New Target Date for the Ontario Not-For-Profit Corporations Act

Kate Lazier, Toronto

The Ontario government recently announced that the Not-For-Profit Corporations Act, 2010 (the “ONCA”) will come into force on July 1, 2013.  As we have reported previously, the ONCA has been passed by the Ontario Legislature but is not yet in force.  It will come into force on the day named by proclamation.  On that day, the ONCA will apply to non-share capital corporations established under the Corporations Act (Ontario).

While the current target date is July 1, 2013, the government has in the past announced earlier target in-force dates.  Our understanding is that the government is waiting to have regulations and electronic filing systems in place before it officially announces that the legislation is in force.   In the Spring of 2012, the government released a draft outline of the regulations to the ONCA.   We understand that this draft was revised but not re-released.  We are still waiting for the release of draft regulations. 

With the moving target date and the current government being prorogued, we have been asked whether we expect July 1, 2013 to be the actual in-force date.   Predicting the future is difficult.  The first sign that this date will hold firm will be the release of draft regulations.  Once there are draft regulations, the next issue is politics.  As noted, the government has already passed the legislation and the in-force date is determined by proclamation of the Lieutenant Governor in Council.  This process does not require a sitting government.  However, political considerations may nonetheless impact whether and when this legislation is brought into force.  So we need to wait and see.

Miller Thomson LLP’s charity and not-for-profit group will continue to keep our readers updated as this legislation progresses through the legislative process.

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Court Finds Fundraiser Guilty of Fraud

Susan M. Manwaring, Toronto

Adam Gour stands charged that  "...between the 1^st day of September in the year 2009 and the 30^th day of November in the year 2009, … at the Town of Bradford West Gwillimbury, … and elsewhere in the Province of Ontario, he did by deceit, falsehood or other fraudulent means defraud the people of Ontario the sum in excess of $5000.00..." (R. v. Gour, 2012 ONSC 4082, para. 1)

And thus began a recent decision of Mr. Justice McIsaac of the Ontario Court of Justice summarizing the charges brought against a fundraiser for circumstances that the Court subsequently found to constitute fraud.  The facts of the case, R. v. Gour, are not good ones.  Mr. Gour appears to have been involved with questionable fundraising for some years prior to the time of these allegations.  It appears that the main objective of his efforts and the efforts of those who worked for his charity was to provide a living for those involved rather than to provide funds in support of a charitable mission.  And, of course, the charitable mission of the entity in respect of which this behaviour occurred – the Northern Ontario Sick and Disabled Children’s Foundation – is a mission that tends to be attractive to donors and thus leads to successful fundraising.

Mr. Gour and his canvassers stated that they were raising funds to support medical expenses for needy children with medical afflictions not covered by the provincial medical program. The facts before the Court included evidence that the canvassers were paid by commission, that they failed to disclose the commissions they received to the public, and that in fact Mr. Gour had instructed them not to disclose the commissions.  Further, there was evidence before the Court that the children in the “posters” used in connection with the fundraising efforts never benefited from the funds raised.  Even worse, in one case the parents had not authorized the use of their daughter’s name and image by the organization.

The Court, having reviewed the facts, held:

“Applying those criteria to the facts as found by me, I am satisfied beyond a reasonable doubt of the following:

1. the failure to disclose the handsome commissions being paid to these apparent "volunteers" constituted the hiding of a fundamental and essential element of this fundraiser-contributor relationship; and
2. this failure to disclose was such as to mislead the reasonable contributor.”

Interestingly, the Court also confirmed that it had turned its mind to the issue of whether the charges under the Criminal Code were appropriate or whether an action should have been brought civilly against Mr. Gour and the others involved in the fundraising.  In considering this argument Mr. Justice McIsaac stated:

“I am similarly unimpressed with the submission that the alleged misconduct canvassed in this case would be better dealt with under the Charities Accounting Act, instead of being policed under the heavy hand of the Criminal Code. There is no question that the allegation herein could have formed the basis for civil proceedings under that legislation… However, I do not see the Crown's choice to proceed under the Criminal Code as being in any way inappropriate.” (para. 25)

Finally the Court said:

“In coming to this conclusion, I reject [defence counsel’s] suggestions that the commissions described in this case are an unfortunate "fact-of-life" given the prevailing competition in the charity industry of present-day Canadian society.

In responding to this submission, I want to make it clear that I am not ruling that charities cannot employ the necessary evil of third party fundraisers. They can do so and even allow them to charge 95% of their collections so long as they give the potential contributor an informed and transparent choice. If the donor is prepared to opt for a high-commission charity as opposed to a low or no-commission option, that is his or her choice. But, at least it is a choice that is fully informed.” (para. 23)

Needless to say the Court was less than impressed and on the facts as you read them, the conclusion of guilt is not that surprising.  The facts that were the most damaging related to the lack of transparency and accountability to the donors.

That said, there remains the question of the implications of the decision for fundraisers and charities generally.  One technical concern is that the decision can be read as requiring disclosure in all instances – even if the public doesn’t ask.  That standard may be an easy one to apply where the fundraisers are paid by commissions, but what of other scenarios?  Some provinces have regulated fundraising and the nature of the disclosure required.  Others have chosen not to pass fundraising legislation.  The lawyer for Mr. Gour suggested an appeal would be filed based on this concern and we have confirmed that an appeal of the conviction was filed on July 26.

Another implication is that the publication of these kinds of decisions leads to public mistrust of the sector.  These scenarios are the exception not the rule.   Rarely do we see the good stories in the papers – more often (as is the case with this article) the decisions such as the one in R. v. Gour get the coverage.  An argument can be made that the decision by the Crown to charge Mr. Gour should be viewed as a positive one and that the conviction could make others who might try to take advantage of the public think twice. 

However, those who work in the sector will undoubtedly recognize that references to “the necessary evil of third party fundraisers” or comments that cast fundraising in an unsavoury light as not helpful to the sector generally.  The bottom line is that people who use the charitable system to their own personal benefit bring the sector as a whole into disrepute.  They need to be stopped to preserve the integrity of charitable fundraising and the Crown in this instance took a bold step to stop these individuals from continuing to deceive the public for their own personal benefit.   Stay tuned for the results on appeal.  And query whether a decision such as this may result in the Ontario government introducing charitable fundraising legislation similar to that which exists in Alberta or Saskatchewan.

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CRA Comments on Donations of Depreciable Property

Andrew Valentine, Toronto

A recent CRA technical interpretation provides a useful review of the rules surrounding donations of depreciable property.  CRA was responding to questions from a taxpayer inquiring about the tax treatment of such donations in several different scenarios.  Essentially, CRA considered the implications where a corporation donates depreciable property having a fair market value of zero as well as the implications where the property has a positive fair market value.  The document serves as a useful reminder that corporations need to take care to ensure that they take account of the full tax implications of a charitable donation.

In general, when a corporation makes a gift, it may claim a tax deduction for the eligible amount of the gift (that is, the fair market value of the property donated less any advantage to the donor in respect of the gift).  Where the gift is made inter vivos, the donor is deemed to receive proceeds of disposition equal to the fair market value of the property.  CRA notes in the technical interpretation that as a general proposition the corporation may need to account for:

• income, if the donated property was inventory;
• capital gains or losses, if the property was capital property; and
• recapture of capital cost allowance, if the property was depreciable property.

CRA focused on the issue of depreciable property.  Under the Income Tax Act, depreciable property is pooled into different classes, with different rates of capital cost allowance prescribed in respect of each class.  Corporations may deduct the capital cost of each class of depreciable property at the prescribed rates when determining income from business or property.  Corporations must track the undepreciated capital cost (UCC) of all property for each class, reducing it annually by the amount of capital cost claimed as well as for any dispositions of property in the class.  When new properties in a class are acquired, the UCC of that class increases by the cost of the property.

When depreciable property is sold or gifted, the corporation’s UCC in respect of that class of property decreases by the corporation’s proceeds of disposition (less any disposition costs), up to the original cost of the property.  Put simply, the Act provides that where, in a year, the amount of all decreases in the class (i.e., proceeds of disposition plus capital cost allowance claimed) exceeds all increases in the UCC of the class (i.e., the cost of all property in the class acquired in the year plus any recaptured amounts), the corporation must recognize the recaptured excess as income.  Where the reverse is true, and all increases in the UCC of a class exceed the total of all decreases in the year, the corporation may claim a terminal loss when calculating its income.

CRA commented in the technical interpretation that when a corporation makes a gift of property with a fair market value of zero, there will be no deemed proceeds of disposition and thus no decrease to the UCC in the class. 

Where a corporation gifts donated property with a positive fair market value, this fair market value is deemed to be the corporation’s proceeds of disposition.  The corporation’s UCC will accordingly be decreased by this amount, up to a maximum of the original cost of the property.  There may be recapture or a terminal loss depending on whether the decrease exceeds the increases to the UCC in the class or vice versa.

CRA also commented on the calculation of capital gains in respect of a donation of depreciable property, pursuant to proposed rules in the Act.  Where the fair market value of the donated depreciable property exceeds the lesser of the UCC of the class and the adjusted cost base (ACB) of the property, the Act permits the donor to elect the fair market value of the property provided that this amount is between the fair market value of the property, on one hand, and the lesser of the ACB and UCC of the class, on the other.

The technical interpretation notes also that certain anti-avoidance rules apply where the donated property was acquired by the donor less than three years before the gift, or less than ten years before the gift if the property was acquired for the specific purpose of making of the gift.  In these circumstances, the fair market value of the gift is deemed to be the lesser of the fair market value otherwise determined and the ACB of the property.

It is clear from this summary that the rules surrounding donations of depreciable property are reasonably complicated.  It is important that corporate donors ensure that they account properly and in full for the donation.  Charities must also ensure that any receipts issued comply with the Act.  Miller Thomson’s Charities and Not-for-Profit Group lawyers are pleased to assist with the legal issues that apply in respect of such gifts.

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The Case of the Missing Records - Part 3

Hugh M. Kelly, Toronto

This is the third in a series of articles about how to deal with deficiencies in corporate records.

In Part 1, we discussed the importance of conducting thorough searches of available records and evidence of past corporate actions and decisions.  In Part 2, we discussed the process by which gaps in the available records can be filled through the process of reconstruction, ratification and confirmation so as to produce records as reasonably accurate as possible in the circumstances.

In this Part, we will look at two specific deficiencies that often affect not-for-profit corporations:

• what if the corporation has not maintained its membership list?
• what if the directors have not been elected properly?

In a sense, these are specific examples of incomplete records, and many of the comments in Parts 1 and 2 of this series will apply.  There are, however, specific best practices that should be followed in addressing these questions.

What if the corporation has not maintained its membership list?

Membership records are crucial to the life and existence of any corporation - the lifeblood so to speak - but it takes time and effort, and a lot of both, to collect, record and maintain constantly changing membership information.

It is much easier today with computer programs than in the “old days” of hand-written paper registers.  But no experienced person will doubt that the collection, recording and maintaining of membership records still requires a live person to insert new data, amend existing data, and remove or archive obsolete data. These tasks, whether or not computerized, are drudgery without much appeal to most people. And so, inevitably, in some and perhaps many organizations, there is a constant struggle to ensure that the membership information retained by the organization mirrors the de facto picture.

So, what to do when the membership records are known to be deficient?

Conduct searches for available information

The nature of the searches will not differ much from what was suggested in Part 1. Once again, common sense should prevail, and the search process described in Part 1 applies equally to the search for membership information. Most organizations have membership lists routinely prepared for management and directors, often with a view to invoicing for membership fees or donation solicitation.  This would be where the initial search would begin.

The next source of valid membership information may be in minutes of meetings, either of directors or of members. It is a common requirement that applications for membership must be approved by the directors, and for such corporations, a review of the minutes of meetings of directors may be the appropriate starting-point. Similarly, minutes of meetings of members are another potential source, since sometimes minutes include a list of those in attendance.

In the case of an organization that charges fees or dues, or an organization that provides services such as sport or exercise facilities, a bar or dining room, considerable member information may be contained in the records of such financial transactions. Employees managing such services can usually tell what persons are up-to-date on their annual fees and dues, and who is responsible for the charges for organization-provided services. These financial records could then form the basis of the reconstruction of membership lists.

Another possible source of membership information – albeit less reliable – can be the persons who are members and who can recall the names of, and maybe even the contact information for, other members for whom no formal records have been maintained. But as they say, "beggars can't be choosers" and less reliable information may be better than no information at all. Follow-up verification of what is obtained through such personal recollections may afford reasonable reliance upon lists generated in this way.

Reconstruction, ratification, confirmation

Once these sources have been mined and the collected information has been organized, the reconstruction, ratification, and confirmation process described in Part 2 might, with some variations, be applied.

The reconstruction resolution can only name the persons who have been identified in the searches, so the notice of the meeting seeking confirmation of the reconstruction resolution cannot be given to other persons who may actually be members. There does not seem to be any help for that. The directors could, and should, adopt a policy that if any other person comes forward subsequent to the notice of the meeting, such person would have the right to provide reasonably reliable evidence of membership and would be recorded as a member if that evidence satisfies the board of directors acting reasonably. Beyond that, the organization would need to rely upon their attempts in good faith to make the reconstruction as accurate as possible.

As soon as the reconstruction resolution has been approved, the membership particulars should be inserted in a formal register of members. And the organization should adopt a system of continuous updating of that register.

It should also be noted that if a person's name has been wrongly entered, retained, deleted or omitted from the records of a corporation, the person may apply for a court order to rectify the record.

What if the directors have not been elected properly?

Directors No Longer in Office

It will be a matter of judgment whether any current action is necessary where the possible improper election affects only directors who are no longer in office. If there is some concern about a potential challenge to the validity of corporate action taken while an improperly elected director participated, the cure is for the validly elected current directors to ratify and confirm, as a current act, the original imputed action(s) effective as of the date of the original action(s) taken. As in the case of reconstruction resolutions noted in Part 2, appropriate recitals explaining the background and reasons should be included.

Identity of Current Directors

Where the issue is the identity of the persons who have been elected as directors, the reconstruction, ratification and confirmation process described in Part 2 is suggested – including the search, the determination of who was elected and for what time period(s), the reconstruction resolution, and the meeting of members to confirm the reconstruction resolution.

Defects or Irregularities Respecting Current Directors

If the identity of the persons who have been elected as directors is not an issue, the problem may be an after-discovered defect or irregularity in the election, appointment or qualification of those persons. This is expressly resolved by the specific provisions contained in each of the Canada Not-for-Profit Corporations Act (s. 139), the Ontario Corporations Act (s. 292) and (when proclaimed) the Ontario Not-for-Profit Corporations Act (s. 37).  These provisions provide that the acts of directors and officers are valid despite an irregularity in their election or appointment or a defect in their qualification.

There is no corresponding provision under the Canada Corporations Act where it is afterwards discovered that a director has not been properly elected. There are three possible solutions dependent upon the nature of the defect.

First, if the person remains in bankruptcy, then he/she is not capable of meeting the statutory requirement for acting as director; in this case, there is no "cure" for the defect, with the result that the director "slot" occupied by the person would be vacant.

Second, if the person does not meet a requirement set out in the by-laws (such as residency), then the directors could enact, and the members confirm, a by-law amendment altering the requirement, either for that specific person for her/his term of office, or more generally. Otherwise, a new election could be required.

Finally, if the required election process was not followed, the only practical solution would be to hold a new election using the proper procedures.

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Corporations Canada – Change of Policy Regarding Addresses For Directors

Brenda Taylor, Senior Corporate Law Clerk

Corporations Canada has, in the past, required that a corporation provide the residential address of each director when filing information with their office. Examples of documents for not-for-profit corporations and charities on which a director’s address is recorded with Corporations Canada are:

1. Under the Canada Corporations Act (“CCA”) Letters Patent or an Annual Summary; and
2. Under the Canada Not-for-profit Corporations Act (“CNCA”), Articles of Incorporation, Notice of Directors and Annual Returns.

On September 26, 2012, Corporations Canada released a statement advising that effective immediately, a corporation could record an address for service for each director rather than a residential address. Corporations Canada considers a valid address for service to be an address where legal documents can be delivered and accepted for service either by the director or by someone on the director’s behalf. It must also be an address where an acknowledgement or delivery receipt can be provided, if required. In other words, a director’s address cannot be a post office box. An address for service can continue to be a director’s residential address if preferred.

For corporations that have not yet continued under the CNCA and are therefore still subject to the CCA, a director’s address for service can be recorded on the Annual Summary (Form 3) required to be filed by June 1 of each year.

For corporations continuing or incorporated under the CNCA, a director’s address for service can be recorded on one of the following forms, as applicable:

As part of continuance/incorporation:

• Notice of Initial Registered Office and First Board of Directors (Form 4002);

Following continuance/incorporation:

• Notice of Changes Regarding Directors (Form 4006); or
• Annual Return (Form 4022).

The foregoing policy also applies to corporations incorporated under the Canada Business Corporations Act and the Canada Cooperatives Act.

Forms and other information documents available on Corporations Canada's website reflect this change. For further information, please feel free to contact our offices. You may also contact the Client Services Centre of Corporations Canada, by telephone at 1-866-333-5556 or by e-mail at corporationscanada@ic.gc.ca.

Canada Revenue Agency continues to require that a director’s residential address be recorded on relevant documents filed with their office.

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What's Happening at Miller Thomson

Hugh M. Kelly presented an orientation for newly appointed members of the Complaints, Discipline, Appeal and Review Committees of Immigration Consultants of Canada Regulatory Council, on September 13 and 14, 2012.

Hugh M. Kelly presented "Directors' and Officers' Governance Workshop – Part 1" , for the Halton Catholic Children's Education Foundation, on September 26, 2012.

Iain Benson addressed the plenary session of The Canadian Conference of Catholic Bishops on September 27, 2012 in St Adele, Quebec on the topic "Some Reflections on The Freedom of Conscience and Religion in Canada."

Karima Kanani presented "Clarity and Conflict In Governance Roles: Strengthening Leadership and Accountability " at the Association of Family Health Teams of Ontario conference on October 16, 2012.

Kate Lazier presented on the Ontario Not-For-Profit Corporations Act at the Alzheimer Society of Ontario Fall Conference on October 19, 2012.

Susan Manwaring presented at the Ontario Counsel of Agencies Serving Immigrants on Social Enterprise and the Not-for-Profit Organization in Toronto on October 23, 2012.

Robert Hayhoe co-presented “Special Governance Challenges for Not for Profit Companies” at Lexpert’s Corporate Governance for 2012 Session on October 23, 2012.

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