Charities and non-profit corporations that are federally incorporated should prepare for the changes to their governing legislation, which is expected to come into force in the Spring of 2011. The Canada Not-For-Profit Corporations Act (the “CNPCA”) received Royal Assent on June 23, 2009 and will be effective on a day to be named. Industry Canada has indicated that the day will be named in the Spring of 2011.
The CNPCA will replace the Canada Corporations Act (CCA). Once the CNPCA is in force, all corporations incorporated under the CCA will have three years from that date to continue the corporation under the CNPCA (i.e., until the Spring of 2014). If a corporation does not continue under the CNPCA within the three year period, it can be dissolved.
Parts of the CNPCA also apply to federal corporations established by Special Act. We will provide further information on this topic in an upcoming newsletter.
The differences in the CNPCA compared to the previous legislation will require each corporation to amend its governing documents to bring itself into compliance with the CNPCA when continuing under the CNPCA. Highlights of some of the differences in the CNPCA are summarized below.
Incorporation as of Right
Under the CNPCA, corporations can incorporate as of right. This should cut down the time to incorporate, as the application to incorporate need not be reviewed by Industry Canada.
Ultra Vires Discarded
Under the CCA, corporations were limited to carrying out activities in furtherance of the objects listed in the corporation’s Letters Patent. Under the CNPCA each corporation will have the powers of a natural person. Thus, a corporation’s activities will no longer be limited unless the corporation’s articles specifically restrict the corporation.
In order to continue to qualify as a registered charity, a charitable corporation will need to add restrictions to its objects to ensure that its objects remain exclusively charitable.
Under the CNPCA, a corporation will be a "soliciting corporation" if it receives more than $10,000 over 3 years from a government, another soliciting corporation or person (other than the corporation’s members, directors, officers, employees or persons related to such persons).
Soliciting corporations must have at least 3 directors, are subject to stricter audit requirements, must file financial statements with the government, and on wind-up must distribute assets to a qualified donee.
New Requirements for Articles Versus By-laws
The CNPCA requires that membership classes and voting rights be outlined in the Articles of Incorporation. The Articles of Incorporation are the equivalent to the Letters Patent under the CCA. This change will mean that the information regarding membership will be publicly available and cannot be changed without filing Articles of Amendment with the government.
Voting Rights for Non-voting Member Rights
As discussed more fully in our January 2010 newsletter, non-voting members in certain circumstances will get voting rights. A corporation that wants to avoid this result should amend its by-law as soon as possible before the CNPCA is in force.
Directors’ Fiduciary Duties
The CNPCA introduces an objective standard of care for directors. Directors must fulfill their duties to the level of care of a reasonably prudent person in similar circumstances. This is the same standard of care as included in many corporate statutes across Canada. The CNPCA allows directors to avoid liability through due diligence in carrying out their duties.
While the CNPCA introduces an objective standard of care, directors of charities are still considered “trustees” at common law and may be held to a higher standard of care.
No Ex officio Directors
The CNPCA provides that the majority of directors must be elected by members and up to 1/3 of the directors can appointed by the other directors. This means that the CNPCA does not allow for directors to become directors by virtue of their position in another organization. Such directors are called ex officio directors.
A corporation with ex officio directors will need to amend its governance structure under the CNPCA.
New Audit Requirements and Thresholds
Soliciting corporations with gross annual revenues above $250,000 must have an audit. The members of a soliciting corporation that has revenues between $250,000 and $50,000 can elect to have a review engagement in lieu of an audit. The member of a soliciting corporation that has revenues under $50,000 can elect not to have an audit or review engagement.
The lawyers in Miller Thomson LLPs Charity and Not-For-Profit Group can assist federal corporations to continue under the CNPCA.
decision of the Ontario Court of Appeal clarifies when a charity must indemnify
Pandher v. Ontario Khalsa Darbar was an appeal of the costs
portion of an Ontario Superior Court of Justice decision in what appears to
have been a bitter governance dispute between groups of members of a Sikh
temple. Relying on the indemnity provision in the temple’s constitution, the
appeal court decided that the costs of the successful minority directors were
to be paid by the temple, not by the unsuccessful majority directors.
Superior Court of Justice costs decision had found that “[t]o an extent it will
be unfair to look to the Ontario Khalsa Darbar to pay costs. Surely the costs
arose as a result of the action of its Board of Directors. In the end result it
is appropriate that all defendants except the Ontario Khalsa Darbar be jointly
and severally responsible to pay these costs” (of over $200,000).
the appeal court confirmed that absent male fides, it would give effect to the
director’s indemnity provision in the temple’s constitution, and ordered that
the costs of the successful directors be paid by the temple rather than the
directors. The appeal court observed that “the primary purpose of
indemnification is to provide assurance to those who become directors that they
will be compensated for adverse consequences that ensue from well-intentioned
acts taken on behalf of the corporation. This policy applies with force to
not-for-profit organizations.” It turned down a new argument that the court
should rely on its inherent jurisdiction over charities to refuse to apply the
indemnity, but went on to doubt that the court had such a power.
willingness to apply the indemnity is an interesting conclusion that calls into
question a long-standing position of the Ontario Public Guardian and Trustee
(PGT). The PGT takes the position, consistent with the common law of trusts,
that a director of a charity is not permitted to benefit directly or indirectly
from the directorship. The PGT has traditionally extended its view of a
director benefit to include director indemnities or insurance. As of 2001, a
regulation under the Ontario CharitiesAccountingAct provides that it is not a breach of trust for a charity to
indemnify its directors if it considers certain items prior to indemnifying:
degree of risk involved in administering the charity;
likely it is that the director, officer or trustee will suffer a financial loss
through administering the charity;
there are other practical means of significantly reducing the risk;
the amount and cost of the insurance is reasonable given the risk to the
director, officer or trustee of suffering a financial loss. If the risk of loss
is low, the cost of insurance purchased by a charity should also be low;
the cost of the insurance is reasonable given the revenue of the charity?
is not usually reasonable for a charity to spend a significant part of its
income on liability insurance;
the charity will benefit by giving the indemnity or buying the insurance. For
example, the charity may attract better directors or be able to get more income
if it buys the insurance.
regulation confirms by implication the PGT’s view that absent this regulation,
indemnity is a breach of trust as a matter of common law. In principle, this
would be the case in provinces other than Ontario, notwithstanding that no such
analogous saving provision exists.
decision of the Ontario Court of Appeal suggests that the purpose of giving a
directors’ indemnity is to assist the corporation by protecting directors, not
to benefit the directors. After all, there would be no need for the indemnity
absent being a director, so the indemnity is designed to put the director in
the position that he or she would have been in without the office (a neutral
position), not to provide a benefit. Thus, the court’s decision should give
charity directors in Ontario and in other provinces considerable comfort about
the enforceability of director indemnities absent male fides. Nonetheless,
Ontario charities should continue to comply with the Charities Accounting Act
regulation out of an abundance of caution.
Andrew J. Roman, Toronto Brittany Benning, Articling Student, Toronto
December 16, 2010, the telemarketing firm Xentel DM Inc. (“Xentel”) made
national headlines when the Canadian Radio-Television and Telecommunications
Commission (“CRTC”) announced that the company had agreed to pay $500,000 in
penalties for telephoning individuals whose names were registered on the CRTC’s
National Do Not Call List (“DNCL”). Four days later, the CRTC announced that
Bell Canada had agreed to pay a $1.3 million penalty for similar violations.
The two sets of penalties were the largest ever paid by Canadian companies for
a contravention of the DNCL; indeed, prior to these two substantial penalties,
the CRTC had imposed only 25 modest penalties. This recent expansion of
enforcement by the CRTC raises obvious concerns for charities and not-for
profit corporations that regularly promote their organizations through
Federal Telecommunications Act gives
the CRTC the authority to create a national DNCL, which the CRTC put into force
on September 30, 2008. The DNCL is enforced through the CRTC’s Unsolicited Telecommunication Rules (the
“Rules”). The Rules state that no
company may make a telemarketing telecommunication to a consumer whose number
is listed on the national DNCL.
technically do not apply to telemarketing calls made by or on behalf of a
registered charity. Nonetheless, the
CRTC requires registered charities to comply with other rules it created in the
Rules with similar effects. For example, an exempt charity participating in a
telemarketing initiative must still register its business information with the
National DNCL (www.LNNTE-DNCL.gc.ca). As part of this registration, the organization must inform the CTRC
that it qualifies for an exemption under the Rules. Additionally, an exempt
charity is required to maintain its own internal DNCL. The Rules provide that an exempt organization
must add a consumer’s name to the organization’s DNCL within 30 days of the
date of the consumer’s Do Not Call request.
the implementation of the National DNCL, the CRTC was initially criticized by
members of Parliament for failing to impose penalties against companies that
violated the Rules. Perhaps in response to this criticism, the CRTC recently
significantly increased its investigations – by November 2010, there were 102
ongoing investigations of potential violations of the DNCL. Additionally, the CRTC implemented a new
enforcement program to address promptly complaints from consumers on the DNCL.
December 16, 2010, the CRTC announced that the telemarketing firm Xentel agreed
to pay a record-breaking $500,000 penalty for contraventions of the DNCL.
Xentel was charged with two violations of the Telecommunications Act. First, between June and November 2009,
Xentel had made calls to individuals on the DNCL on behalf of organizations
that were not registered charities within the meaning of the Act. Some of these
companies had also failed to subscribe to the national DNCL. Second, the CRTC
found that Xentel had phoned individuals registered on the national DNCL on its
own behalf. Since Xentel is not a registered charity, such calls would constitute
a further violation of the Telecommunications
later, on December 20, 2010, the CRTC announced that Bell Canada had agreed to
pay $1.3 million in penalties. The CRTC found that Bell Canada had employed a
third party telemarketing firm that improperly initiated communications to
individuals on the DNCL. Additionally, the CRTC found that some of the
individuals contacted by the telemarketing firm should have been on Bell’s
recent penalties demonstrate that the CRTC is taking an increasingly aggressive
role in supervising and disciplining organizations that fail to comply with the
Rules. The Xentel case shows that the CRTC will demand large penalties from
corporations that the CRTC believes improperly make calls when they do not
qualify for the charities exemption.
Moreover, the substantial penalty imposed upon Bell Canada demonstrates that
the CRTC is prepared to penalize any corporation, large or small, that employs
third parties to initiate telecommunications if those third parties violate the
this recent enforcement history, three key factors must be considered by
charities and not-for-profits seeking to avoid liability. First, the
organization should ensure that it is in fact a registered charity. Second,
even such an exempt organization must register with the National DNCL, and must
maintain its own DNCL. Third, the charity must carefully monitor any
telemarketing companies used by the organization to make calls, as well as any
employees of the organization who make telemarketing calls, to ensure
compliance with the Rules.
Charities are required under the Income Tax Act to maintain books and
records related to their operations.
Such “books and records” include minutes of meetings of both directors
and members. Most organizations, whether
they are incorporated or not, keep at least some sort of minutes of meetings,
though the detail and scope vary enormously. They may range from a record of
decisions made to almost verbatim descriptions of what transpires, with the
views of all participants being recorded in detail.
There may be all sorts of implications
stemming from the minutes of meetings, both positive and negative.
explanation of the need to maintain minutes is as follows:
“It is characteristic of all committee
discussions and decisions that every member has a vivid recollection of them
and that every member’s recollection of them differs violently from every other
member’s recollection. Consequently, we accept the convention that the official
decisions are those and only those which have been officially recorded in the
minutes by the officials, from which it emerges with an elegant inevitability
that any decision which has been officially reached will have been officially
recorded in the minutes by the officials and any decision which is not recorded
in the minutes has not been officially reached even if one or more members
believe they can recollect it, so in this particular case, if the decision had
been officially reached it would have been officially recorded in the minutes
by the officials, and it isn’t so it wasn’t.” (Sir Humphrey Appleby in episode 9 of Yes, Prime
In one case decided by the Federal Court of
Appeal, the board of the organization consisted of three people, each of them
very busy professionals. Their meetings were haphazard at best and almost
always by telephone. No minutes were kept, though there is no doubt that
decisions were made and implemented. One
of the several reasons given for revoking the organization’s registration as a
charity was that under the Income Tax Act, a charitable organization must keep
“records and books of account”. Failing to do so is one ground for revocation
of charitable status. In this case,
the failure to keep minutes, while not a crucial element, was part of the
reason why the organization lost its appeal against revocation.
But this can be contrasted with a second
case heard by the same court. The evidence before the court included minutes of
board meetings. The Board was quite large and composed of very active members,
all of whom had strong views on just about every topic. The minutes reported heated
debates about the approaches being used in carrying out their charitable
These debates, recorded in great detail in
the minutes, became fodder for the CRA when arguing in support of the
organization’s revocation. By selecting parts of the minutes of several
meetings (often out of context) and reading them to the court, the Justice
lawyer attempted to show that the organization was “out of control”, even
though a review of all the minutes would disclose nothing more than internal
debates about how the highest level of efficiency could be achieved. Those directors
arguing for change at the meetings had put “horror scenarios” forward, and it was these which the
CRA seized upon. The charity lost by a
In another situation, the charity’s
secretary was in the habit of keeping almost verbatim notes. At the end of a meeting and likely after
adjournment, the Chair informally asked the members whether any of them were
willing to canvass on behalf of a candidate for Parliament during the election
which was in progress. The secretary had that matter noted. Five years later a
CRA audit used the statement to bolster its case that the charity was
improperly involved in politics.
The lessons we take from these experiences
is that while it is absolutely necessary that formal minutes of meetings be
kept, particularly to show that the directors or trustees are doing those
things which are legally required of them, recording every slight difference of
view within the board may be asking for trouble in the future.
We also have run into a situation though, where
the keeping of good minutes saved a non-profit from serious trouble.
In one case, the CRA was proposing to
retroactively strip an organization of its status as a non-profit because, in
its view, the organization had accumulated too great a surplus and appeared to
have no plans to reduce it. Representatives
of the Board said that to the contrary, the intention was to create a
charitable foundation and to transfer the excess funds to the foundation. The
CRA auditor said, in effect, “prove it”. Lo and behold, the minutes from a
board meeting eighteen months before showed that the issue of setting up a
foundation was not only discussed, but steps were being taken to ascertain from
their lawyer and membership what the proposed foundation would be set up to do. Though the consultation process with members
was not as yet complete, the CRA accepted that the intention was there and gave
the organization a year to set up the foundation, transfer the funds and retain
its non-profit status.
In most cases, documented minutes (along
with other internal documents, such as agreements or correspondence) will never
be closely examined by anybody outside the organization. But all these documents should, while
retaining accuracy, be drafted with the view that they might be the subject of intense and even hostile scrutiny by the CRA or
a court. Thus they should be prepared with a view to meeting the statutory and
operational requirements while at the same time trying not to reveal matters
which could be potentially embarrassing.
One option in extreme cases, is to have the
meeting go into either an in camera
or off the record session which would allow full and frank debate (this is not
uncommon, for example, when personnel issues are discussed) with the record
simply reflecting the fact that after such a discussion, the board made certain
decisions which are, of course, to be recorded.
This approach allows the members to properly exercise their obligations
to offer their views while at the same time simply reflecting decisions, with
negative votes or abstentions duly recorded.
Doing minutes of meetings should be a
mundane exercise in most cases but the statutory obligation to maintain books and records under subsection
230(2) should be kept in mind…tempered with a certain level of common sense,
knowing that at some stage, minutes could
A question regarding the use of an alter
ego trust (or a joint partner trust) as a charitable remainder trust was raised
at the CRA roundtable at the 2010 CALU Conference (CRA document number
2010-0359461C6). Generally speaking, a
charitable remainder trust (“CRT”) is a trust that is set up to provide an
income stream to one or more individuals, usually for their respective
lifetimes, and that names one or more charities as the ultimate beneficiary
(i.e. the capital beneficiary), of the property held by the trust. The term “charitable remainder trust” is not
defined in the Income Tax Act. As such, CRTs are not currently treated as a
separate type of trust for the purposes of the Act. The current tax treatment of CRTs is based on
the general rules applicable to charitable donations and the taxation of
In its Registered Charities Newsletter #27,
the CRA states the following concerning setting up a CRT:
charitable remainder trust involves transferring property to a trust whereby
the donor or beneficiary retains a life or income interest in the trust, but an
irrevocable gift of the residual interest is made to a registered charity. A
registered charity can issue an official donation receipt for the fair market
value of the residual interest at the time that the residual interest vests in
In order to
qualify as a CRT, the terms of the trust cannot allow for any capital
encroachments. The transfer of property
to the CRT must also be irrevocable.
An alter ego
trust is a trust that is defined in the Income
Tax Act. To qualify as such, the
settlor of the trust must be at least 65 years of age at the time the trust is
created, the settlor must be entitled to receive all of the income earned in
the trust during the settlor’s lifetime and the settlor must be the only person
entitled to any of the capital of the trust prior to the settlor’s death. A joint partner trust is similar, but the
benefiaries are the settlor and a spouse or common-law partner.
speaking, where an individual transfers property to any type of trust, there is
a disposition of the property transferred at fair market value and any
resulting capital gain is taxed in the hands of the transferor. Where property is transferred to a CRT (or
any charity for that matter), there is an election available under the Income Tax Act that allows the
transferor to choose the value of the property transferred for the purposes of
calculating any gain. The transferor can
elect a value between the cost of the property and its fair market value. Where the transferor elects at cost, this
will ensure that there is no capital gain on transfer. With respect to alter ego trusts, whether
they qualify as CRTs or not, where a settlor transfers property to an alter ego
trust, there is a rollover available under the Act which allows the transfer to
occur without triggering any capital gains.
As such, where a transfer is made to a CRT that is also an alter ego
trust, there is no need to make the election discussed above because of the
In the question
put to the CRA at the CALU 2010 Roundtable, the CRA confirmed that the transfer
of property to an alter ego trust that was also a CRT could occur without
triggering a capital gain and that a donation receipt could be issued by the
charity that is named as the ultimate beneficiary of the CRT. This receipt must be issued for the value of
the charity’s residual interest in
the trust, and in most cases this will require a professional valuation to
In a later
technical interpretation that refers to this question at the CALU 2010
Roundtable (CRA document number 2010-0369261E5), the CRA was asked whether an
individual’s claim for a donation tax credit as a result of a gift to a CRT
would be limited if immediately after the gift the individual and the trust are
affiliated. The concern here is the
application of what are known as the “non-qualifying security rules” in the Income Tax Act, which the CRA points out
were designed to defer the opportunity for certain donors (i.e. individuals not
dealing at arm’s length with their corporations) to receive a tax benefit by
making gifts to charity of securities in those corporations. Under these rules, the tax benefit associated
with making a gift to charity is generally restricted unless the charity
disposes of the security or the security ceases to be a non-qualifying
security. The CRA states that it is a
question of fact whether the non-qualifying security rules will apply to a gift
in this context. The CRA provides the
following example: the non-qualifying security rules would apply where a donor
transferred to an alter ego CRT a share of a corporation that was, immediately
after the transfer, a corporation with whom the donor was not dealing at arm's
length. Similarly, if a donor
transferred a beneficial interest of the donor in a trust that was, immediately
after the transfer, affiliated with the donor, the non-qualifying sercurities
rules would also apply.
complicated provisions that require careful planning to ensure they are
utilized properly. We would be happy to
provide advice to both donors and charities dealing with CRTs (whether alter
ego or otherwise) and gifts of complicated property to such trusts.
Hugh Kelly, Q.C.led two workshops for Ontario Catholic
School Trustees’ Association on “What you
need to know about Conflict of Interest” on January 14, 2010.
Hayhoe presented “Elimination of the 10-year Rule: What are the implications for your
organization?” at the 8th Annual Foundation, Endowment &
Not-For-Profit Investment Summit Strategy Institute held at the Metropolitan
Hotel on January 18-19, 2011.
Manwaring joined a panel of
speakers presenting as part of the Rotman Net Impact Series at the Rotman
School of Management on the topic of “Using
Social Innovation to Impact Change” on January 24, 2011 held at the
University of Toronto.
Manwaring and Robert
Hayhoe have co-authored an article titled “Breaking
Down the Borders: Operating Charitable or Tax Exempt Organizations Across the
Canada/US Border“ in the 2011
Lexpert®/American Lawyer Guide to the Leading 500 Lawyers in Canada .
Arthur Drache wrote “Charities and Tandem Entities”, “Briefly
Noted in January”, “Public Accountability for Some Ontario Charities”,
Parliamentary Prognosis”, Minutes of Meetings Still a Vague Area in Terms of
Style”, “The Value of a Donated Life Insurance Policy” in the February 2011
issue of Canadian Not-for-Profit News.
This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice.
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