2021 NFP Act Statutory Review Consultation Paper

1.0 Introduction

  1. Canada's not-for-profit corporations are as varied in form as they are in focus. They come in a range of sizes that serve a diversity of purposes, including healthcare, education, arts, sports, environment, social services, political advocacy as well as cultural and religious organizations. The sector is a significant contributor to the country's economy, generating more than 8.5% of our gross domestic product and employing more than 2 million CanadiansFootnote 1. It is also particularly known for its services to youth and individuals in poverty or with low income, as well as for how it is inclusive of women, immigrants, visible minorities, LGBTQ2+ individuals, persons with disabilities, First Nations, Métis and Inuit.Footnote 2 Another defining hallmark of the sector is the selfless volunteering that over 12 million Canadians contribute everyday to charities and not-for-profits that enriches the lives of all Canadians.Footnote 3
  2. In total, there are approximately 170,000 not-for-profit corporations in Canada of which approximately 20% – or over 38,000 – are regulated under the Canada Not-for-Profit Corporations Act (NFP Act or Act). Enacted in 2011, the NFP Act was designed to promote accountability, transparency and good corporate governance, while being flexible enough to meet the needs of organizations both small and large. Modelled after the Canada Business Corporations Act (CBCA), the Act brought the advantages of a modern corporate governance statute to not-for-profit organizations. It streamlined the incorporation process, enhanced financial transparency and accountability, and clarified the rights and responsibilities of directors, officers and members.
  3. The NFP Act requires that ten years after its entry into force, the Minister of Innovation, Science and Industry report to Parliament on the "provisions and operation" of the Act and provide "any recommendations for amendments". The Minister's Report would then be referred to a committee of the Senate, the House or both Houses of Parliament for study and report.Footnote 4
  4. This statutory review provides an opportunity to assess whether the Act continues to meet its objectives a decade after its implementation. This discussion paper considers issues that have been identified by stakeholders or have emerged since 2011, and is intended to provide a framework for public consultations that will contribute to the Minister's Report.
  5. The statutory review comes amid a confluence of COVID-induced economic and resource challenges faced by not-for-profit sector. Organizations coped with enormous pressure and disruption, having to protect their employees, adapt their services and in many cases find alternative sources of revenues. They also played a key role in responding to the crisis and providing essential assistance to communities across the country. The Government has worked to mitigate the financial pressure experienced by the sector throughout this difficult period, notably by ensuring eligibility of not-for-profit organizations in many flagship programs of its economic response plan. The statutory review affords an opportunity to ensure the sector is supported by a sound legal framework as the country advances into recovery.
  6. The statutory review also follows the release of a Special Senate Committee Report titled Catalyst for Change: A Roadmap to a Stronger Charitable Sector, and the Government's responseFootnote 5 to its 42 recommendations calling for, among others things, a "renewed relationship with the federal government". While issues related to the NFP Act were heard by the Senate as part of this process, the Report observed that a statutory review would soon take place and thus refrained from making recommendations related to corporate law.

2.0 Background

  1. In Canada, responsibility for corporate law is a shared jurisdiction, with approximately 20% of not-for-profit organizations regulated under the NFP Act and the rest under provincial or territorial legislation. Every province and territory in Canada regulates not-for-profit organizations either through a stand-alone statute such as a Not-for-profit Corporations Act or a Societies ActFootnote 6, or through dedicated sections embedded within their business corporations legislation.Footnote 7 Despite these structural differences, the federal NFP Act and the provincial and territorial statutes or provisions that regulate not-for-profits have adopted an approach to non-profit governance that is harmonized with business corporation frameworks.
  2. The NFP Act and regulations set out the legal and regulatory framework for federally incorporated non-share capital corporations. This framework accommodates a wide range and variety of public and private organizations, including corporations that solicit public monies in support of societal objectives or that engage in commercial endeavours.
  3. Despite the name of the NFP Act, corporations it regulates are able to make a profit and conduct the same business activities as business corporations. If they do, not-for-profit corporations may be subject to regular corporate taxes under the Income Tax Act. Rather, the main difference between not-for-profit corporations and business corporations has to do with the way they are structured and how they distribute profits. For example, while business corporations issue shares and pay dividends to their owners, who hold the shares, not-for-profit corporations have members, do not issue shares and cannot pay dividends. Not-for-profit corporations have flexibility in how they use their revenues and profits in furtherance of its activities, as set out in its articles and by-laws, and the Act.
  4. The NFP Act provides the basic structure and standards for the governance of a not-for-profit organization, but it does not prescribe in detail how it is to be run or put any restrictions on the nature of its social, political or market activities. The Act sets out the rules and provides the mechanisms to facilitate the interaction among directors, officers, members and other interested parties that affect decision making, but gives a significant latitude to organizations to tailor requirements to their needs based on their size and purpose.
  5. Canada's NFP Act seeks to achieve its objectives through a combination of mandatory and default provisions. Mandatory provisions are compulsory for all not-for-profit corporations, whereas default provisions set out baseline rules of operation (e.g., quorum at members' meetings) that can be amended by the corporation in its articles, by-laws or by a unanimous members' agreement.
  6. Not-for-profit corporations may develop their own by-laws or avail themselves of the model by-laws developed by Corporations Canada. Corporations Canada also provides multiple policies and guidance documents designed to help navigate the application and incorporation process, as well as eventual changes to the corporation.
  7. A key feature of the NFP Act is the distinction made between soliciting and non-soliciting corporations. A corporation is considered soliciting when it has received more than $10,000 from public sources in a single financial year, which includes gifts or donations from third parties, financial assistance from a government and gifts or donations from another corporation that received income from public sources.Footnote 8 Given that soliciting corporations receive public funds, they are subject to more onerous corporate governance and financial accountability requirements than non-soliciting corporations. The majority of the over 38,000 federally regulated not-for-profit organizations are non-soliciting organizations.Footnote 9 Importantly, the requirements under the NFP Act are distinct and separate from those that apply under the Income Tax Act. Not all soliciting corporations are registered charities for tax purposes, but those that are must abide by the governance and financial accountability standards established by both acts.

3.0 Discussion

  1. Since its enactment, the NFP Act has been the subject of constructive commentary from stakeholders. While many have opined that the statute represents a modern legislative framework, others have suggested that the regime should more closely reflect the variability and operational realities of Canada's not-for-profit corporations.
  2. Some stakeholders have recommended that the Government convert several mandatory rules into default rules or consider incorporating additional measures to enhance flexibility for NFPs. Reforms have been suggested in areas such as financial reporting, audit and review requirements, appointments of directors by the board of director, virtual meetings and voting rights. Each of these is discussed in more detail below.
  3. While this statutory review primarily considers the merits of amending the legislative text in the NFP Act, the Government recognizes that certain issues identified by stakeholders may be addressed in a number of ways, including approaches that would include both legislative and regulatory changes. In providing input, stakeholders are thus invited to indicate where regulatory changes may be consequential, or provide an alternative, to legislative amendments.

3.1 Audit and financial reporting obligations

  1. Under the current framework, a corporation's financial review obligations depend on whether it is a soliciting or non-soliciting corporation and on its gross annual revenues:
    • The most minimal rules apply to soliciting corporations with gross annual revenues of less than $50,000Footnote 10 and non-soliciting corporations with gross annual revenues of less than $1,000,000Footnote 11. These corporations are, by default, required to appoint a public accountant, but can waive this requirement through an unanimous resolution of their members. The public accountant must conduct a review engagementFootnote 12, but members may pass an ordinary resolution to require an audit instead. If no public accountant is appointed, only a compilationFootnote 13 is necessary;
    • Soliciting corporations with gross annual revenues between $50,000 and $250,000Footnote 14 must appoint a public accountant to conduct an audit, but members may pass a special resolution (2/3 of the votes) to choose a review engagement instead; and
    • Finally, non-soliciting corporations with more than $1,000,000 and soliciting corporations with more than $250,000 in revenues must appoint a public accountant who conducts an audit.Footnote 15
  2. These distinctions were intended to ensure proper levels of transparency and accountability, while minimizing unnecessary administrative burden for smaller entities. Maintaining public trust and confidence in the operation of the sector was considered essential to ensure its continuous funding.
  3. Some parties have expressed concerns that the accounting, audit and financial reporting obligations in the NFP Act and regulations are confusing and unduly onerous for small corporations. Notably, they point out that donation levels can vary from year to year, creating a "yoyo" effect on accounting requirements, and that determining whether certain funds are from public sources can be burdensome for small organizations. Recommendations for changes have included increasing revenue thresholds that trigger different types of financial review; calculating revenues thresholds on a multiyear rolling average; lowering the percentage of votes required for changes in the level of review; and more generally allowing corporations to choose the financial review level that suits them.
  4. Question: Stakeholders are invited to provide comments on whether and how adjustments should be made to audit and financial reporting obligations, including with regards to the reduction of the administrative burden and the maintenance of an appropriately high standard of corporate accountability and transparency.

3.2 Board of directors

  1. The NFP Act provides that the board of directors is responsible for managing and supervising the management of the activities and affairs of the corporation. Directors are elected at the members' annual general meeting. There are also rules that allow the board of directors to appoint other directors provided the articles allow it and provided the number of directors appointed by the Board does not exceed one third of the directors elected at the previous annual meeting of members.Footnote 16 This one third rule exists to prevent the board from appointing a majority of the directors. For soliciting corporations, a minimum of three directors must be elected, two of whom cannot be officers or employees of the corporation.Footnote 17 All directors must be elected by the membership or appointed by the board within the authorities set out in the NFP Act.
  2. These provisions sought to balance the competing needs of operational flexibility and agility for boards of directors with accountability to members. Since its enactment in 2011, however, some parties have stated that the NFP Act director election provisions are inflexible or are out of step with long standing traditions of many not-for-profit corporations.
  3. Some stakeholders have argued that the "one third rule" is difficult to apply and overly constraining. These stakeholders have suggested that the rule be streamlined, for example by reducing the percentage of directors that needs to elected or attaching the rule to any election made by the members rather than to the immediate last annual general meeting.
  4. Another flexibility sought is the ability to have ex officio directors. Ex officio directors are individuals that automatically become directors because they hold a particular office, such as the CEO of the organization. Proponents of this change argue that not-for-profits who want to have ex officio directors should be enabled to have such a stipulation adopted by members in the by-laws.
  5. There is also a concern among some stakeholders that the obligation for soliciting organizations to have two directors who are not also officers is impractical for smaller corporations, including those that oscillate between soliciting and non-soliciting status.
  6. Question: Stakeholders are invited to comment on whether and how adjustments should be made to the NFP Act related to the appointment of directors, including with regards to providing greater flexibility while ensuring that the Board remains accountable to the membership.

3.3 Hybrid and virtual decision-making

  1. The NFP Act provides that meetings must be held within Canada or at a place prescribed in the by-laws or determined by the directors.Footnote 18 Members are permitted by default to participate at a meeting via telephonic or electronic means, unless the by-laws state otherwise.Footnote 19 On the contrary, corporations can only hold fully electronic or telephone meetings if it is expressly prescribed in their by-laws.Footnote 20 These provisions were intended to balance the need of the organization to accommodate member participation through means of their choice and the need to manage the corporation's resources responsibly.
  2. Some stakeholders have expressed concerns with the incongruence between the default requirements related to virtual participation. They noted that, with advances in information technology and broadband availability, the ability to meet or participate virtually should be open to all corporations as a default, with those corporations who wish to wholly or partially prohibit its use should do so in their by-laws. Some stakeholders have requested clarification to the language used or obligations created by some provisions of the NFP Act and regulations (e.g., the "place" of the meeting and the use of anonymous voting) to ensure that organizations are fully able to conduct their affairs entirely through virtual meetings.
  3. Question: Stakeholders are invited to comment on whether and how adjustments should be made to facilitate virtual meetings, including with regards to the cost-saving opportunities permitted by advances in information technology and the need to ensure the full participation of members on issues for which they have the right to vote.

3.4 Classes of membership

  1. Members of a not-for-profit corporation, as defined in its articles and by-laws, have certain rights and responsibilities under the Act, including the right to elect or remove directors, and to fill vacant director positions. Members also vote to approve or amend the articles of incorporation and by-laws.
  2. The NFP Act enablesFootnote 21 corporations to set out the classes, or regional or other groups, of members, and to attach different voting rights to those classes or groups. The design of this feature of the Act was intentionally non-prescriptive, seeking to accommodate a large spectrum of corporate structures and decision-making processes. Notably, the Act is silent on delegate voting, and thus does not expressly permit or prohibit it. The decision not to include default provisions stemmed from the recognition that delegate voting would not be required by all types of corporations.
  3. Some stakeholders nonetheless contend that the Act should explicitly permit and provide guidance with regards to delegate voting, a common form of voting structure in the not-for-profit sector. They point out that many corporations have a large constituency made up of different segments where it is impossible and impractical to have all members to attend membership meetings (e.g., religious denominations, professional organizations). These stakeholders argue that work arounds have been developed to enable delegate voting under the NFP Act, but they are complicated and may not reflect the true nature of the corporations.
  4. Question: Stakeholders are invited to comment on whether and how adjustments should be made to facilitate delegate voting, including with regards to the respective benefits and risks of expressly detailing rules regarding this type of organizational structure.

3.5 Members rights

  1. The NFP Act mandates that all votes for decisions on which members must have a say be taken during a meeting of the members. Such meetings have to be called at least once a year, and a notice of the time and place has to be provided to members entitled to vote in accordance with the by-laws.Footnote 22 The Act further stipulates that the by-laws of a corporation may provide for any prescribed methods of voting by members not in attendance at such meeting (absentee voting). The NFP Act does not require absentee voting. If a corporation choses to allow absentee voting, it must follow the rules set out in the regulations. Also, while the Act permits corporations to create a class of "non-voting members" that does not have a say on its ordinary management, it preserves the ability for all members to have a say before a corporation is dissolved, continued or fundamentally restructured, including changes to the rights of members. Footnote 23 At a general level, these various provisions are intended to protect members and ensure sound democratic management of not for-profit corporations.
  2. Members rights is another area where flexibilities have been sought by some stakeholders. Among others, legislative changes have been recommended to make the requirement that votes take place at member meetings a default rather than a mandatory rule. The objective would be to facilitate holding members votes outside of meetings. These stakeholders argue that technology enabling such stand-alone votes is now well established and reliable.
  3. Some stakeholders have also asked for the ability for corporations to require proxyholders to be members. The regulations currently provide for voting by proxy,Footnote 24 but stipulate that a proxyholder need not be a member of the corporation. Proponents of change argue that this limitation does not reflect industry practice and that the legislation and/or regulations should be amended to provide that NFPs' articles or by-laws may require that proxyholders "are" members.
  4. Further amendments are also sought in relation to non-voting members' rights. According to some stakeholders this mandatory rule should be amended to become a default rule that can be altered through the corporations by-laws. These stakeholders contend that non-voting members in a delegate voting system have no expectation to take part in any decision, and that granting voting rights to non-voting members is disruptive and prevents not-for-profit corporations from structuring their decisions optimally.Footnote 25
  5. Question: Stakeholders are invited to comment on whether and how adjustments should be made to members voting rules, including with regards to providing greater flexibilities and ensuring appropriate protection for democratic rights of members.

3.6 Permitted distribution of assets

  1. The NFP Act prohibits distribution of income or property to a member unless in furtherance of is activitiesFootnote 26 or otherwise permitted by the legislation. It also requires that the articles of a corporation set out how property is distributed upon liquidationFootnote 27. Restrictions apply to certain types of corporations that have received public monies (including soliciting corporations)Footnote 28, however.
  2. Some stakeholders have asked for more clarity on whether the Act allows certain practices during the life of a corporation, such as a social club and similar organization returning subscription fees upon resignation or membership termination. They contrast the lack of guidance within the Act of these types of situations with the rule provided in cases of liquidation, where a statement in the Articles of incorporation to the effect that property will be distributed among members appears expressly permitted.
  3. Question: Stakeholders are invited to comment on whether and how adjustments should be made to permitted distribution of property, accretions or profits, including with regards to accommodating the variety of organizations governed by the NFP Act.

3.7 Recent developments in business corporations legislation

  1. Since the enactment of the NFP Act in 2011, the CBCA has been amended to address developments in corporate governance regarding a) diversity disclosureFootnote 29, b) corporate beneficial ownership informationFootnote 30, and c) the fiduciary duty of directorsFootnote 31.
  2. With regard to diversity, there has been increased recognition that more diverse leadership brings value and that more diverse corporations are more likely to achieve better organizational outcomes. To foster progress towards more diverse leadership and management, 2018 CBCA amendments required distributing (generally, publicly traded) corporations to report annually to shareholders and Corporations Canada on the diversity of their boards of directors and senior management. They must also report on their diversity policies, including representation targets, using a "comply and explain" approach – if they do not have such policies in place, they must explain why. The requirements were intended to foster management-shareholder dialogue and encourage corporate Canada to recognize the benefits of diverse backgrounds in decision-making. The comply-or-explain approach was also designed to align more easily with similar obligations that exist for most publicly-traded corporations under provincial securities regulation with respect to the representation of women. In extending such requirements it was generally believed that large publicly-traded firms should be held to a higher standard of governance and accountability than other corporate entities.
  3. Concurrent to the adoption of these amendments, the Special Senate Committee on the Charitable Sector issued its report on the charitable sector recommending that the Government of Canada, through the Canada Revenue Agency, include questions on both the T3010 (for registered charities) and the T1044 (for federally incorporated not-for-profit corporations) on diversity representation on boards of directors based on existing Employment Equity guidelines. The Government subsequently responded noting its support of the recommendation and that the Advisory Committee on the Charitable Sector should consider conducting further study on this issue.
  4. With respect to corporate beneficial ownership information, the Government amended the CBCA to requireFootnote 32 private corporations to create and maintain a register with information about "individuals with significant control" of their corporation. The objective is to counter bad actors seeking to conceal corporate ownership and control for illicit purposes, including money laundering, terrorist financing and tax evasion. When wrongdoers take advantage of the ability to create complex ownership structures and make use of nominee shareholders and directors, the identities of the natural persons or "beneficial owners" who own and control corporations can remain hidden from those who may need to know, such as law enforcement and tax authorities. To enhance the availability of beneficial ownership information to certain authorities, the CBCA was further amendedFootnote 33 to require that these same corporations make their registers available to certain investigative bodies upon request (subject to certain conditions).
  5. Like business corporations, not-for-profit entities may also be vulnerable to abuse; they enjoy the public trust, can have access to considerable sources of funds, and sometimes have a global presence. That said, there are already safeguards in place in the NFP Act, the Income Tax Act as well as Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) to counter illicit activities. In the NFP Act more specifically, these include the requirement for corporations to prepare and maintain at its registered office records of a register of directors, officers and members as well as the articles and the by-laws, the minutes of meetings of members and the resolutions of members. Corporations are also required to maintain adequate accounting records, and provisions in the Act that require the use of a public accountant help ensure scrutiny of their activities.
  6. Finally, the Government amendedFootnote 34 the CBCAFootnote 35 to make clear that corporate directors and officers of all CBCA corporations, when exercising their fiduciary duty to act in the best interests of the corporationFootnote 38, may consider a wide range of stakeholder interests, including those of shareholders, employees, pensioners and retirees, creditors, consumers, governments, and the environment. This principle had already been recognized by the Supreme Court of Canada and is also found in some European and U.S. state corporate law statutes.
  7. The NFP Act currently requiresFootnote 37 that every director and officer, in exercising their powers and discharging their duties, act honestly and in good faith with a view to the best interests of the corporation. Nothing in the NFP Act or regulations specifies what the board of directors of a not-for-profit corporation should consider in its evaluation of said "best interests".
  8. The Government was mindful of the significant differences between the businesses and not-for-profit sectors when it advanced the aforementioned reforms, and opted not to transpose the new CBCA provisions in the NFP Act. At a general level, however, encouraging greater diversity, combatting illicit use of corporate structures and promoting responsible governance remain important priorities. The statutory review offers an opportunity to holistically examine the adequacy of the NFP Act in light of these objectives.
  9. Question:  Stakeholders are invited to comment on whether and how recent developments in business corporations legislation should be considered in the not-for-profit context.

3.8 Other issues

  1. The topics presented above are indicative but not exhaustive of concerns that may exist as they relate to the scope of potential amendments that could be made to the Act and its accompanying regulations. The Government is mindful that some stakeholders have raised additional issues in the past, including with regards to definitions and terminology and the creation of purpose-specific obligations for different categories of not-for-profit organizations. Stakeholders are also welcome to comment on novel trends in the sector that may have an impact on the functioning of the Act.
  2. Question: Stakeholders are invited to provide submissions on whether and how other modifications to the NFP Act may be warranted.

4.0 Submitting comments

  1. Stakeholders are invited to provide written comments on the consultation paper by July 30, 2021. Submissions should ideally be provided electronically in plain text or in a word document format by email to: ic.nfpactreview-examenloibnl.ic@canada.ca
  2. Subject to the considerations below, Innovation, Science and Economic Development Canada may make public all stakeholder responses received and/or may provide summaries of stakeholders' submissions. In order to respect privacy and confidentiality, please advise when providing your comments whether you:
    1. request that your identity and any personal identifiers be removed prior to publication; or,
    2. wish that any portions of your submission be kept confidential (if so, clearly identify the confidential portions).
  3. Information received throughout this submission process is subject to the Access to Information Act and the Privacy Act. Should you express an intention that your submission, or any portions thereof, be considered confidential, the government will make all reasonable efforts to protect this information.