First Reference company logo

Inside Internal Controls

News and discussion on implementing risk management

machine cogs image

Taking matters into your own hands: dissolving before the government does it for you

Readers will know that the new Canada Not-for-Profit Corporations Act came into effect in 2011, bringing the regulation of not-for-profits into line with modern corporate legislation. This carries with it the onus to apply for continuance under the new Act by October 2014, or be dissolved.

The CNCA contains a laundry list of requirements and default provisions which may not sit well with some corporations; and so they could not be blamed for choosing to wrap up their operations rather than submit themselves to a new regime.

This raises an interesting question: in the case of a corporation that has no interest in continuing under the new Act, what is the rationale for going through the time-consuming dissolution process rather than allowing the government to do it for them in 2014?

The short answer is that it is essential for a corporation to maintain maximum control over its affairs, rather than entrusting them to the federal bureaucracy. The winding-up of a corporation exposes both the organization and the individual directors to certain liabilities. In this sort of circumstance it is infinitely more prudent to guard your own interests than to simply assume that the government will protect them for you.

When a corporation is dissolved, it is of course unavoidable that its charitable status will also be revoked. Regardless of whether this revocation is initiated by the charity or the CRA, a “revocation tax” equal to essentially 100 percent of the charity’s assets will be assessed at the start of the winding-up period. If the revocation is voluntary, the charity is in control of the date of assessment. It can arrange to distribute its assets before applying for revocation, effectively allowing for a “tax” of zero.

Taking control in this manner is essential. Although even an involuntarily-revoked charity can pay out some assets during the winding-up period, the length of this period is limited and at times uncertain. In addition, during the winding-up period the pool of potential recipients is smaller. Before the winding-up period, the charity may pay out to any “qualified donees.” [1] Once the machinery of revocation is in motion, charities are limited to paying their assets out to the much more restrictive category of “eligible donees.”[2] These are essentially only registered charities that are at arm’s-length from the revoked charity. The result is a more demanding process of paying-out that carries with it the risk of overrunning the winding-up period. The charity may be left with more assets on its hands at the time of the tax assessment than it planned for.

Of course, if the charity is already moribund and has no assets, it need not be concerned with this tax. However, there still exist pressing reasons to execute a controlled and orderly wind-up. Simply abandoning a corporation exposes both the charity and its directors to unnecessary liabilities, as the fiduciary duties of the directors continue to exist for as long as the charity does – and sometimes longer. This is good advice even in ordinary circumstances, but should be given special consideration in this statutory transition period.

Given the sheer number of registered charities in Canada and the nature of bureaucracy, it is to be expected that the 2014 deadline will bring with it a lengthy backlog of corporations that will need to be dissolved. The government will be taking on a considerable task, and anyone familiar with the nature of bureaucracy might guess that it will not exactly be performed efficiently. If steps are not taken to wind-up a charity in an orderly manner before this bottleneck surely occurs, directors may unknowingly remain exposed to liabilities for an indeterminate amount of time. It would be unwise to simply assume that the government will carefully tie up any loose ends for you, or even that you will receive proper notice that the corporation (and therefore your fiduciary duties) have come to an end.

In order to maintain control over the process and protect themselves from liability, federally-incorporated registered charities should start deciding sooner rather than later whether to transition or wind-up. The 2014 deadline will be here before you know it, and with it your last chance to take your dissolving corporation’s affairs into your own hands.

Alexandra Tzannidakis
Drache Aptowitzer LLP

Follow me

Drache Aptowitzer LLP

Tax and Charity Lawyers at Drache Aptowitzer LLP
Drache Aptowitzer LLPis one of Canada’s foremost experts in the law related to charities and non-profit organizations. Their team of bloggers is led by Adam Aptowitzer LLB. He is a lawyer practicing in the areas of charity and tax law. He is a member of both the bars of Alberta and Ontario. He has been speaking and writing on the topic of charity law for several years and been published in numerous publications including the Canadian Taxpayer, the Canadian Fundraiser and the Not-for-Profit News and has been cited as an expert in many publications including the National Post.Read more
Follow me
Send to Kindle

, , , , , , , , , , , , , , , , , , , , , ,

Comments are currently closed.