Canada: The New Canada Not-For-Profit Corporations Act: What It Might Mean For Your Franchise System’s Ad Fund

Last Updated: March 7 2012
Article by Rebecca Hamovitch

In many franchise systems, franchisors administer (or reserve the right to later establish and administer) an advertising fund. These ad funds may be administered directly through the franchisor entity, or through a separate corporation or trust set up by the franchisor. If your ad fund is administered through a federally incorporated not-for-profit corporation, you will have to comply with certain requirements set out in the new Canada Not-for-profit Corporations Act (the "New Act").

The federal government proclaimed the New Act into force effective October 17, 2011. The New Act is the first revision of the statutory law governing federal not-for-profit corporations in more than 60 years. As a result, it is game-changing legislation, intended to bring greater transparency and accountability into the federal not-for-profit sector. Franchisors who have incorporated a not-for-profit company should be aware of some of the immediate implications of the New Act.

Until your corporation applies to Industry Canada to be continued (i.e. transferred) under the New Act, it will continue to be governed by the Canada Corporations Act (the "Old Act"). As a result, it will be "business as usual" for your corporation until you complete that application. Your corporation does not have the right to continue under any legislation other than the New Act. This means that if an existing not-for-profit corporation no longer wishes to be a federal not-for-profit corporation, it must first continue under the New Act and then continue a second time under the legislation of a province or other jurisdiction with continuance rights that are reciprocal to those in the New Act.

However, there is a sunset date for operations under the Old Act. Significantly, if your existing not-for-profit corporation does not apply for articles of continuance under the New Act by October 17, 2014 (three years from the date the New Act came into force), the federal government will cancel your corporation's charter with no opportunity for revival. It will then cease to exist.

Industry Canada has provided forms for applications for articles of continuance. One of the mandatory requirements for the articles of continuance will be a statement of "purposes" for the applying corporation, though Canada Revenue Agency has not provided any guidelines as to what such a statement must entail. There is no filing fee charged for the continuance filing. As long as the form is completed with the required information, the articles of incorporation will be issued.

It should be noted that there is also new provincial legislation dealing with not-for-profit corporations. The Ontario Not-for-Profit Corporations Act, 2010 (the "Ontario Act") has received Royal Assent, and it is anticipated that it will be proclaimed into force in late 2012. In contrast to the New Act, the Ontario Act, once proclaimed in force, will immediately apply to all then existing Ontario not-for-profit corporations without any requirement for action on their part.

One of the goals of the New Act is to conform the rules governing federal not-for-profit corporations as closely as possible to the rules governing for-profit corporations, and as such, there are significant parallels between the New Act and the Canada Business Corporations Act. Among other things, this will mean that after your corporation continues under the New Act, it will have all of the capacity of a natural person.

After continuance under the New Act, your corporation will also be subject to stricter audit and reporting obligations. This requirement is intended to create greater transparency and more fulsome disclosure to members of the corporation, Industry Canada and Canada Revenue Agency. As a result, you should consider budgeting additional funds for accounting expenses. Of course, there are a large number of other changes to governance and other aspects of your corporation which will apply after it continues under the New Act.

An advertising fund can be critical to a franchise system's brand awareness, profitability, and overall success. Given that failure to continue under the New Act within the proscribed timeframe will result in the automatic and permanent dissolution of any existing federal not-for-profit corporation, it is crucial that franchisors fully inform themselves and comply with the New Act. We would be happy to advise on and facilitate the planning and transition from the Old Act to the New Act in a timely and cost-effective manner.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Rebecca Hamovitch
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