Taking the Path Less Travelled: Options Other than Continuing
by Brent Randall
There has been extensive discussion regarding the positive aspects of not-for-profit and charitable corporations continuing under the new Canada Not-for-profit Corporations Act. Most of the analysis focuses on perceived positive elements such as the clear rights afforded to members or the more streamlined incorporation and continuance processes. A question that has not been as frequently considered, however, is in what situations might a corporation not want to continue under the new Act?
The Act explicitly forbids not-for-profit and charitable corporations from having ex officio directors. Based on certain relationships that the corporation has developed over time, or because it wishes to keep former Chairs or Presidents in the fold, the Act’s denial of ex officio directors may cause a problem.
Corporations in this position may be able to take solace in the fact that there is still a lot of flexibility in the way an organization can draft its by-laws. The Act has two mandatory by-law provisions regarding conditions of membership and notice for voting members meetings. Otherwise, corporations still have room to be creative to address their needs in their by-laws. While the Act does not allow for ex officio directors, a corporation’s by-laws could find other ways to recognize these stakeholders. One example could be through the creation of a class of voters who have rights similar to what an ex officio director would possess.
Another element of the Act which may not be appealing to certain organizations is the requirement to provide annual financial statements to Industry Canada. Making the financials of the corporation public in such a way may not be desirable to an organization, (even if similar information is available through the CRA) and if so, those organizations will want to consider alternative options to continuing under the new Act.
Corporations may also have a problem with the Act’s review or auditing requirements. Whether an accountant conducts a review or audit will depend on the determination of whether the corporation is a designated corporation. Regardless, the level of financial scrutiny that the Act prescribes may not be something an organization wishes to be bound by, possibly because it feels it is unnecessary or too costly. Corporations that find themselves in this situation may want to look at alternatives to the Act as well.
One option, at least for charities, is to reconstitute the corporation as a charitable trust. Since trusts can be set up for purposes and not just for specific beneficiaries, a trust deed can be drafted based on the charitable purposes of the original corporation. The board of directors from the corporation could become the trustees of the new trust, as both positions have similar responsibilities. The corporation could then transfer its assets to the newly created trust, and dissolve the corporation.
The charitable trust is an attractive option because it affords privacy and flexibility since it does not need to follow corporate rules. One of the reasons that charitable trusts are not commonly used is because in contrast to the directors of a corporation, the trustees have personal liability for the actions and debts of the trust. Whether this is a concern that is justified, however, is debatable. Regardless, the charitable trust takes more skill to set up and the trustees generally face higher stakes than directors or officers of a corporation. As such, while the charitable trust ought to be considered, it should be done so with care.
Next month, we will set out some avenues that corporations that do not want to continue under the Act, but who want to maintain their corporate status, may wish to consider.
If your corporation is evaluating what the new Act has to offer, it is important to recognize that while it might not be the best choice for every corporation, there are still ways to make it work. Furthermore, the Act’s requirement that organizations amend, or at least look closely at their by-laws and governance structure before continuance serves an important purpose by effectively evaluating the corporation. The process of incorporation or continuance under the new Act could be a worthwhile endeavour not only for a corporation going forward, but for its structure and functioning today as well