On May 12, the Ontario Government released its first draft of legislation to replace the existing Corporations Act, for non-profit corporations. This will affect most non-profits (some are incorporated federally), but will not affect co-operatives (whether non-profit or not).

It is the result of some intensive consultation that occurred several years ago. That consultation was the impetus for the formation of the Ontario Non-profit Network (ONN – see http://ontariononprofitnetwork.ca/), a network of networks that helps to build communication and coordination amongst non-profit organizations working for the public benefit in Ontario.

Generally, this proposed legislation modernizes the corporate law that applies to Ontario non-profits quite nicely.

Initial fears of constraints on commercial activity did not materialize.

But none of ONN’s big asks made it into the draft. These were:

Clear Definition of Public Benefit Corporation

From ONN’s January 2008 response to Discussion Paper 1:

The Revised Act should focus exclusively on incorporation of not-for-profit and mutual benefit organizations that have public benefit objects. This will allow for robust distribution constraints on NFP Corporations and provide improved clarity for both the non-profit sector and the public as to the true nature of a NFP corporation. “True membership corporations”   (organizations that can distribute assets to members upon dissolution) should be dealt with.

While the concept of public benefit corporation was introduced, it is vaguely defined, and is used in a very limited way. The need for a very clear line between those organizations that devote their assets and activities exclusively for public benefit, and those that provide services to their members, was not taken to heart.

An Act Solely for Public Benefit Corporations

As ONN said in its January 2008 brief,

One of the reasons there is so much confusion regarding the Corporations Act is that it covers a number of distinct groups and therefore has some provisions for some groups and other provisions for other groups, and so on. (Currently for example, trade associations, golf clubs, charities and social enterprises are all included in the same legislation) The Ontario Bar Association has raised the option of having a stand alone Not-for-Profit Corporations Act. We think this is a very good idea.

The current Corporations Act is cumbersome and confusing because it includes  these different types of organizations. A dedicated act for public benefit organizations would allow for clear provisions with regard to the structures of public benefit NFP corporations. A NFP incorporation under this act would have a robust constraints prohibiting distributions to members during the existence of the corporation.

While the proposed Act went part way by defining public benefit corporations, it also governs  mutual benefit organizations  (that may, or may not, choose to distribute their assets to the members on dissolution), perpetuating that confusion, and reducing the likelihood of achieving effective distribution constraints.

Robust Distribution Constraints

ONN’s request for robust asset distribution constraints on public benefit corporations was ignored.

From that January 2008 brief:

NFP legislation should have robust distribution constraints preventing excessive compensation to staff, directors and members  with exceptions for indemnification, expenses, and remuneration of a director or member for services. Upon dissolution, the assets of the NFP corporation would be gifted to another like organization or as set out in their by-Laws, – keeping the assets in the public domain.

The constraints are, if anything, weakened, as the existing obligation to pursue activities without the purpose of gain for its members  is not repeated in the proposed Act, and by giving non-profits the powers of a natural person, there is no longer a constraint that even requires the objects to be adhered to.

The essential feature of a public benefit corporation – that it devotes its assets exclusively for public benefit in perpetuity – should be enshrined in this legislation.

Financing Public Benefit Corporations

In our June 2008 brief on the financial challenges facing public benefit corporations, we noted:

The challenge for PBCs is to bridge the gap that sometimes arises between the financial resources they are able to access, and the resources necessary to fully finance their intended activities.

How can corporate law reform assist in that?

There is one untapped source of debt capital – the community that supports and values its PBC. While that community will very likely be tapped for voluntary contributions, there will be additional capital that could be raised, as loans, in appropriate circumstances, from supportive members of the community. We use the term “community capital” to describe such loans

ONN recommended:

That the proposed Act include provisions requiring offering statements for debt capital raised by a PBC from the public with the same exemptions, rules and procedures as are applicable to co-operative offering statements.

If this recommendation had been implemented, the recent efforts to raise capital by way of the sale of bonds for the Centre for Social Innovation’s new building at 720 Bathurst Street in Toronto would have been greatly eased.

This recommendation was ignored.

– Brian

Brian Iler is a member of ONN’s Non-profit Corporations Act Expert Committee, and is ONN’s liaison to the Ontario Bar Association’s Charities and Non-profit Law Section.

Filed in: Not for Profit Law

Tags: ONCA, Ontario Not‑for‑Profit Corporations Act