Tax Insights: Ontario Not-for-Profit Corporations Act coming into force ─ What you need to know

Issue 2021-24

In brief

The Ontario government has announced that the Not-for-Profit Corporations Act (ONCA), which provides a modern legislative framework for Ontario’s not-for-profit corporations, will finally come into force on October 19, 2021. Not-for-profit corporations in Ontario need to be aware of the provisions in the ONCA and ensure they understand and comply with this new governing statute. 

This Tax Insights provides an overview of the ONCA (including tax and accounting considerations) and next steps for not-for-profit corporations to consider. It also provides information on the new online Ontario Business Registry that will service Ontario not-for-profit corporations.

In detail

Background

The ONCA, which received royal assent on October 25, 2010, is finally being proclaimed and will come into force on October 19, 2021. The ONCA received an extension from the Ontario Legislative Assembly in September 2020 to prevent it from being repealed as a result of the 10-year delay in its proclamation. However, the 2020 extension did not apply to all provisions that were in the ONCA. As a result, several provisions that were not part of the 2020 extension are considered to be repealed and therefore will not come into force. The repealed provisions relate to voting rights of non-voting class members and class veto rights, and would have given non-voting class members the right to vote on certain fundamental changes.

Until the ONCA comes into force on October 19, 2021, the Ontario Corporations Act will continue to govern Ontario not-for-profit corporations.

Once the ONCA comes into force, it will generally apply to all Ontario corporations incorporated under an Act of the Ontario legislature that do not issue ownership shares. The ONCA will not apply to:

• not-for-profit organizations incorporated federally under the Canada Not-for-profit Corporations Act
• companies with social purposes
• insurance corporations under Part V of the Ontario Corporations Act
• corporations without share capital that fall under the Co-operative Corporations Act

Companies with social purposes that were incorporated or continued under the Ontario Corporations Act will have a five‑year transition period, during which they must continue as either a non-share capital corporation under the ONCA, a co‑operative corporation under the Co-operative Corporations Act, or a share capital corporation under the Business Corporations Act. 

Transitioning to the Not-for-Profit Corporations Act

The ONCA will come into force on October 19, 2021, but certain exemptions and transition rules will mean that its implementation will be staged. The transition provision in section 207 of the ONCA provides corporations extended time to conform with rules relating to their governing documents, while provisions not related to governing documents will be in effect as of October 19, 2021. 

Existing Ontario not-for-profit corporations will have a three‑year transition period to make any necessary changes to their articles and by-laws so as to conform to the new rules. After this three‑year period, any provisions in letters patent, supplementary letters patent, by-laws or any special resolution of a corporation that do not conform with the ONCA will be deemed to be amended to conform with the ONCA. 

Not-for-profit corporations should keep abreast of these and any new changes and be cognizant of this three-year grace period. It may take organizations a lot of time to make the required adjustments and affect the new requirements across the corporation’s various stakeholders.

Some not-for-profit corporations may have preemptively made changes to their governing documents in anticipation of the ONCA coming into force. However, as some of the provisions of the ONCA were not renewed with the extension in September 2020, not-for-profit corporations should revisit their governing documents to ensure that they are in compliance, as some of the changes made preemptively may no longer apply. 

Not-for-Profit Corporations Act

Upon coming into force, the ONCA will:

• simplify the incorporation process, making it easier and more efficient (i.e. all applications for Articles of Incorporation will be submitted directly to ServiceOntario)
• clarify that a not-for-profit corporation can earn a “profit” through commercial activities as long as it is reinvested to support the corporation’s not-for-profit purposes
• clarify rules for governing a corporation and increase accountability (i.e. the ONCA will provide a statutory duty of care for directors, which will require them to act honestly and in good faith with a view to the best interests of the corporation and to exercise reasonable care, diligence and skill)
• provide a due diligence and good faith reliance defence for directors
• allow some corporations to use a new process for reviewing a corporation’s financial statements, called the “review engagement,” in place of an audit of the financial statements
• enhance members’ rights (both voting and non-voting) and outline actions members can take if they believe directors and officers are not acting in the corporation’s best interest
• give members greater access to financial records
• make a new distinction between public benefit corporations and other not-for-profit corporations that are not public benefit corporations
• allow a not-for-profit corporation to provide in its by-laws other means of voting (by mail, telephone or electronic means) in addition to, or in place of, voting by proxies
• allow a member of a corporation to appoint a proxy holder, if permitted by the articles or the by-laws of the corporation
• require a corporation that has two or more classes or groups of members to set this out in the articles (instead of in the by-laws)
• state that corporations do not always have to include a member’s proposal in meeting notices in certain circumstances

Ontario Business Registry

Coinciding with the ONCA, the Ontario Business Registry (Registry) will be launched on October 19, 2021, and will service Ontario corporations, including Ontario not‑for‑profit corporations, making it easier and faster for Ontario corporations to interact with the government. Any organization that is registered, incorporated or licensed to conduct business in Ontario will have to register for an online profile and provide an email address, as all notices from the Registry will be made electronically.

The Registry will make government services accessible online 24 hours a day and allow select qualified intermediaries, such as lawyers and accountants, the ability to complete transactions on behalf of the organization by email or mail, or through authorized service providers.

Starting October 19, 2021, corporations must also start filing their Ontario Corporations Information Act annual return through the Registry; Ontario’s temporary exemption from filing this annual return will be lifted with the launch of the Registry. 

In addition, a charitable corporation will no longer need approval from the Office of the Public Guardian and Trustee to incorporate. All applications for Articles of Incorporation will be submitted directly to ServiceOntario, including applications where applicants have drafted their own purpose clauses.

Temporary COVID-19 measures allowing for electronic meetings

When the ONCA comes into effect on October 19, 2021, there will be a temporary suspension period of specific provisions from the proclamation date until December 31, 2021, as a consequence of the COVID-19 pandemic. The temporary suspension will provide additional flexibility with respect to meetings and voting. During the suspension period, directors’ and members’ meetings by electronic means, as well as voting by mail, telephone or electronically, will be subject to different rules. These temporary provisions are outlined in Schedule 1 of the ONCA and apply regardless of whether or not they are specifically provided for in the articles or by-laws of the not-for-profit corporation. 

Next steps for Ontario not-for-profits

Ontario not-for-profit corporations should:

• consider what changes need to be made to comply with the ONCA, including changes to the corporation’s by-laws, letters patent, supplementary letters patent and special resolutions
• review its powers to determine if those powers are still necessary and whether special provisions should continue to restrict any activities or powers
• review its membership structure, and ensure that, if there are two or more classes or groups of members, the member classes are set out in the articles
• ensure its conditions for membership are set out in the articles
• review its borrowing powers, as the ONCA gives directors the power to borrow money without member authorization, unless the articles or by-laws provide otherwise

Tax and accounting considerations

The coming into force of the ONCA may necessitate revisiting a not-for-profit corporation’s accounting policies. A notable change relates to the level of assurance required for a corporation’s financial statements. The ONCA will now permit, under certain circumstances, a review engagement (instead of an audit) to be performed on a corporation’s financial statements. 

Key tax and accounting considerations include: 

• a not-for-profit corporation should not issue official income tax donation receipts unless it is a qualified donee under the Income Tax Act
• at each annual meeting, members of a corporation shall, by ordinary resolution, appoint:
  • an auditor¹ to conduct an audit, or
  • a person¹ to conduct a review engagement,
    

of the corporation’s financial statements

• members of a public benefit corporation may pass an extraordinary resolution to:
  • have a review engagement (instead of an audit) of its financial statements for a particular financial year, if the corporation’s annual revenue in that financial year exceeds $100,000, but is less than $500,000 (or such other prescribed amounts)
  • not appoint an auditor and not have an audit or a review engagement of its financial statements if the corporation’s annual revenue in that financial year is $100,000 or less (or such other prescribed amount)
• members of a corporation (other than a public benefit corporation) may pass an extraordinary resolution to:
  • have a review engagement (instead of an audit) of its financial statements for a particular financial year, if the corporation’s annual revenue in that financial year exceeds $500,000 (or such other prescribed amount)
  • not appoint an auditor and not have an audit or a review engagement of its financial statements if the corporation’s annual revenue in that financial year is $500,000 or less (or such other prescribed amount)
• corporations shall prepare and maintain records containing accounting records adequate to enable the directors on a quarterly basis to ascertain the financial position of the corporation with reasonable accuracy  
• a corporation shall retain its accounting records for at least six years (i.e. subject to any other Act or tax rule that requires a longer retention period)
• notwithstanding that the ONCA permits an Ontario not-for-profit corporation to earn a “profit” through commercial activities as long as it is reinvested to support the corporation’s not-for-profit purposes, the corporation should consult with its tax adviser or tax counsel to determine if conducting the particular for-profit commercial activity disqualifies the corporation from obtaining or maintaining its income tax-exempt status

With the ONCA coming into force, there may be additional filing and reporting requirements under other statutes such as the Corporations Information Act and the Corporations Tax Act.

The takeaway

Ontario not-for-profit corporations should review the provisions in the ONCA to understand the new governing statute and consider the changes that they may be required to make to ensure that they comply with it. This includes changing the corporation’s governing documents, as well as reviewing the corporation’s powers and membership structure. The Ontario government is expected to release more information regarding the ONCA as the proclamation date approaches.

^{1. To be an auditor of a corporation or to conduct a review engagement of a corporation, a person must be permitted to conduct an audit or review engagement of the corporation under the Public Accounting Act, 2004, and be independent of the corporation, any of its affiliates, and the directors and officers of the corporation and its affiliates.}