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The business of not-for-profit

Lawyers are calling for changes to the governing law not-for-profit corporations to better reflect realities in the sector.

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When the federal Canada Not-for-Profit Corporations Act came into force in 2011, it was met with a mix of approval and disappointment by lawyers who practice in the charities and not-for-profit law area. Now that it's coming up for its mandatory 10-year Parliamentary review, lawyers are hoping to see changes made.

The CNCA did get some credit for modernizing the law in the not-for-profit sector at the time. But charities and not-for-profit (CNFP) lawyers found themselves struggling to implement some of its rules and having to create workarounds, says Cliff Goldfarb, counsel at Gardiner Roberts in Toronto. "[It] did clean up a lot of loose ends and implement a lot of things that we wanted," he says. But many of his peers also found it "prescriptive, patronizing and philosophically unrelated to the culture that had evolved in the CNFP sector over many decades."

Goldfarb contends that Industry Canada (as Innovation, Science and Economic Development Canada was known at the time) imposed a framework that was alien to a sector that already had established practices and understandings. "[T]hey chose arbitrary ways of dealing with concepts that didn't apply without really understanding what their effect was going to be." In situations "when there wasn't such a concept, they invented one, which wasn't really relevant to the way the sector operated."

While its predecessor, the Canada Corporations Act Part II, was very sparse as related to not-for-profits, "the current Act provides a lot more guidance and a lot more information," says Linda Godel, a partner at Torkin Manes in Toronto. One of the positives that came from the legislation was the implementation of a nimble system for electronic registrations, communications and filing, she says.

To a great extent, the CNCA mirrors the Canada Business Corporations Act, which has created challenges for lawyers and their clients adapting not-for-profit practices to a business-based legal regime.

"Not-for-profit corporations are not the same as business corporations," says Godel. "The goal of business corporations is to make money for their shareholders, and there is no ownership interest in not-for-profit corporations." Many of the principles regarding ownership rights borrowed from the CBCA "just are not appropriate," she adds.

A more relevant Act

Leading up to the CNCA review, the CBA's Charities and Not-for-Profit Law Section has made a submission to Corporations Canada. It includes a series of recommendations that would "eliminate some problems and make the Act generally more relevant and useful for the sector." 

In November 2018, Goldfarb appeared before the Senate Special Committee on the Charitable Sector, where he described the current regime as artificial, complex, and based on the importation of irrelevant business law principles. He highlighted areas of the Act that would benefit from changes and focused on the three areas he describes as "big-ticket items": the distribution of assets to members or other CNFPs; corporate democracy; and financial accountability. If these three items are fixed, says Goldfarb, "a lot of the other problems might fall off the table."

The CBCA's concept of "distributing corporation," applicable to large public companies, was given the equivalent in the CNCA of "soliciting corporation," which Goldfarb describes as "disruptive and inappropriate." In addition to applying to many small, volunteer-run CNFPs, it catches some charities, but not others, and it can flip-flop from year to year. It can also catch corporations that receive funding from soliciting corporations and don't realize it until later. 

The addition of votes for non-voting members and mandatory class votes for corporations with multiple membership classes was a significant problem. While shareholders of business corporations and members of CNFPs have a similar role, there is a major difference—most CFNP members have no economic stake in the corporation. This has resulted in less corporate democracy, since many organizations have eliminated all non-voting classes, says Goldfarb. "Other organizations have reduced numbers of classes to one, resulting in often complex workarounds."

Reducing the burden of audits

When it comes to financial accountability, "a lot of organizations are being forced to have audits, which are very expensive and eat up a significant part of the budget of smaller organizations," says Goldfarb. A charity that brings in more than $50,000 must have either an audit or a review engagement. He points out that it's almost impossible for organizations with significant membership to obtain unanimous approval, something that's required for an audit exemption, which is driving many smaller corporations to eliminate external members.

Spearheaded by Goldfarb, the CBA's Charities and Not-for-Profit Law Section submission recommends removing some irrelevant CNCA provisions, such as the concept of "soliciting" and "non-soliciting" corporations, along with establishing mandatory class voting and extending voting rights to non-voting member classes, which have been major sticking points for those subject to the CNCA. 

Another suggestion is to remove a mandatory audit from the Act and members who want to appoint a public accountant or require an audit or review engagement be given the statutory right to vote for these options.

Godel is hopeful that Corporations Canada will listen to the CBA section's input now that its members have worked with the Act over the past several years. "The hope is that Corporations Canada will be receptive to the comments that have been raised by members of the bar who are very experienced in dealing with not-for-profit corporations and will implement some, if not all, of the changes that we've identified."

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