Ontario’s Not-for-Profit Corporations Act: Update

By Victoria Prince

Bill 65, Ontario’s Not-for-Profit-Corporations Act, 2010, (“the New Act”), introduced into the Ontario Legislature last spring, received royal assent on October 25, 2010. The New Act modernizes the law governing Ontario not-for-profits and provides them with new flexibility, while imposing some new requirements.

Not-for-profit organizations currently incorporated under the Corporations Act will have three years from the date the New Act is in force (likely some time in 2012) to continue under the New Act and amend their letters patent (henceforth called “articles”), by-laws and other “constating” documents to bring them into line with the legislation. The documents of an organization that fails to make amendments will be deemed amended to comply. (This differs from the new federal legislation.)

Given the uncertainties that could result from being deemed to comply, associations are strongly advised to start reviewing their documents now.

Changes Made in Committee

Those readers who were following the progress of Bill 65 through the Legislature may know that a few changes were made between second and third reading. Three notable changes were:

• The requirement that two thirds of the board of directors be members of the organization was dropped. The result is that the board can consist entirely of non-members unless the bylaws specify otherwise (a significant departure from the current Corporations Act requirement that all directors be members).

• The maximum term for directors was increased from three to four years. The proposed three-year term attracted a fair amount of criticism.

• A provision was added allowing by-laws to authorize members to vote by mail or by telephonic or electronic means in addition to or instead of voting by proxy.

Key Features of the Act

While we don’t have space in the current article to cover all the changes that the New Act makes in the existing law, here are some key ones:

• Ontario’s not-for-profit corporate law is brought closer to the Business Corporations Act and the law governing for-profit organizations.

• Not-for-profit corporations will have the rights of a natural person, meaning they will have a broader range of possible activities.

• Directors will now be subject to a standard of care based on the actions of a reasonable prudent person, rather than the existing standard, which references individual directors’ personal experience and expertise.

Members are given rights such as to nominate directors, require discussion of matters related significantly to affairs or activities and initiate by-laws and fundamental changes. Certain members’ rights cannot be waived.

Articles of the corporation must set out the voting rights of members; where they do not, all members will be voting. This is a critical point for all organizations to consider in relation to their existing membership structure because many organizations currently set out voting rights in their by-laws rather than in their letters patent.

Organizations will now be able to have a varying number of board directors rather than being constrained to a fixed number.

Conflict of interest rules will apply to officers as well as directors and are set out in the legislation.

There will be varying audit requirements depending on the size and nature of the organization.

What Do Associations Need to Do Now?

If you are an Ontario not-for-profit corporation, you should first ascertain what legislation you are currently incorporated under. If it’s Ontario’s Corporations Act, you should start looking at your letters patent and by-laws with an eye to the requirements of the New Act and how you want your governance model to look in the future. (If it is the federal Corporations Act, there will be things to consider as well!)

Should you change the size of your board of directors? Do you want the board to be drawn entirely from the membership? Do you want all members of the association to have equal voting rights? If not, what new categories of members do you need? Do you want your members to be able to vote by proxy or electronically? What type of audit requirements will you have?

You would be wise to seek professional legal advice in developing the answers to these questions in order to ensure compliance with the New Act. Be on the lookout for bulletins on the forthcoming regulations, which will spell out details around some of the statutory provisions. Networking with other CSAE members is another good source of information. Remember that everyone will — or at least should — be reviewing their by-laws over the next couple of years.

The important thing is not to leave this work until the second or third year after the New Act comes into effect. You may have only a couple of annual general meetings to take by-law amendments to for approval (if changes and AGM approval are needed).

What about Public Benefit Corporations?

The New Act creates a new category of not-for-profits, the “public benefit corporation.” The term is defined to include charitable corporations, i.e., not-for-profit corporations that have as their purpose the relief of poverty, advancement of education, religion or other charitable purposes; and non-charitable corporations that receive more than $10,000 in a financial year from donors other than members, directors, officers, employees or from “grants or similar financial assistance from the federal government or a provincial or municipal government or any agency of any such government.”

The legislation exempts public benefit corporations from certain requirements applicable to member-benefit associations (e.g., when audited financial statements are required) but imposes additional requirements in other instances (e.g., no more than one third of the directors may be employees, and the distribution of assets on liquidation is subject to special restrictions). Associations that come within the definition should carefully review the relevant provisions in the New Act.

Bill 65 in a Nutshell

The passage of Ontario’s new Not-for-Profit Corporations Act represents both an opportunity and a threat for provincially incorporated associations. The legislation will mean a more modern and flexible legal framework in which to operate as well as an occasion to revisit and improve governance arrangements.

At the same time, associations that don’t review their letters patent and their by-laws in a timely way face the uncertainties arising from having those documents amended for them by statute. Today is not too early to start thinking through the implications, possibilities and options!

Victoria Prince, LL.B., is a Partner with Borden Ladner Gervais, LLP, and Toronto Regional Chair of the firm’s Not-for- Profit Practice Group. She can be reached at 416-367-6648

This article was originally published in the December 2010 CSAE Trillium Chapter FORUM E-Newsmagazine

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