has been approved by CRA prior to filing for articles of continuance. The statement of the charity's purpose required by the articles should be a general statement of the purpose of the charitable organization (similar to a mission statement), and should be compatible with the activities that the corporation is restricted by its articles from carrying on.

NPOs, particularly registered charities, that wish to take this opportunity to amend their objects, should consult with the CRA on the proposed changes before filing their articles of continuance. As the Act is closer to being proclaimed into force, the CRA is expected to release a policy directive or other information to explain how the Agency proposes to deal with federally incorporated charities continuing under the CNCA and what will be required of them in respect of the preparation and filing of their articles of continuance.

4. By-laws

NPOs should now start thinking about what amendments to their by-laws may be necessary to comply with the CNCA, even though by-laws will no longer be subject to ministerial approval. A detailed discussion of all by-law matters affected by the CNCA is beyond the scope of this article, but generally, NPOs continuing under the Act will likely be required to make changes to any by-law provision that deals with the appointment or election of directors, ex officio directors (note that the CNCA does not provide for ex officio directors), the number of directors and composition of the board, the term of office of directors, classes of members, members' voting rights, manner of approving by-law amendments and the appointment of auditors (referred to in the CNCA as public accountants).

We know of many organizations that operate in noncompliance with their by-laws, especially where the by-laws are outdated and/or too restrictive. This is a good time for NPOs to review their corporate and governance practices and bring them in line with the Act and other modern governance standards and procedures. The CNCA is a contemporary corporate statute that is much more enabling than the antiquated CCA. It will allow NPOs continuing or incorporated thereunder to adopt a governance structure and corresponding by-laws that are flexible and best meet the needs of the organization. While some organizations currently undergoing a by-law review may be tempted to adopt new by-laws now that comply with the CNCA, it is likely preferable to wait until the legislation is in force since there are many new features and provisions of the new Act that are not compatible with the CCA.

5. Effect of Continuance

Once a NPO is continued under the CNCA, the articles of continuance will be deemed to be the articles of incorporation of the continued corporation and will replace the letters patent (or other form of charter or incorporation instrument). Thereafter, the NPO is subject to the CNCA as if it had been incorporated under that Act. The CNCA also provides that from the date shown in the certificate of continuance the certificate of continuance is deemed to be the certificate of incorporation of the continued corporation and that any members cease to be members of the NPO and become members of the continued corporation. In addition, from the date of continuance:

The property of the NPO continues to be the property of the continued corporation;
The corporation continues to be liable for the obligations of the NPO;
An existing cause of action or claim is unaffected;
Any civil, criminal or administrative action or proceeding pending by or against the NPO may be continued by or against the continued corporation;
Any conviction against, or ruling, order or judgment in favour of or against, the NPO may be enforced by or against the continued corporation.

C. CONCLUSION

It is expected that once the CNCA is proclaimed into force those who work closely with NPOs continuing under the Act will experience a moderate learning curve. However, as we become more familiar with the new legislation and how it impacts the day-to-day operations and general governance of CNCA corporations, we will appreciate the Act's thorough yet flexible framework, which is intended to meet the needs of both small and large NPOs, while providing accountability and transparency.

To ensure a smooth transition to the new legislative regime, it is essential that executives, directors and officers familiarize themselves with the Act and consider what changes may need to be made to the organization's corporate documents so as to conform with the CNCA. In the meantime, BLG will continue to monitor the Act's progress and advise you of any important developments affecting your organization.

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Canada: What You Need to Know about Continuing under the New "Canada Not-For-Profit Corporations Act"