In recent years, many US-based not-for-profit organizations have expressed interest in moving their operations to Canada.

However, this ambition often comes with a challenge: the U.S. non-profit (“U.S. Corp”) typically wants to maintain control over the Canadian counterpart (“Canada Corp”).

This article outlines some high-level options for structuring Canada Corp to ensure U.S. Corp retains effective oversight, based on the federal Canada Not-for-profit Corporations Act (“CNCA”). Additionally, we will discuss how these structures can influence charitable registration and the implications for the organization’s Canadian operations.

Why membership structure matters

A non-profit’s membership composition is critical when structuring a Canadian non-profit.

In Canada, non-profits are generally governed by directors and by members. A non-profit’s members are akin to shareholders in a for-profit enterprise.

Under the CNCA, members (or a particular class of members) control the corporation by exercising their right to elect or appoint, and remove, the corporation’s directors, and to vote on certain fundamental matters pertaining to the governance and structure of the corporation.

For non-profits that are, or applying to become, registered charities, membership affects how the Canada Revenue Agency (“CRA”) designates the charity. Registered charities could be designated as:

  • charitable organizations;
  • public foundations; and
  • private foundations.

In determining a charity’s designation, the CRA considers several factors. These factors include:

  • who controls the charity;
  • who funds the charity; and
  • whether the governing officials are at arm’s length with each other.

If U.S. Corp has substantial control over Canada Corp, there is an increased likelihood that the CRA will designate Canada Corp as a private foundation, rather than a public foundation or charitable organization. This is a significant consideration as private foundations are subject to additional operating restrictions that do not apply to charitable organizations or public foundations. For instance, private foundations are prohibited from carrying on any business activity, even related business activities.

There are three general ways – each with varying levels of control and flexibility – to structure Canada Corp’s membership to allow U.S. Corp to exercise effective control over it:

(a) sole membership;

(b) limited membership; and

(c) multiple class membership.

Three membership structure options

a) Sole membership

A sole membership structure is the simplest option for U.S. Corp to maintain control over Canada Corp.

With a sole membership model, Canada Corp has only one member – U.S. Corp. As the sole member, U.S. Corp would have full control over Canada Corp, with the sole discretion to appoint and remove directors of Canada Corp. U.S. Corp also effectively has a veto over fundamental changes of Canada Corp (such as changes to Canada Corp’s purposes and governing documents) since, under the CNCA, such fundamental changes must be approved by the members. 

If U.S. Corp is also Canada Corp’s main funding source, this structure may result in Canada Corp being a “non-soliciting corporation,” which means it would enjoy relaxed compliance requirements under the CNCA. On the other hand, a charity that receives more than 50% of its income from a controlling member will be designated as a private foundation by CRA. For this latter reason, Canada Corp might wish to consider other membership structures.

b) Limited membership

In a limited membership structure, a defined group of individuals serve as the members of Canada Corp.

For instance, Canada Corp’s membership could be limited to those persons who are serving as the directors of U.S. Corp from time to time.  The U.S. Corp’s directors would be provided with complete control over selecting and removing the directors of Canada Corp, and could exercise a veto over fundamental changes to Canada Corp.

While Canada Corp’s board would be responsible for the strategic oversight and management of Canada Corp, U.S. Corp’s directors (through their membership in Canada Corp) would be able to exercise control over Canada Corp’s board and ensure that Canada Corp’s mission continues to align with the purposes for which it was established. In this way, U.S. Corp would have ultimate control over Canada Corp. 

However, if Canada Corp wishes to become a registered charity, the limited membership structure might raise questions. A Canadian registered charity must exercise direction and control over its own resources. Governance control by U.S. residents could bring this state of affairs into question.

c) Multiple class membership

A multiple class membership structure involves two classes of members, and each class has overlapping but ultimately different rights in Canada Corp:

  • One class of members – made up of U.S. Corp exclusively – can have a veto over fundamental changes to Canada Corp; and
  • The second class of members could be made up of persons who are responsible for the strategic oversight and management of Canada Corp and could include the directors of Canada Corp themselves.

A multiple class membership structure is preferred if Canada Corp wishes to apply for charitable registration and avoid being designated as a private foundation. The CRA expects a Canadian charity’s decision-making to be independent and based in Canada. A multiple class membership structure, if structured properly, allows Canada Corp to meet this requirement.

Concluding remarks

For U.S. non-profits expanding into Canada, selecting the right governance structure under the CNCA is critical to ensuring consistency and alignment in purpose, governance, and long-term impact. It could also have an impact on an organization’s designation if the organization wishes to apply for charitable registration.

If you represent a U.S. non-profit that is considering setting up in Canada and/or obtaining charitable registration, a member of Miller Thomson’s Social Impact Group would be pleased to assist you in selecting a suitable governance structure.