Through our outreach to the sector, ONN has been providing basic orientation on the new Ontario Not-for-Profit Corporations Act, 2010 (ONCA). We have collected data about the structure of sector organizations. We now have profile data which confirms the critical importance of making amendments to the ONCA.
As you may be aware, the ONCA gives authority to organization members to pass binding resolutions on Boards of Directors. We now estimate that over 75% of nonprofits in Ontario have memberships larger than their Boards of Directors. A membership that exceeds the Board of Directors leaves an organization open to disruption by a small faction of its membership who can tie the organization up with multiple member meetings and unwanted motions. Organizations are left vulnerable to radical and single-issue factions in their memberships or congregations.
For approximately 25% of organizations the role of membership is so embedded in their operations that they will not be able to restructure, leaving them inordinately and continuously vulnerable to disruption. The remaining organizations would need to engage in a costly and often complex restructuring of their corporation to protect the integrity of their missions and retain their voluntary directors. This restructuring would have to take place before the ONCA transition period is completed. Given the extraordinary membership powers and the vulnerability of organizations, we anticipate sector organizations that are able to do so, will narrow and limit their memberships — precisely the opposite of what is intended by the Act and contrary to what the sector would like to do.
In addition, as we have engaged in developing policy with the Government of Ontario, it has become apparent how important it is for the government and the sector to have consistent membership in public benefit corporations (PBC) within the ONCA. A permanent designation of PBC would not only prevent the misuse of public assets currently made possible with the temporary asset locks associated with temporary PBC status, but would also assist greatly with policy development for the sector.
The PBC, if amended as we recommend, would allow clear distinctions between nonprofit corporations that serve the public good, and nonprofits that are membership based, such as trade associations and private clubs. This is an important policy distinction, as public policy seeks to support organizations serving the public good. Public policy regarding access to Ontario lands, Infrastructure Ontario loans, Ontario Trillium Foundation grants and Ontario vendor of record, all seek to differentiate between member-based and public-good organizations. A permanent opt-in for PBC status with asset lock and higher accountability standards will simplify public policy development greatly.
The Problems with the ONCA
The new ONCA has many positive components and the sector needs modern legislation that meets our current and future needs. We like the more modern approach to incorporation as a right, the provision recognizing a nonprofit corporation’s right to earn revenues to support its mission, the modernization of e-mail as a legitimate form of notice and other similar initiatives. These new provisions, however, are overshadowed by the serious problems this legislation presents for nonprofit organizations.
If implemented as currently written, the Act will likely cause significant hardship for Ontario charities and nonprofit organizations, forcing organizations which have been operating successfully for decades to undertake disruptive and potentially divisive corporate restructuring. In addition, provisions in the act will actively discourage volunteers from serving as Directors due to concerns that they may not be able to fulfill contractual and other obligations.
Where ONN Stands
ONN is advocating for the ONCA to be proclaimed as soon as possible. We will continue working with the Ministry of Government and Consumer Services to bring forward reforms to improve the ONCA following proclamation.
One of the challenges we have is that the legislation and its impacts are not broadly understood.
That is where you come in: Help us build awareness of what our sector needs in corporate legislation: educate your government and political contacts.
Steps to Take
1. Find out more about the ONCA. Read the ONN brief, stay tuned for transition supports from Community Legal Education Ontario, and ask your lawyer (ONN is not yet recommending that you spend money on corporate restructuring. We hope to get reforms so this would not be necessary).
2. Brief your Board members on the legislation and the problems with how it is currently drafted. ONCA has major implications for Board governance.
3. Brief in person and/or write your government funders and political contacts about ONCA. Chances are they have limited or no knowledge of the ONCA and its impacts (You can provide them with the ONN brief and explain how it will affect your organization and work).
4. Minister contacts and MPP contact information can be found in the sidebar.
5. If you have written or met with a senior civil servant or MPP please let us know. Contact Lynn Eakin.
Will the ONCA Affect Me?
a. Are you a non-profit (but not a charity) providing a benefit to your community?
Under the new Act, charities are always categorized as public benefit corporations (PCB). As a public benefit corporation there are additional accountabilities than those required of member-based organizations that are not public benefit corporations.
If you are not a charity you may become a temporary PBC if your corporation receives $10,000 or more from a third party. This temporary PBC status is what we call the “yo-yo” corporation — a corporation that moves in and out of being a public-benefit corporation (PBC). A Yo-Yo corporation has a non-distribution constraint (sometimes referred to as an asset lock) on assets for three years. After three years the corporation reverts to being a member-based organization that is able to distribute assets to members upon dissolution of the organization.
In sum: there is no permanent asset lock for nonprofits serving communities unless they are charities. This may be appropriate for nonprofits who exist exclusively to serve their members e.g. professional associations or clubs, but does not work for nonprofits who exist to serve their communities e.g. service clubs, children’s sport leagues etc. Charities, as everyone knows, have a permanent asset lock but we do not think the general public knows the difference between a charity and a nonprofit organization serving their community. We believe that our communities expect an asset lock on all organizations working for the public good in their communities.
b. Do you have a voting membership at your annual meeting that is larger than your Board of Directors?
There is a big chance in the rights of members in the new legislation, particularly their ability to pass binding resolutions on Boards of Directors. Unlike the current Act, under the ONCA members can pass resolutions on any subject and that resolution is binding on the Board of Directors. Currently such resolutions are advisory, as is the case in other corporate legislation like the Ontario Business Corporation Act. We believe it is a drafting error as no other corporate legislation, except the Federal not-for-profit corporate legislation, has a provision like this. This provision risks being seriously disruptive to many organizations, could hinder good governance, and will discourage individuals from standing as Directors.
c. Do you have groups of supporters, patrons, donors, participants, or others that are considered non-voting members of your organization?
Under this legislation such groups, depending on how they are established, could be treated as non-voting members. They would be given a vote on issues of fundamental importance to the corporation (e.g. mergers, restructuring, and possibly fee setting). In our sector, non-voting members were intended to be non-voting. They do not have the same interests as minority shareholders under corporate legislation but the ONCA treats non-voting members as if they are minority shareholders.
d. Are you a registered charity that answered yes to question b or c?
Currently if you have different classes of members they are set out in the by-laws. Under the ONCA, classes of members must be described in your articles. However if you are a charity, CRA must approve any changes to articles. The CRA’s review of your articles could expose your organization to a review of your charitable objects as well. Many Ontario organizations have charitable objects that predate the current CRA interpretations, and are more expansive than objects that are currently being approved. If CRA chose to alter your objects it could substantially alter the work your organizations are able to do.