Why Jurisdiction Matters to Corporate Finances: CNCA vs. ONCA
By Alexandra Tzannidakis
While Federal not-for-profit corporations are still adjusting to the new Canada Not-for-profit Corporations Act (CNCA), their Provincially-incorporated counterparts in Ontario are about to face a similar change when the Ontario Not-for-profit Corporations Act (ONCA) comes into force later this year. The two pieces of legislation are similar-yet-different enough to confuse the uninitiated. Their slightly misaligned schemes of financial review are particularly complex, but are well worth taking the time to understand.
The circumstances in which corporations are required to undertake a costly yearly audit are not quite the same under the Federal act as under the forthcoming Ontario act. A corporation which might end up expending a great deal of money on audits under one act could avoid them entirely under the other. Knowing which act to incorporate under (or continue into) can help an entity realize significant savings.
The CNCA and ONCA draw a similar distinction between two types of corporations, differing mostly in name and occasionally in detail.
The ONCA distinguishes between Public Benefit Corporations (PBCs) versus non-PBCs, where a PBC is:
(i) any charitable corporation; or
(ii) a non-charitable corporation that received more than $10,000 total in its most recent financial year from
(a) donations or gifts from people who are not its members, directors, officers or employees; and
(b) grants or similar assistance from Federal, Provincial, or municipal government or any government agency.
The CNCA distinguishes between soliciting versus non-soliciting corporations, where a soliciting corporation is one that received more than $10,000 total within any one of its past three financial years from
(i) donations or gifts that it requested from people who are not its members, directors, officers or employees at the time of the request, or the spouse or relative of any of those people;
(ii) grants or similar assistance from federal, provincial, or municipal governments or any government agency; and
(iii) donations or gifts from an entity that received during its most recent financial year more than $10,000 in the type of assets described in (i) and (ii).
Under the Federal law, a yearly audit is mandatory for soliciting corporations with gross annual revenue in their last financial year of more than $250,000. Under the forthcoming Ontario law, audits are mandatory for PBCs with gross annual revenue in their last financial year of $500,000 or more. The other various combinations of designation and revenue at both the Federal and Ontario levels can either choose a less-costly review engagement or, in some cases, waive the review requirements entirely.
There are undoubtedly advantages to choosing Federal incorporation, the review requirements being otherwise equal. However, reality can rapidly become complicated.
Consider the case of a parent corporation with several smaller corporations subordinate to it. If all the entities are incorporated Federally, and the parent corporation qualifies as soliciting, the money the parent distributes to its subordinates will go towards making them soliciting as well (under category (c) described above). One potential result would be the parent and all the subordinates each having to pay for a separate audit in any given year, which would translate to a significant financial burden.
A good grasp of the differences between the ONCA and CNCA will immediately suggest a solution to this problem: if the subordinate corporations are incorporated under the Ontario act instead of the Federal one, the money they receive from their parent corporation will presumably not contribute towards their threshold for becoming a PBC and they will be unlikely to face mandatory audits. Keeping in mind of course that accountanting rules may have a different take on the audit requirements of related entities.
Choosing the appropriate act to incorporate under is one thing, but in some cases an entity that is already incorporated may wish to switch its governing legislation. In these cases, both the importing and exporting jurisdictions must permit the continuance. The CNCA allows corporations from any jurisdiction (except those established by an Act of Parliament) to apply to be ‘imported’ into its purview. It also allows corporations to apply to ‘export’ out of it. The current law governing not-for-profit corporations in Ontario does not allow continuances, but the ONCA will. The flexibility provided by the forthcoming ONCA makes this a good time for entities to consider the options they are about to have regarding their required level of financial review.