Modernizing the legislative framework of not-for-profit corporations

Jan 15, 2009

by Peter Graham, Lawyer, Rural Legal Services

The Ontario Ministry of Government and Consumer Services has undertaken a project to review and reform the Ontario Corporations Act (CA) in order to develop a new legal framework to govern the structure and activities of charities and not-for-profit corporations in Ontario. The update of the legislation promises to modernize and improve the basic corporate governance rules for not-for-profit corporations.

The Ministry has requested feedback on several issues including the incorporation process, corporate powers and capacity, directors and officers, membership and corporate finance. The consultation process has been going on since May of 2007 when the first of three discussion papers was released. I propose to review some of the key issues under consideration. Further details may be obtained from the Ministry website at www.gov.on.ca/mgs/en/AbtMin/198247.html.

Should the CA move from a letters patent system of incorporation to a system of incorporation “as of right”?

Currently, not-for-profit corporations are incorporated in Ontario through the filing of an application for letters patent, which is an old form of incorporation where the government has total discretion to allow a corporation to incorporate. Ministry staff reviews the applications and has authority to require revisions to the objects or purposes of the corporation if they appear to fall outside the scope of the statute.

The issue is whether the government should allow applicants to incorporate “as of right”, subject to certain statutory conditions, such as restrictions on corporate names.

A related issue is the extent to which not-for-profit corporations should be limited in their activities. Currently, not-for-profits are limited under the doctrine of ultra vires to activities which are specifically within the ambit of the objects set out in their letters patent.

Should Directors’ Liability be limited?

Currently, the CA lacks provisions that set out the duty of care, standard of care, and defences against liability applicable to directors of not-for-profits. Directors may be personally liable to account for losses from breach of their fiduciary duties, conflict of interest, fraud, negligence, or criminal behaviour. Directors may also be personally liable for unpaid wages, taxes, and pension contributions if the corporation becomes insolvent.

This is an important issue due to the difficulties in recruiting and retaining qualified directors in the face of the increasing potential for liability due to the wide range of activities in which not-for-profits are now engaged. A balance must be struck between the potential liability of persons who perform valuable public services as volunteer directors and the need for accountability to those who suffer losses from breaches of duties by directors.

Should certain corporations be allowed to opt for a financial review in lieu of a full audit?

The CA requires not-for-profit corporations whose annual income is $100,000 or more to undergo an annual audit. Audits are a way of promoting financial accountability and transparency.

An audit involves the analysis of a corporation’s financial records and operations by a public accountant, and includes the testing of each significant item on a corporation’s financial statement to provide reasonable assurance that a corporation’s financial statements accurately represent its financial position. However, the cost and administrative burden associated with undergoing an annual audit can be considerable, especially for small not-for-profits. To minimize this expense, some not-for-profit statutes permit corporations to undergo a financial review in lieu of an audit, if annual incomes fall within a given threshold. A review is also performed by a public accountant, but involves less extensive procedures to provide reasonable assurance that a corporation’s financial statements are plausible. A review provides a lower degree of credibility than is achieved by an audit, but is much less expensive than a full audit.

Should standard, default by-laws be included in the new CA?

By-laws are a key way in which a corporation establishes rules for its governance, especially rules for conducting meetings and assigning responsibilities to directors and officers. They are an important part of supplying a not-for-profit corporation with the framework to effectively carry out its activities.

The CA currently establishes the directors’ power to pass by-laws in respect of a list of items, including the admission of members, fees and dues of members, termination and transfer of memberships, etc. but does not provide any guidance as to the nature and form of the by-laws.

The drafting of by-laws can be a complex task which may cause difficulty for some not-for-profits, especially those who are unable to afford legal services. In some cases, not-for-profits are left either without by-laws to govern their corporation’s affairs, or with a set of inadequate by-laws. One way of overcoming this problem is to include standard by-laws in the CA that would apply to every not-for-profit corporation, unless the corporation adopted different by-laws.

This suggestion is a good one with no apparent drawbacks. From this lawyer’s experience, having a basic by-law available for not-for-profit corporations would be of great assistance to not-for-profits and their directors.

Legalese is a column of general information and opinion on legal topics by the lawyers of Rural Legal Services, Box 359, Sharbot Lake, ON, K0H2P0, 613-279-3252, or 1-888-777-8916. This column is not intended to provide legal advice. You should contact a lawyer to determine your legal rights and obligations.