Not-for-Profit Corporation

A not-for-profit corporation is a corporation that is not operated for the purpose of distributing gains or profits to its members. The defining characteristic is the restriction on distributing the corporation's property or profits to its members — any surplus must be applied to the NFP's purposes, not returned to members as dividends or profit shares.

This does not mean an NFP cannot generate revenue in excess of its expenses. An NFP can earn a surplus — the restriction is on distributing that surplus to members. Surpluses must be reinvested into the NFP's activities.

Ontario provincial not-for-profit corporations are governed by the Ontario Not-for-Profit Corporations Act, 2010, SO 2010, c 15 (ONCA). ONCA was passed in 2010 but was not fully proclaimed in force until October 19, 2021, replacing the previous Corporations Act, RSO 1990, c C.38 for NFPs. Existing NFPs incorporated under the old Act had until October 18, 2023 to transition to ONCA.

Federal not-for-profit corporations are governed by the Canada Not-for-Profit Corporations Act, SC 2009, c 23 (CNCA). The choice between provincial and federal incorporation parallels the OBCA/CBCA decision for business corporations.

ONCA significantly modernized the governance framework for Ontario NFPs, bringing it closer in many respects to the OBCA framework for business corporations. Key features and changes from the old Corporations Act include:

Articles of Incorporation: Under ONCA, NFPs are incorporated by filing Articles of Incorporation with the Ontario Ministry of Public and Business Service Delivery, replacing the previous letters patent system.

Two classes of NFPs: ONCA distinguishes between public benefit corporations (PBCs) and non-public benefit corporations. A PBC is an NFP that is either a registered charity or operates for the benefit of the community (not just its members). Non-PBCs are membership organizations that benefit their own members (e.g., sports clubs, professional associations).

Director numbers: ONCA requires a minimum of three directors for PBCs (ONCA, s. 23(1)). Non-PBCs may have as few as one director.

Financial disclosure: PBCs with revenues over $100,000 must have their financial statements reviewed by a public accountant. PBCs with revenues over $500,000 must have a full audit (ONCA, s. 79-80). These thresholds are lower than those for business corporations.

Electronic meetings and documents: ONCA modernized the rules for electronic meetings, written resolutions, and electronic signatures.

Member rights: ONCA enhanced member rights, including the right to inspect certain records, requisition a meeting, and seek court remedies for oppressive or unfairly prejudicial conduct.

Derivative actions and oppression remedy: ONCA introduced oppression remedies and derivative action provisions parallel to those in the OBCA, allowing members and others to seek court intervention when the NFP is conducted in a manner that is oppressive or unfairly disregards their interests (ONCA, s. 207-214).

Transitional period: Existing NFPs incorporated under the old Corporations Act had until October 18, 2023 to update their articles and by-laws to comply with ONCA. NFPs that missed this deadline were continued under ONCA with default provisions applying.

Incorporating an Ontario not-for-profit corporation under ONCA involves the following steps:

1. Choose a name: The NFP's name must comply with ONCA naming rules. It must not be deceptively similar to an existing corporation's name, must not be misleading about the NFP's purposes, and must include a legal element (though NFPs are not required to include "Inc.", "Corp.", or similar — the name stands on its own).

2. File Articles of Incorporation: Articles are filed through the Ontario Business Registry (OBR). The government fee is $155. The Articles must include: - The NFP's name - Membership classes (and any rights and conditions attached to each) - Whether the NFP is a public benefit corporation (PBC) or non-PBC - The number or minimum/maximum number of directors - Any restrictions on the NFP's activities - Any conditions precedent to commencing business

3. Adopt by-laws: ONCA requires an NFP to have by-laws, but also permits the NFP to operate under the default rules in ONCA where by-laws are silent. At the organizational meeting, the directors should adopt comprehensive by-laws covering membership, meetings, directors, officers, and committees.

4. CRA registration (if charitable): If the NFP wishes to issue charitable donation receipts, it must separately apply to the CRA for registered charity status. Incorporation as an NFP does not automatically confer charitable status. The CRA application (Form T2050) requires detailed information about the NFP's objects and activities.

5. Ongoing compliance: File an annual return with the Ontario government; maintain minute books, membership registers, and financial records; hold an annual members' meeting; and comply with audit/review requirements based on revenue thresholds.

ONCA establishes a detailed governance framework for Ontario NFPs. Key requirements include:

Members: An NFP must have members. Under ONCA, the articles or by-laws define the classes of membership, the conditions for becoming a member, and the rights of each class (including voting rights). A member has the right to vote at members' meetings, inspect certain records, and in some circumstances requisition a meeting.

Directors: Directors of an NFP are responsible for managing or supervising the management of the NFP's activities (ONCA, s. 20). Directors owe duties of care and loyalty to the NFP (ONCA, s. 40-41) — the same standard as OBCA directors. PBCs must have at least three directors; no more than one-third of directors can be from the same "interested persons" category (broadly, employees, contractors, or individuals related to such persons).

Officers: The NFP's by-laws must provide for at least one officer responsible for accounting and financial records. A common set of officers includes a Chair (or President), Secretary, and Treasurer.

Meetings: Members must meet at least once a year (annual meeting). The meeting must include presentation of financial statements, election of directors, and appointment of auditors or accountants (ONCA, s. 60-61). Notice requirements and quorum requirements are set out in ONCA and the by-laws.

Directors' liability: ONCA directors face the same personal liability risks as OBCA directors for unremitted employee deductions and wages. However, ONCA provides a due diligence defence (ONCA, s. 42) — a director is not liable if they acted in good faith relying on professional advice or internal financial statements.

Conflicts of interest: Directors must disclose material interests in any transactions with the NFP and abstain from voting on those matters (ONCA, s. 45-46).

Not all NFPs are charities. This distinction is fundamental to understanding an NFP's regulatory obligations and financial benefits.

Non-charitable NFPs: These are corporations incorporated for purposes other than profit, but whose purposes do not meet the CRA's definition of charitable purposes. Examples include: - Sports clubs and recreational associations (benefit members, not the public at large) - Professional associations (e.g., a business owners' association) - Social clubs - Cultural or ethnic community organizations (depending on purposes)

A non-charitable NFP cannot issue official donation receipts. It may not be tax-exempt unless it qualifies for a specific ITA exemption (e.g., a section 149(1)(l) club whose income is derived principally from member dues).

Registered charities: An NFP whose purposes are exclusively charitable under ITA law can apply to the CRA for registered charity status. Charitable purposes recognized in Canada fall into four categories (based on the English law preamble to the Statute of Elizabeth, 1601, as developed by Canadian courts): relief of poverty, advancement of education, advancement of religion, and other purposes beneficial to the community.

A registered charity can: - Issue official donation receipts that donors can use to claim a charitable donation tax credit (individuals) or deduction (corporations) - Receive tax-exempt treatment on its income under ITA s. 149(1)(f) - Apply for property tax exemptions under the Ontario Assessment Act

A registered charity must comply with ongoing CRA obligations: file an annual T3010 Registered Charity Information Return, meet disbursement quota rules (spending a minimum percentage of assets on charitable activities each year), and avoid prohibited political activities.

Directors of Ontario NFPs owe duties of care and loyalty under Section 40 and 41 of ONCA:

Duty of care (s. 41): Directors must act honestly and in good faith with a view to the best interests of the corporation, and exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances.

Fiduciary duty (s. 40): Directors must act with a view to the best interests of the NFP — not of any particular member or constituency. For PBCs (charities and community benefit organizations), directors must consider the public interest served by the NFP's purposes.

Personal liability: ONCA directors face personal liability for: - Unremitted employee source deductions (income tax, CPP, EI) under the Income Tax Act and Employment Insurance Act - Vacation pay and wages under the Employment Standards Act, 2000 - Unpaid wages for up to 6 months under ONCA s. 57 (for non-PBCs; the ONCA provision parallels OBCA s. 131)

Due diligence defence: A director can avoid liability if they can show they acted honestly and reasonably, and relied on professional advice or accurate financial statements.

Volunteer protection: ONCA provides a specific protection for volunteer directors (non-compensated directors) of PBCs: they are not personally liable for the NFP's acts or omissions unless the act or omission was done with gross negligence or willful misconduct (ONCA, s. 44).

A group of residents in Guelph wants to establish a community legal aid clinic providing free legal services to low-income residents. They incorporate "Guelph Community Legal Aid Inc." under ONCA, filing Articles of Incorporation ($155 government fee) that state it is a public benefit corporation with charitable purposes (advancement of access to justice).

They apply to the CRA for registered charity status, which is granted. The clinic can now issue official donation receipts, apply for charitable grants, and receive tax-exempt income. It establishes three classes of members: regular members (community residents), professional members (volunteer lawyers), and life members (major donors).

The clinic is governed by a board of at least 5 directors (exceeding the ONCA minimum of 3 for PBCs) and holds an annual general meeting. With annual revenues of $300,000 (from government grants and donations), it is required to have its financial statements reviewed by a public accountant (the ONCA $100,000 review threshold applies, but the $500,000 audit threshold does not yet apply).

Directors who serve as volunteers receive the benefit of ONCA's volunteer director liability protection, limiting their personal exposure to acts involving gross negligence or willful misconduct.