Charity Law

Country Reports: North America

 

The International Journal
of Not-for-Profit Law

Volume 3, Issue 1, September 2000

Canada

Reform of the Canada Corporations Act

By Jane Burke-Robertson
Drache, Burke-Robertson & Buchmayer
Ottawa, Canada

Industry Canada, the Federal Department dealing with corporations, announced a major study of federal non-profit corporate law in July of this year when it issued Reform of the Canada Corporations Act: The Federal Non-profit Framework Law, a discussion paper on proposed changes to the Canada Corporations Act (CCA). The intention is to carry out consultations with individuals involved in the non-profit sector this fall.

The discussion paper comes after numerous attempts to reform the federal incorporation legislation dealing with non-profits, the last most significant attempt being in the 1970’s. The existing legislation has remained fundamentally unchanged since 1917. However, it is expected that this initiative will have more success since it follows on the heels of the report presented by the Voluntary Sector Task Force which called for the reform of the CCA. This Task Force was comprised mostly of senior government officials and representatives from the charitable and not-for-profit sector and resulted from the Panel on Accountability and Governance in the Voluntary Sector’s report, Building on Strength: Improving Governance and Accountability in Canada’s Voluntary Sector, 1999, known by most as the “Broadbent Report.”

The federal discussion paper begins with a commitment by the federal government to “ensuring the strength and success” of the voluntary sector by providing a good corporate governance law. It recognizes the important role played by the non-profit sector in Canadian society and that the existing regulatory framework provided by the CCA is not meeting the varied needs of those involved in the sector. The discussion paper states that “world class corporate law is a tool, not for government, but for the organizations under that law” and it speaks to the importance of the CCA reform serving as a model for other jurisdictions within and outside of Canada as they develop or reform their own laws. Those who are intimately involved in the process of reform of the CCA are hopeful that the new CCA will serve as a model for other provincial non-profit statutes which vary considerably across the country.

In the face of these promises of reform, it must be said that the existing process for incorporation of non-profits is abysmal, (notwithstanding the very helpful staff in the Corporations Directorate at Industry Canada). The current portions of the CCA which apply exclusively to non-profit corporations are found in Part II of the CCA which contains only six sections. The remaining provisions which are applicable to non-profit corporations are incorporated by reference out of Part I. The result is legislation which was not drafted to take the complex and varied needs of the non-profit sector into account and which is scarcely adequate to provide for a sound governance system. Several years ago in order to “bridge” this gap, Industry Canada issued a policy statement on the incorporation and amendment of non-profit corporations, and this has been widely used by those wishing to incorporate in this sector. Since incorporation under the CCA is subject to ministerial discretion, Industry Canada has used the policy statement as a tool in exercising its discretion to issue letters patent of incorporation and it requires applicants for incorporation to ensure that the by-laws and applications to incorporate comply with both the CCA and the policies of the Department. The policies were last revised in April 1998, but there remain many legal practitioners in the non-profit field who are of the view that the Industry Canada does not have the right to effectively “legislate” by policy and that strict adherence to these policies should not be required.

This brings us to the current discussion paper. The paper is divided into six major topics:

  1. Interpretation and Application of a New Act, including the issue of whether there should be a classification scheme to accommodate the diverse types of organizations.
  2. Corporate Powers and Capacity, dealing in large part with the question of whether there should be incorporation as a right instead of the current system which relies on ministerial discretion.
  3. Directors and Officers, including liability issues, voting and electronic communication.
  4. Corporate Finances, including disclosure and accountability issues.
  5. Membership Issues, including the rights of members and access to legal remedies.
  6. Fundamental Change and Winding-up, including a change in purpose, change of legal jurisdictions and dissolution.

Industry Canada is also consulting on several other issues including: use of standard by-laws, board structure and committee structure, including “outside directors”; procedural matters, such as proxy voting, electronic meetings and communications and written resolutions; and “for-profit” activities, including how these activities may be carried out and by whom.

The CCA reform is expected to involve two consultations, each following a discussion paper. The next discussion paper is expected in the fall of 2001. Industry Canada expects the new legislation to be available in 2003.

Industry Canada’s discussion paper and a questionnaire are available at https://strategis.ic.gc.ca/cca_paper

Mexico

Mexico City-“Law on the Promotion of Social Development Activities of Civil Organizations for the Federal District.”

Information to be considered by US Grantmakers

By Sam Charron
ICNL

Introduction

The recent adoption of the Law on the Promotion of Social Development Activities of Civil Organizations for the Federal District (LFAD) by the Mexico City House of Representatives is the culmination of a five year effort of a coalition of Mexican nonprofit organizations. The LFAD clarifies the relation between the nonprofit sector and the government, underlines the importance of transparency and reporting, and created the possibility for the creation of tax and other incentives for civil organizations which adhere to the obligations set forth in the Law. (See C. Castro, New Law on Promotion of Social Development Activities in Mexico City, IJNL Vol. 2 Iss. 4).

The LFAD applies to public benefit organizations located in the Federal District, regardless of their legal form, whose beneficiaries are the inhabitants of the Federal District [LFAD §1]. While the LFAD sets forth certain obligations for the organizations which are relevant to an equivalency determination, it is important for funders to note that organizations which are registered in the Registry of Civil Organizations of the Federal District must continue to meet the obligations set forth in other legal provisions which relate to the organization’s social object. [See LFAD §11]

Relevant Legal Provisions

Inurement- The LFAD does not apply to organizations that have as their principal object to work exclusively for the benefit of their members [LFAD §4(III)]. Organizations subject to the LFAD may not individually designate their beneficiaries [LFAD §8(II)], nor may they distribute surplus to their members [See LFAD §8(III) (requiring a registered organization to provide for such a prohibition on distribution in its constitutive act or statute)]. Organizations that are registered in the Registry of Civil Organizations of the Federal District must dedicate the entirety of their resources to carrying out their objective. [LFAD §11(III)].

Proprietary Interest- Organizations must dedicate the entirety of their resources to carrying out their objective. [LFAD §11(III)] They may not distribute surplus to their associates. In addition, organizations must transfer their property to other registered organizations upon dissolution.

Dissolution- Registered organizations must provide in their constitutive act or statute that upon dissolution they will transfer their property to another organization registered under the LFAD. [LFAD §8(III)].

Activities (General)- Article 2 states: “For the purposes of this Law, Social Development activities are those which are carried out in the Federal District, not for profit, for the benefit of third parties, with a sense of joint responsibility and transparency, without religious or (party) political ends and, under the principles of solidarity, philanthropy and social welfare, organizations formed in keeping with Mexican law, whatever the juridical form that they adopt, to:

  1. Strengthen and promote the enjoyment and exercise of human rights;
  2. Encourage social conditions that favor human development;
  3. Promote the carrying out of works and services for the benefit of the   public;
  4. Encourage regional and community development, in a manner that is sustainable and the exploitation of natural resources, protection of the environment, and the conservation and restoration of the ecological balance;
  5. Carry out civil protection and prevention activities;
  6. Support vulnerable and socially disadvantaged groups in achieving their objectives;
  7. Provide social welfare under the terms of the laws on the matter;
  8. Promote civic education and citizen participation for the benefit of the people;
  9. Develop educational services in terms of the General Education Law;
  10. To contribute human resources. Materials or services for the health of the people in the framework of the General Health Law and the Health Law for the Federal District;
  11. Support activities that favor urban development and territorial order;
  12. Promote the advance of knowledge and cultural development;
  13. Develop and promote scientific and technological research;
  14. Promote the fine arts, popular (folk) traditions and the restoration and mountainous of archaeological, artistic and historical monuments and sites, as well as the preservation of the cultural patrimony, in keeping with applicable legislation;
  15. Provide support to the creation and strengthening of civil organizations through:
    1. the use of the media,
    2. the provision of technical aid and consultation,
    3. training;
  16. Help the growth of individuals’ productive capacity in order to achieve their full self-sufficiency and development;
  17. Those activities which, based on the principles that inspire this law, contribute to the social development of the people.”

Article 3 of the LFAD sets forth activities that are subsidiary in nature to the main activities listed in Article 2. These subsidiary activities include:

  • stimulating the productive capacity of beneficiaries with the end of achieving self-sufficiency.
  • obtaining and channeling economic, human, and material resources; and
  • engaging in economic activities (see below)

Economic Activities- To assist in carrying out the Social Development activities listed in LFAD § 2, civil organizations may initiate economic activities with the purpose of dedicating all of their returns to acts of welfare and Social Development. [LFAD §3(III)]. While this provision does not provide information as to specific activities, organizations will be bound to those rules governing economic activities set forth in the laws on relating to the organizations’ social object (e.g.- the civil codes). [see LFAD §11].

Political Activities- The LFAD does not apply to political parties or associations. [LFAD §4(I)]. Registered organizations may not have ties of dependence or subordination to political parties and must abstain from engaging in partisan political activities. [LFAD §11(IV)]

Obtain a copy of the Law

An electronic copy of the Law on the Promotion of Social Development Activities of Civil Organizations for the Federal District is available at the Mexican Center for Philanthropy’s website (www.cemefi.org).

the United States

A. Legal Framework

The Bishop Estate controversy, which has been the subject of several articles in the Journal, has led to a symposium issue of the University of Hawai’i Law Review, which was published this past summer (although the issue is called the Winter 1999 issue, it, like many law review issues, did not come out until considerably later!) This is a very useful issue, for although the discussions in the articles center around one case, they raise issues that are more broadly relevant, not only for US law but more generally. The list of articles and other relevant materials is as follows. Information about obtaining a copy of this issue of the Law Review can be obtained by writing to University of Hawai’i Law Review, William S. Richardson School of Law, 2515 Dole Street, Honolulu, Hawai’i 96822 USA.

B. Tax Status

Several issues of current concern to US not-for-profit organizations with tax exempt status are discussed in the July/August 2000 of the EO Tax Journal, published by Paul Streckfus. These include the US law restrictions on political activities of charities (exempt from Federal income taxation under Section 501 (c)(3) of the Internal Revenue Code; materials related to the proposed “corporate sponsorship” regulations, under section 513 of the Code (related to the circumstances under which such payments do not constitute “unrelated business income”); and materials related to disclosure of political activities by tax exempt political organizations (so-called section 527 organizations).

  1. The political activity issues for charities principally concern the participation of charities in election-related activity. As it generally does in an election year, the IRS has issued an “Election Year Advisory” to alert US charities to the limitations on their political activities. This is a highly controversial area, in part because charities are not infrequently interested in trying to circumvent the rules (see, e.g, Branch Ministries v. Rossotti, which was discussed in our June issue. The guidance is contained in IR-2000-47, which was issued July 5, 2000.

    The EO Tax Journal also includes a letter dated June 26, 2000, which addresses concerns raised by Independent Sector about lobbying by US public charities. The letter describes in detail the ways in which such lobbying is permissible under the law and the conditions that apply to a Section 501(h) election.

  2. The discussion of the proposed “corporate sponsorship” regulations is extensive, and includes an unedited transcript of the June 21 public hearing where the regulations were discussed. Also included are several sets of comments from interested parties, including Independent Sector, the ABA Section of Taxation Committee on Exempt Organizations, and the New York State Society of CPAs.
  3. The legislative developments regarding disclosure by Section 527 organizations are also extensively covered. The materials include the amending bill (HR 4762), as signed by the President, as well as statements of various members of the House and Senate. This resolution to a major political problem with regard to Section 527 organizations’ participation in various political campaigns indicates that the US Congress can indeed work quickly when it perceives the need to do so (in an election year, at least)!

Information about the EO Tax Journal can be obtained from Paul Streckfus, pstreckfus@aol.com. Subscriptions to the hard copy journal are available for $299.

Watchdogs Combine for Broader Rreach

By Betsy J. Rosenblatt,
Senior Editor, National Center for Nonprofit Boards

The National Charities Information Bureau (NCIB) and the Council of Better Business Bureaus’ Foundation (CBBBF) will combine this fall to create a new, more expansive entity that will continue the work of evaluating charities and disseminating information to the public.

George Penick, chair of the board of NCIB, and Candace McIlhenny, executive director and CEO of CBBBF, agree that the merger will provide a stronger voice for accountability in the nonprofit sector by eliminating redundant services and combining the strengths of the two groups. NCIB, founded in 1918, has a robust fund-raising base and a long history of holding charities up to strict standards. NCIB evaluates nationally soliciting charities. The Philanthropic Advisory Service (PAS), which is the chief program of CBBBF and performs basically the same function as NCIB, has wider dissemination channels with access to all 132 local Better Business Bureaus in the United States. Individual Better Business Bureaus do reports on a wider variety of local organizations. Reports on charities are available on www.ncib.org and www.bbb.org and are often published in the Chronicle of Philanthropy, a trade publication covering the nonprofit sector.

Both organizations serve as watchdogs for the sector, providing potential donors and other interested parties with a breadth of information about the practices of charities. Some of this same information is listed on the Internal Revenue Service (IRS) Form 990 that tax-exempt organizations are required to file with the IRS. While 990s are becoming more accessible with new legislation that requires their availability to the public, the reports that NCIB and PAS offer are more comprehensive because the organizations do their own research. NCIB and PAS are not regulators and do not possess any punitive powers, rather they attempt to inform the public about whether charities match up to the standards they have set for a sound and healthy organization.

“For years, these organizations have performed the important functions of raising awareness among donors and promoting self-regulation among nonprofits, especially around the issues of accountability and financial responsibility,” said Judith O’Connor, president and CEO of the National Center for Nonprofit Boards.

CBBBF is a 501(c)(3) organization independent from the Council of Better Business Bureaus (CBBB), which serves as an educational foundation to help consumers make knowledgeable choices in the marketplace. CBBB is the umbrella organization that oversees all local Better Business Bureaus. CBBB is mainly funded by businesses, but its primary user is the general public.

Penick looks forward to combining both the funding and distribution channels of the two organizations.

“We’ll have an organization that has more capacity than either organization had separately,” said George Penick. “More reports will be done and more frequently, resulting in a greater pool of information for the public.”

“We also want to enhance our services overall,” said Candace McIlhenny. “We may create new products and explore ways to expand. We will examine ways to better serve the charities themselves. Many organizations look to our guidelines as helpful self-evaluative tools. We also need to bring greater visibility and awareness to this resource. We want more people to take advantage of it.”

The new organization will maintain the same chief goals NCIB and PAS previously held: creating and serving an informed giving public.

The groups hope that negotiations will be finalized by January 2001 and that the new organization will be operational next spring.

Once New York and District of Columbia courts approve the merger, NCIB will move its operations into the Arlington, Virginia headquarters of CBBBF and adopt a new name, yet to be decided. Currently, Penick plans to chair the board of the new organization, and McIlhenny will serve as its chief executive. The new organization will have a new board, consisting of at least 20 members – 10 nominated by NCIB and 10 by CBBBF. Some of the board members will likely be individuals who now sit on the existing boards, and some will be brand new. One member of NCIB’s previous staff will join the new organization. PAS currently employs 7 staff members, who will remain. Bennett Weiner, director of PAS and CBBB vice president, will stay in that capacity. The Council of Better Business Bureaus will provide support services to the new organization.

Penick expects to encounter some of the logistical challenges that any nonprofit merger entails but anticipates that the two organizations will deal with them. Two of the most significant hurdles, choosing a chief executive and a board chair, are already taken care of. Several members of NCIB found new jobs after the merger was announced, so combining staff members is not a problem either. Penick says it will simply take time for the new board members to “develop and cement a good working relationship,” but he is confident that will happen.

Some critics have expressed concern that the standards of the new organization for evaluation of charities will not be as tough as NCIB’s because the two organizations standards are not identical, but Penick emphasizes that criteria will remain high. “We have slightly different approaches,” Penick said, “but we are looking at the same things.” Each organization has independently been reviewing its standards in the past year, and once the new organization is formed, the new board will take on the task of integrating those standards and possibly creating additional new ones.

“This decision was not made lightly,” said Al Lenhardt, NCIB board member and executive vice president and COO of the Council on Foundations. “The board went through a long deliberative process and looked at potential downfalls. This is a great business opportunity. Some people were concerned because NCIB is 82 years old and they didn’t want it to change, but they were looking at an old model. You have to change or you perish.”

“I think this is absolutely the right thing to do,” said Peter Shiras, NCIB board member and the senior vice president of the nonprofit advocacy organization Independent Sector. “There was quite a bit of duplication between what NCNB and PAS did. This will create a stronger, more vibrant organization.”

Talks of the merger originated more than three years ago but fell apart at that time. After that, NCIB hired William Massey as president. Massey reinvigorated the organization, then decided to relocate and leave NCIB this past spring. After Massey’s departure, NCIB was faced with the prospect of engaging a search firm to find a new president. Instead, its board decided to take another look at the merger idea and reopened the conversation with CBBBF. Foundation Center president Sara Engelhardt has served on NCIB’s board since 1984. “I’ve seen NCIB through many transitions of leadership and board members and environment,” she said. “I am very enthusiastic about this merger. This is finally the right timing and the right organization.”

Ben Shute, secretary of the Rockefeller Brothers Fund, has funded NCIB in the past and recently awarded a grant to cover some costs of the merger. Rockefeller Brothers is also continuing a grant to NCIB to work on its website even after the merger. “It seemed to us that with the rapidly moving world of the Internet and the interest in making information available to donors, the merger was a logical thing to do.”

“Watchdog groups often look at the boards of nonprofit organizations when assessing whether the public is being served in an ethical and responsible way,” said O’Connor. “It will be interesting to see what revised criteria for evaluating charities will result from this merger.”