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Considerations for Ontario Not-for-Profit Corporations Under the New Not-for-Profit Corporations Act, 2010

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Overview

Capital Perspectives – Newsletter

The Not-for-Profit Corporations Act, 2010 (Ontario) (ONCA) came into force on October 19, 2021. For many existing corporations without share capital incorporated in Ontario, it will replace the outdated Corporations Act (Ontario) (OCA) as the governing statute. The ONCA has a similar regulatory framework to Ontario’s for-profit corporations under the Business Corporations Act (Ontario) (OBCA).

Most existing not-for-profit corporations will have a three-year transition period (until October 18, 2024) in which to make the necessary modifications to their governing documents (letters patent and bylaws) to become compliant with the ONCA. In the event an existing corporation fails to make such modifications, the governing documents will be deemed to have been amended to comply with the ONCA. For most not-for-profit corporations seeking to incorporate in Ontario for the first time, the ONCA will automatically apply. Additionally, if directors do not pass bylaws within 60 days of incorporation under the ONCA, the corporation will be deemed to have passed standard organizational bylaws, which can be amended thereafter.

The application of the ONCA to companies without share capital has certain exceptions including corporations with social purposes (which have a longer time to continue under the ONCA), corporations incorporated under a general or special act of Parliament, corporations subject to the Co-operative Corporations Act and insurance corporations.

Set out below are some broad areas of change that not-for-profit organizations need to consider under the ONCA. The changes under the ONCA are numerous and this article only summarizes some of the applicable changes and considerations.

1. Determine Whether the Corporation is a Public Benefit Corporation

Corporations will need to consider which of the ONCA’s  two categories of corporations – the public benefit corporation and the not for public benefit corporation – are applicable to them. Public benefit corporations are subject to additional and more stringent requirements under the ONCA.

A corporation will be considered a public benefit corporation if one of the following two criteria are met: (i) the corporation is a “charitable corporation” as defined in the ONCA, meaning the corporation is incorporated for the relief of poverty, the advancement of education, the advancement of religion or other charitable purposes; or (ii) the corporation receives, in the financial year, more than $10,000 in donations or gifts from persons who are not members, directors, officers or employees of the corporation or in the form of grants or similar financial assistance from government or a governmental agency (i.e. it is a “non-charitable public benefit corporation”). Whether a corporation qualifies as a public benefit corporation is determined as of the first annual meeting in the subsequent financial year. Except for a charity, a corporation can switch between the two categories based on the criteria set out in the ONCA.

As a public benefit corporation, certain additional rules under the ONCA may be applicable including (i) not more than one-third of its directors are permitted to be employees of the corporation or any of its affiliates, (ii) more onerous obligations in respect of financial reporting (see below), and (iii) different consequences upon winding up and different restrictions on distributions to members.

2. Review Your Letters Patent, Supplementary Letters Patent, Articles and Bylaws

The ONCA, similar to the OBCA, provides for incorporation as of right upon submission of articles of incorporation, payment of applicable fees and other required information as set out in the ONCA and its regulations. This is in contrast to the OCA, which requires the filing of letters patent and bylaws, with incorporation remaining at the discretion of the Ministry of Government and Consumer Services. Subject to the ONCA, the corporation has the rights, powers and privileges of a natural person.

As not-for-profit corporations transition to the ONCA, the corporation’s constating documents should be reviewed to ensure they properly reflect the corporation’s current and future activities and to ensure their compliance with the ONCA. The ONCA requires that a corporation include the purposes of the corporation in its articles and that if the corporation has multiple classes or groups of members that they be identified in the articles. The conditions for membership are to be set out in the bylaws. The ONCA provides that a corporation can have a purpose that is commercial in nature, provided that the corporation’s articles identify that such commercial purposes are solely for the advancement of, or in support of, one or more of the corporation’s not-for-profit purposes.

3. Review Director and Officer Requirements and Obligations

Under the ONCA, the articles can specify a specific number, a minimum or a maximum number of directors but every corporation must have a minimum of three directors.

Corporations should also take the opportunity to revisit provisions related to directors and officers more broadly under the ONCA. Questions for consideration include: (i) whether directors should also be required to be members of the corporation (previously under the OCA a percentage of the directors were required to be members), (ii) whether to change the directors’ terms of office as the maximum term under the ONCA is four years and whether the terms should be staggered, and (iii) whether ex officio directors should be included, as permitted under the ONCA.

The articles and bylaws of the corporation may need to be reviewed to consider whether additional flexibility for the corporation is appropriate given the changes under the ONCA, including to allow directors’ meetings to be held in any place and to allow directors to appoint officers and delegate powers to them, subject to certain limitations. Additionally, the ONCA requires that the chair of the board be a director however, unlike the OCA, the president of the corporation no longer is required to be a director.

The corporation and its directors should keep in mind that the ONCA imposes express requirements for directors and officers to report conflicts of interest in certain circumstances and refrain from voting in respect of such matters, similar to the regime under the OBCA. Directors are also expected to act honestly, to act in good faith with a view to the best interests of the corporation, and to exercise reasonable care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances carrying out their duties. Adhering to these duties is necessary if directors wish to rely on the due diligence defence provided for under the ONCA. The corporation also needs to consider whether to provide for indemnification of its directors and officers and whether to purchase insurance, subject to certain restrictions, for the benefit of those individuals who are indemnified, both as permitted under the ONCA.

4. Review Member Provisions

With the introduction of the ONCA, not-for-profit corporations should take the opportunity to review their membership structure and ask whether the structure still meets the needs of the corporation including whether there should be more than one class or group of members and whether provisions should be added to the articles or bylaws to permit memberships to be transferred. The ONCA provides significant new voting rights and remedies for members, similar to those afforded to shareholders under the OBCA. It is important to note that the ONCA does not include the ability to implement a unanimous members’ agreement that would result in the transfer of the powers of the directors to the members.

Members entitlements under the ONCA include: (i) the ability to submit a proposal, subject to certain requirements and thresholds, on any matter such member wishes to raise at an annual meeting, (ii) members holding at least 10%, or a lower percentage set out in the bylaws, may requisition the calling of a meeting of members or directors, again subject to certain restrictions, (iii) if permitted by the articles or bylaws, proxy voting by members, and (iv) several protective measures for members including the ability to apply to the court for an investigation into oppressive or prejudicial actions by the corporation and to apply to the court to bring a derivative action on behalf of the corporation.

The ONCA changes the definition of “special resolution” from what was previously defined in the OCA. Under the ONCA, a matter approved by special resolution is a resolution approved by the corporation’s members, subject to certain thresholds identified in the ONCA, but typically being at least two-third of the votes cast on such resolution at a members’ meeting by the members entitled to vote at the meeting called for such purpose. A resolution can also be passed by being signed unanimously by all the members. Under the OCA, a special resolution was passed by the corporation’s directors and confirmed by the members, subject to certain thresholds.

Members must approve certain fundamental changes such as amalgamations and the sale, lease or exchange of all or substantially all of the property of a corporation other than in the ordinary course of its activities.

5. Review the Corporation’s Financial Reporting Obligations

The ONCA introduces some new flexibility to financial reporting obligations for certain not-for-profit corporations. The ONCA requires that at each annual meeting, the members must appoint an independent auditor, subject to members passing an extraordinary resolution* to permit a review engagement instead of an audit or not to have either an audit or review engagement.  

The ONCA introduces a process for reviewing a not-for-profit corporation’s financial records called the “review engagement”. This process is less extensive than an audit and, as a result, is generally less expensive. Certain not-for-profit corporations may also be permitted to waive a formal audit and review engagement, which will depend on the corporation’s revenues in the financial year, and whether the corporation is a public benefit corporation. The following chart summarizes what type of financial review a corporation under the ONCA may need: 

Type of corporation

Amount of revenue per financial year

Type of financial review

Public benefit corporation

$100,000 or less

Waive*

Public benefit corporation

More than $100,000, but less than $500,000

Review engagement*

Public benefit corporation

$500,000 or more

Audit

Non-public benefit corporation

$500,000 or less

Waive*

Non-public benefit corporation

More than $500,000

Review engagement*

*Approval to waive an audit or to waive both an audit and review engagement requires an extraordinary resolution, which is approval from at least 80% of the votes cast at a special members' meeting or if all voting members consent in writing.

Members are entitled to financial statements on an annual basis which, after approval by the directors (and prior to that, the audit committee, if any), must be placed before the members at the annual meeting of members.

Conclusion

The ONCA represents an important step forward in modernizing Ontario’s not-for-profit laws and brings the Ontario not-for-profit regime in line with both the federal not-for-profit regime under the Canada Not-for-profit Corporations Act (CNCA) and the for-profit corporations under the OBCA. The ONCA also introduces several new concepts, rights and obligations for directors, officers and members some of which must, or may, be entrenched in the articles or bylaws of the corporation, and some which exist statutorily under the ONCA regardless of the corporation’s articles or bylaws. 

Corporations will want to review their governance documents and membership structure both with a view to ensuring compliance with the ONCA but also with a view to seeing how the governance and management of the corporation may be improved, or adjusted, for the future of the organization, given the changes under the ONCA. For most corporations, there are three years to make the transition but given the multitude of changes it will be important to start the review and implementation as soon as possible. Equally, some corporations will want to make the transition sooner rather than later to take advantage of the provisions of the ONCA.

Special thanks to Ryan Brun for his contributions to this article.


Virginia Schweitzer is Co-Managing Partner of the Fasken Ottawa office and practices in the areas of corporate finance, mergers and acquisitions, securities, mining, energy and technology law.

Ryan Brun is an Articling Student in the Fasken Ottawa Office. Ryan summered with the Ottawa office in 2020 and looks forward to building a broad commercial law practice, with a focus on complex commercial litigation and arbitration.

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