The not-for-profit sector is an important part of Canadian society. In Ontario alone, 46,000 nonprofits incorporated under Ontario’s Corporations Act employ about 16 percent of all employed Ontarians and generate nearly 50 billion dollars in annual revenues. Yet governing corporate law in Ontario and most provinces is out of date.
Good corporate governance for nonprofit corporations is a concern for governments. They fund many nonprofits and use them to deliver important services, especially in the areas of health, social services and culture. Hospitals, long-term care centres, children’s aid societies, art galleries and museums are only a few examples of important not-for-profit corporations.
Government also regulates many nonprofit corporations. Occasionally, it even delegates regulation of industries or professions to these corporations.
In recognition of the compelling need to modernize the Corporations Act, the Ontario government began a consultation process in 2007. Three consultation papers were released in 2007 and 2008. Meetings were held across the province to obtain stakeholder feedback on a wide range of issues. Nonprofit corporations and associations, including the Ontario Bar Association, responded with detailed submissions. All of this work culminated in the enactment of a new Not-for-Profit Corporations Act (ONCA) in October 2010. ONCA is anticipated to come into force on January 1, 2013.
The equivalent federal law has also recently been updated. The Canada Not-for-Profit Corporations Act was proclaimed in force in October 2011. Although differing in some important details, it includes many of the same corporate governance principles as ONCA.
Key features
ONCA will apply immediately to all nonprofit corporations currently incorporated under the Act except for a small number of share capital social clubs, which will have a special five-year transition period.
There is an expedited streamlined incorporation process. Electronic incorporation will be permitted and will allow for same day incorporation. Paper-based incorporations will occur more quickly (less than the current eight days required for an expedited incorporation). Charitable corporations will no longer need the consent of the provincial regulator of charities (the Public Guardian and Trustee’s Office) to incorporate.
The new Act clarifies that corporations will be permitted to engage in commercial activities that support their nonprofit purposes.
Regarding directors and officers, in addition to the duty of loyalty – a duty to act honestly and in good faith with a view to the best interests of the corporation – they must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Conflict of interest rules for directors and officers have been expanded.
Directors and officers have also been given greater protection from personal liability through the addition of due diligence and good faith reliance defenses.
Member rights have been increased. Ten percent of the members can call a special members’ meeting to remove directors or to discuss any other matter of concern related to governance of the corporation. They can initiate changes to the incorporation document (now called articles of incorporation) or the by-laws. Basic procedural rights are given to a member who is to be disciplined or expelled. Members on request can obtain a copy of the financial statements and any audit report at least 21 days before the annual meeting to allow sufficient time for review.
There is an expanded right for members (with at least an 80 percent majority) to approve annually an audit exemption or a review engagement (a lesser form of financial review) in place of an audit. This will relieve smaller corporations of the high financial and administrative burdens associated with an audit.
In transition
After ONCA comes into force, corporations will be given three years to change any conflicting rules in these documents. At the end of this three-year transition period, any such conflicting rule will be effectively invalid.
It is important that boards of directors engage in a careful review of their letters patent (incorporation document) and by-laws for the purpose of making necessary changes to comply with the requirements of ONCA and its regulations. This review is also an opportunity to update these documents to reflect good corporate governance and current practice.
ONCA is a comprehensive, flexible, modern statute that should facilitate improved corporate governance and encourage volunteers to serve as directors and officers. It will inaugurate a new era for Ontario nonprofit corporations.
After 30 years as a lawyer with the Ontario government, Allen Doppelt opened his own legal practise last year in Thornhill, Ontario. He practises primarily corporate law, with an emphasis on the law of non-profit corporations (www.doppeltlaw.ca).
