Drawing the Line on the CNCA’s Financial Requirements
By Alexandra Tzannidakis
The new Canada Not-for-Profit Corporations Act (“CNCA”) introduces a quagmire of financial rules based on two new class divisions that interact in inexplicable ways. This head-scratching setup will likely leave smaller federally-incorporated charities wondering where exactly they fall in terms of important auditing requirements. Although the answer is far from straightforward, we have unravelled it here so that small corporations can know where they stand.
The new Act takes the position that some corporations need tighter financial control than others, and makes this distinction across two separate lines that create a complicated chart of requirements. Some requirements are determined by type of income (“soliciting”), and others by a combination of type and level of income (“designated”).
Soliciting and Non-Soliciting Corporations
The CNCA creates a division among not-for-profit corporations based on the amount of income received from a combination of requested donations and public money. Corporations that received more than $10,000 of this kind of income during the last financial year are deemed to be “soliciting” corporations for the duration of the following year. “Non-soliciting” corporations are everybody else.
The category of income that goes towards the “soliciting” designation includes even unrequested donations or gifts from other soliciting corporations. This reflects the policy behind the designation, which prescribes more stringent regulations for corporations that receive public funds. Following this policy, being deemed a soliciting corporation not only increases financial reporting requirements and tightens rules for distributing assets on dissolution, it also has implications for governance: an increased minimum of three directors (at least two of which are not officers or employees of the corporation or its affiliates), and a ban on unanimous members agreements.
Designated and Non-Designated Corporations
But the CNCA doesn’t stop there; it creates a second division, which dictates the necessary level of financial review on the basis of gross annual revenue. A non-designated corporation must appoint a public accountant to conduct an audit engagement, while a designated corporation can choose between an audit engagement and a review engagement or even do away with the public accountant completely. The Act defines a designated corporation as:
(a) a soliciting corporation that has gross annual revenues for its last completed financial year that are equal to or less than the prescribed amount ($50,000) or that is deemed to have such revenues under paragraph 190(a); and
(b) a non-soliciting corporation that has gross annual revenues for its last completed financial year that are equal to or less than the prescribed amount ($1,000,000).
In (a), the reference to ss.190(a) means that a soliciting corporation may apply to the government to have its revenue “deemed” to be acceptable for the purposes of being considered a designated corporation. This decision is made by the appointed federal Director, apparently on the basis that he or she is satisfied that it is not prejudicial to the public interest to artificially lower a corporation’s required level of financial review.
Where Does This Leave Us?
You may have noticed that there is no obvious connection between the two categories and their respective requirements. Why does making over a million dollars in private funds require a corporation to submit to an internal audit engagement, but not to file financial statements with the government? Why does the receipt of a fairly low threshold of public money require more stringent internal governance rules while at the same time potentially allowing the members to dispense with an audit?
Despite the complexity of the system, or perhaps because of it, the story of its policy and intention is inconsistent at best. Add to this the fact that key terms like “gross annual revenue” remain undefined, and it should come as no surprise that some corporations are not keen to continue under the new Act.
Some smaller corporations, especially those that sit on the border of the prescribed amounts, will be turned off by the prospect of bouncing in and out of various categories from year to year. Under the regime of the Act, this hazard can only be avoided by consistently meeting the requirements of the more stringent designation. This would mean (among other things) subjecting the small corporation to a full audit every single year. Readers know that the audit review process is not a cheap one, and could become a significant financial millstone.
One solution for small entities that wish to continue operating in some other form is to change from a corporation to a trust format. A charitable trust is free from corporate rules, including the obligation to make financial statements public. However, the privacy and flexibility of this arrangement is offset by the directors’ loss of protection from personal liability, an advantage that corporate directors enjoy. It may be that the new statutory regime will nonetheless force some small organizations to undertake a change they would not otherwise have considered.
Alexandra Tzannidakis is an articling student with the Ottawa office of Drache Aptowitzer LLP. She can be reached at firstname.lastname@example.org
 CNCA ss. 2(5.1) and CNCA Regulations s.16.
 CNCA ss. 176(1) and s.177.
 CNCA s.235.
 CNCA s.125.
 CNCA s.170.
 CNCA ss.189(1).
 CNCA ss.188(1) and (2).
 Per CNCA Regulations s.83, review engagements and audit engagements are to be prepared in accordance with the generally accepted standards in the Canadian Institute of Chartered Accountants Handbook – Assurance.
 CNCA s.179 and CNCA Regulations s.80.