The Dire Consequences of Failing to ‘Continue’ to the New Federal Not-for-profit Corporations Act

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Advisers acting for federal not-for-profit corporations take heed: you have a deadline of October 17, 2014, by which to switch over (or “continue”) to the new Canada Not-for-profit Corporations Act. The changeover period has been running since 2011 and this year is your last chance to comply… and yet, less than 10% of affected corporations have actually taken the plunge. So, let us put this another way. On October 18, 2014, Corporations Canada will start dissolving corporations.

How Dissolution Will Work

Dissolutions will be based on the assumption that the corporation is inactive. As there has been a three-year warning period, this assumption is hardly unfair. If you do not have a certificate of continuance in hand by the deadline, you can begin to expect a Notice of Intent to Dissolve from Corporations Canada. This Notice will be sent to every address that Corporations Canada has on file, including the registered office and every director. Considering corporations have a duty to keep this information up-to-date, and at the very least to file an annual information return, if all of the addresses on record are wrong and no one ends up actually receiving the notice then perhaps it is unsurprising that the corporation will end up dissolved for inactivity. Corporations Canada has made it clear that they intend to begin the dissolutions right away and en masse.

Our understanding is that they are still considering the parameters by which they determine the order of the Notices, but that they are likely to start with corporations that have shown longer periods of inactivity (failure to file annual returns for several years running, etc.) If you have not begun to prepare for this impending sea change, then, perhaps your best first step is to ensure that your corporate filings are up to date. If nothing else, this may buy you a little time and will at least ensure that you actually receive any Notice of Dissolution that may be sent to you.

Why You Cannot Afford to Wait Any Longer

The Notice will state that the corporation has 120 days to respond before dissolution is undertaken. Technically, this means the corporation will be able to save itself by applying for and receiving confirmation of continuance before the 120-day period ends. However, there are some very strong arguments to be made against relying on this kind of Hail Mary tactic.

For one thing, consider the fact that Corporations Canada is on track to be dealing with tens of thousands of inactivity dissolutions, a considerable percentage of which will almost certainly consist of corporations that will receive dissolution notices and begin panicked applications for continuance. The spectre of bureaucratic backlog should alarm you; once the application for continuance is out of your hands and into those of the government, there is nothing you can do to guarantee it will be processed quickly enough to save your corporation’s bacon. If there is a problem with the application and it gets sent back to you, all the worse.

Corollary to this is the significant issue that a rushed continuance application is very likely to do your corporation a great disservice. Improperly verified and conducted continuances can lead to a host of serious problems down the road. Corporations Canada merely rubber-stamps any applications that have all the fields filled out; do not rely on them to tell you whether there is a substantive problem in your continuance because that is not their function.

However, the most serious complication of all relates specifically to corporations that are also registered charities. Charitable registration is handled not by Corporations Canada but by Canada Revenue Agency. The two bodies have yet to come to any sort of agreement or understanding regarding their strategy for handling the predicted wave of registered charity corporations that will have their corporate existence dissolved. Registered charitable status cannot exist in a vacuum; it must be attached to some kind of entity. If the corporation dissolves, there is no longer any legal entity – and then what will become of the disembodied charitable status? The CRA will almost certainly revoke the status of any entity that it discovers no longer legally exists.

Although it is possible, at the corporate end of things, to apply to revive a recently-deceased corporation, there is absolutely no guarantee that the CRA will agree to hold off on revoking the charitable status or even to give the revived corporation its charitable status back. Once charitable status is revoked, the charity must pay a ‘revocation tax’ of 100% of its assets. This is essentially a death sentence for an unprepared organization.

The continuance process is time-consuming and must involve a properly-held members’ meeting. In light of the mountain of legal, administrative, and financial headaches that await federal not-for-profit corporations on the other side of October 17, 2014, the only action that makes any sense is to begin preparing for continuance immediately.

Unsure whether your corporation needs to undergo continuance? There are a couple easy ways to check.

  1. If you have the corporation’s Letters Patent on hand:

Check the first page of the Letters Patent to find out which Act the corporation was established under. If the Letters Patent say “Canada Corporations Act”, you need to undergo continuance.

  1. If the Letters Patent are lost:

Visit Corporations Canada’s online database of federal corporations, located at https://www.ic.gc.ca/app/scr/cc/CorporationsCanada/fdrlCrpSrch.html. Search for your corporation’s legal name, and if it appears and its information page under says “Governing Legislation: Canada Corporations Act – Part II” then you need to undergo continuance.

If you are still unsure, we recommend you seek legal advice.

By: Alexandra Tzannidakis
Originally published in “The Canadian Taxpayer”, Volume XXXVI, March 21, 2014, p.47