blogCanada Not-for-profit Corporations Act – Conversion Tip

September 21, 2013

It is now old news that not-for-profit corporation’s established under the Canada Corporations Act (the “Old Act”) must transition to the new Canada Not-For-Profit Corporations Act (NFP Act) no later than October 17, 2014.   The transition process requires that existing not-for-profit corporations replace their existing letters patent and by-laws with new documents that set out the primary rules governing the not-for-profit corporation – sometimes referred to as “charter documents”.

To comply with the NFP Act, not-for-profit corporations organized under the Old Act must file articles of continuance to obtain a Certificate of Continuance as well as create and file new by-laws.  The new articles and by-laws must comply with the NFP Act.  For additional information regarding the NFP Act and the transition process, please refer to Innovation, Science and Economic Development Canada’s (formerly Industry Canada) website: http://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/h_cs03925.html.

Innovation, Science and Economic Development Canada has published great information to help not-for-profits, including model articles of continuance and model by-laws. Many not-for-profit corporations are attempting the transition without the aid of legal counsel.  This is understandable as the transition process is well explained on Innovation, Science and Economic Development Canada’s website and not-for-profits have tight budgetary constraints.

The purpose of this blog post is to draw to your attention the benefit of including the following clause set out in the “Additional Provisions” section of the Model Articles of Continuance posted on Innovation, Science and Economic Development Canada’s website.

“The members of the Corporation are not entitled to vote separately as a class upon a proposal to amend the articles to:

 a.effect an exchange, reclassification or cancellation of all or part of the memberships of the class; or

b. create a new class of members having rights equal or superior to those of the class.”

Let us explain:  Section 199 of the NFP Act introduces the concept of “class voting”.   In certain circumstances, such as a reclassification or cancellation of a class of membership or the creation of a new class of membership, otherwise non-voting members are entitled to vote separately as a class on the proposal.   The result being that a class of non-voting members have a veto power over those certain corporate activities.   Fortunately, the class voting provision in the NFP Act provides that the articles of the corporation may negate class voting rights.

The mechanism for avoiding giving non-voting members this veto is to include the clause set out above in the “Additional Provisions” section of the corporation’s articles of continuance.  If the corporation’s non-voting members are intended to function as interested observers and not active participants in the business and affairs of the non-profit corporation, including this clause in the corporation’s articles of continuance is vitally important.