Spring is typically a busy season for many not-for-profit organizations (“NFPs”) that have fiscal periods ending in December or March. This is the time when organizations close their financial books, finalize year-end financial statements, and prepare financial reports for members and other stakeholders.

NFPs must also consider the legal requirements when fulfilling their annual financial reporting obligations. These requirements may depend on different factors, such as an NFP’s governing statute, the nature and amount of funding it receives, and its contractual commitments.

This article reviews the financial reporting obligations, from a legal perspective, for two popular forms of NFPs in Canada:

  • BC societies (“BC NFPs”) under the Societies Act (British Columbia) (the “BC Act”); and
  • federal not-for-profit corporations (“Federal NFPs”) under the Canada Not-for-profit Corporations Act (Canada) (the “Federal Act”).

1. Financial statement requirements

Obligation to present financials ahead of AGM

Under both the BC Act and Federal Act, directors of NFPs must approve an NFP’s financial statements and also present the financial statements and related auditor’s (or public accountant’s) report, if applicable, to members at the NFP’s annual general meeting (“AGM”). However, Federal NFPs have additional reporting obligations:

  1. All Federal NFPs must send to their members a copy or summary of the financial statements within 21 to 60 days before the AGM or the day on which a written resolution is signed by the members in lieu of the AGM. Alternatively, if their bylaws allow so, a Federal NFP may give its members notice that the documents are available at its registered office and that any member may obtain a copy free of charge on request.
  2. Federal NFPs that are “soliciting corporations” (see below) must file a copy of their financial statements with Corporations Canada no less than 21 days before the AGM or as soon as possible after a written resolution in lieu of the AGM is signed.

Contents of financial statements

The financial statements of an NFP generally include the following with respect to the applicable financial period:

  • a balance sheet (statement of financial position);
  • an income statement (statement of operations or statement of comprehensive income);
  • a statement of changes in equity (statement of retained earnings or statement of changes in net assets);
  • a statement of cash flows (statement of changes in financial position); and
  • note disclosures to the financial statements, including certain notes required by statute.

Financial reporting periods

Both the BC Act and Federal Act provide that the period covered by the financial statements to be presented at an AGM must:

  • begin immediately after the end of the previously completed financial year (or on the date the NFP was established by incorporation or amalgamation); and
  • end within six months prior to the AGM where such financial statements will be presented.

As such, an NFP with a December 31st financial year-end must present its financial statements for the period starting January 1st and ending December 31st at an AGM held no later than June 30th of the following year. If the NFP does not anticipate holding its AGM by June 30th, it must also present “stub-period” financial statements covering the interim period from January 1st of the current year to a date that falls within six months before the AGM – and it must do so on top of presenting financial statements for the period ending December 31st of the previous year.

For example, if the same NFP does not hold its AGM until September 30th, it must present financial statements including the following periods at the September 30th AGM:

  • January 1st to December 31st of the preceding year; and
  • January 1st to no earlier than March 30th of the current year.

2. Financial accounting standards

BC Act

In general, the Canadian Accounting Standards Board establishes financial accounting standards by which Canadian entities outside of the public sector are to recognize, measure, present, and disclose transactions in their financial statements.

However, there is no explicit requirement under the BC Act for BC NFPs to prepare financial statements according to any specific accounting standards or in any specific format (Anderson v. Riverside RV Park Society, 2020 BCCRT 1128 at para. 29). A BC NFP must consider the appropriate accounting standards for financial reporting only if it is required to conduct an audit or review, in which case the resulting report will state whether the financial statements were prepared in accordance with the applicable standards.

Federal Act

By contrast, under the Federal Act, Federal NFPs are required in all circumstances to prepare financial statements in accordance with Canadian “generally accepted accounting principles” (GAAP), irrespective of whether the Federal NFP is subject to an audit or review.

In most cases, this means Federal NFPs must apply either the Canadian Accounting Standards for Not-for-Profit Organizations or the International Financial Reporting Standards as provided in the CPA Canada Handbook – Accounting.

The differing requirements in accounting standards under the BC Act and Federal Act means that BC NFPs are afforded greater flexibility with financial reporting.

3. Levels of required financial review

Demystifying audits, reviews, and compilations

The terms “audit,” “review,” and “compilation” refer to three different types of reports prepared by independent professional accountants and the corresponding levels of review carried out. Each type of report provides varying levels of assurance over the completeness and accuracy of an NFP’s financial statements.

  • Audits – An audit engagement provides the highest possible level of assurance, which is still only a level of reasonable assurance. In an audit report, the auditor expresses an opinion as to whether the financial statements are free from material misstatement in accordance with applicable accounting standards.
  • Reviews – In a review engagement, the accountant provides limited assurance by carrying out less extensive procedures as compared to an audit. Following a review engagement, the accountant gives a conclusion on whether anything has come to their attention to cause them to believe the financial statements are materially misstated with regard to applicable accounting standards.  
  • Compilations – Lastly, a compilation engagement provides no assurance over the financial statements. In a compilation engagement, the accountant simply “compiles” financial information into financial statements and does not carry out any verifying procedures.

BC Act vs Federal Act, soliciting vs non-soliciting corporations

In deciding the level of financial review, an NFP must first turn to the requirements contained in its governing legislation.

Under the BC Act, BC NFPs are generally not required to appoint an auditor to conduct an audit (or review) of their financial statements unless stipulated in their bylaws.

Conversely, under the Federal Act, the required level of financial review depends on:

  1. whether the Federal NFP is a soliciting corporation or a non-soliciting corporation; and
  2. the gross annual revenue of the Federal NFP in its last completed financial year.

For Federal NFPs that are soliciting corporations (generally, those that receive more than $10,000 from public sources – being gifts or donations from non-members, grants from government, or funds form another corporation that also received income from public sources — in a single financial year):

  • an audit is required if the Federal NFP had over $250,000 in gross annual revenue in its previous financial year;
  • either an audit (by default) or review engagement (by special resolution of the members) is required if the Federal NFP had more than $50,000 and up to $250,000 of gross annual revenue in its previous financial year; or
  • a review engagement is generally required if the Federal NFP had gross annual revenue of $50,000 or less in its previous financial year, but the members of the NFP may require an audit by ordinary resolution or waive the appointment of a public accountant by unanimous resolution, in which case only a compilation engagement is required.

For Federal NFPs that are non-soliciting corporations (generally, those that receive $10,000 or less from public sources in each of the three previous financial years):

  • an audit is required if the Federal NFP had over $1 million in gross annual revenue in its previous financial year; or
  • a review engagement is generally required if the Federal NFP had gross annual revenue of $1 million or less in its previous financial year, but the members of the NFP may require an audit by ordinary resolution or waive the appointment of a public accountant by unanimous resolution, in which case only a compilation engagement is required.  

Since, by default, there is no requirement to conduct a financial audit under the BC Act, many BC NFPs can avoid the time, effort, and costs associated with carrying out a financial audit. However, there may still be circumstances where a BC NFP may choose or be required to carry out an audit under its bylaws or contracts. For instance, external stakeholders such as funders, donors, or lenders may require an NFP to produce audited financial statements as a condition to providing funding. In addition, an NFP may decide to conduct an audit to offer greater financial transparency and accountability to its members or the broader public.

Concluding remarks

Meeting financial reporting obligations is often a significant responsibility for many NFPs. In doing so, it is important to consider the different rules that apply under provincial and federal corporate legislation.

Social entrepreneurs or foreign organizations seeking to incorporate an NFP in Canada may want to also consider the financial reporting obligations under different statutes, in addition to other considerations (such as provincial residency requirements for directors), before deciding which corporate form to use. Not all jurisdictions are equal on this front, and there are advantages to establishing an NFP under one corporate statute over another.

If you have questions regarding the financial reporting requirements for NFPs or would like to discuss how such requirements could impact incorporating and operating an NFP in a particular jurisdiction, please reach out to a member of Miller Thomson’s Social Impact Team.