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A Primer on NFP Corporate Finance

There are both similarities and differences between the financing techniques and options open to not-for-profit corporations and for-profit business corporations. Notably, NFP corporations cannot raise funds by issuing shares, as an NFP corporation is a corporation without share capital. Other differences and similarities are discussed below.

Membership Contributions or Dues

Most NFP corporations (especially trade associations and other non-soliciting corporations) raise operating funds through annual membership contributions or dues assessed against members. The Canada Not-for-profit Corporations Act provides, as a default rule, that the board of directors may require members to make an annual contribution or pay annual dues.

This default rule is, however, subject to the articles, by-laws or a unanimous member agreement ("UMA"). Members may wish to have the power to set or approve the level of annual contributions or dues they must pay. If so, the articles (or, in the case of a non-soliciting corporation with a limited membership base, the UMA) can restrict the exercise of board powers. For example, the articles or the UMA may require a super-majority of members to approve any increase in annual contribution levels. This gives members direct control over the amount that they may be required to pay each year to remain a member.

There is nothing in the CNCA that requires that the same amount of annual contribution or dues be charged equally to all members of the same class. The constating documents can differentiate between members in the same class. For example, corporate members may be charged more in annual dues than individual members, large corporations may be charged more than small businesses, etc.

Generally, it is good practice to set membership fees at or before the beginning of each financial year so that each member has an adequate opportunity to decide whether to remain a member and pay the concomitant annual contribution, or to terminate its membership before the contribution becomes payable. In the case of most trade and professional associations, annual contributions are generally tax deductible by the member as a business expense.

Charitable Donation Receipts

Donations made to a registered charity or registered Canadian amateur athletic association generally entitle the individual donor to a tax credit against personal income taxes. Thus, donations to a registered charity or RCAAA are in effect a tax subsidy in which the government pays a portion of the donation (equal to the amount of the personal tax credit) made by the donor to the NFP corporation, making charitable donations a type of government funding as well.

However, less than 50% of NFP corporations qualify as registered charities and, therefore, the tax subsidy is unavailable to them. Charitable status is limited primarily by the nature of the corporation's activities.

However, where the corporation's activities are charitable in nature, the CNCA facilitates the corporation obtaining charitable status. The corporation's articles provide an essential foundation. The purposes of the corporation, as stated in the articles, must qualify as charitable. The corporation's activities must be carried on without pecuniary gain to its members. Under the CNCA, a soliciting corporation can only make a liquidation distribution to one or more qualified donees under the Income Tax Act (Canada).

Revenues/Profits from Operations

An NFP corporation can charge amounts and earn revenues for its goods and services either on a partial or full cost-recovery basis or, subject to certain tax considerations, a marginal profit basis. These revenues (or net profits) are a financing source. If the corporation also qualifies as a tax exempt registered charity, RCAAA or non-profit organization under the Income Tax Act, the retained earnings can accumulate free of income tax (which, again, acts as a source of indirect government funding).

As a matter of corporate law, an NFP corporation under the CNCA can carry on any activity that an individual (or a federal business corporation) can carry on. Thus, an NFP corporation has the flexibility to raise funds from a related business (such as a gift shop inside a museum) or fund-raising events (such as dinners or golf tournaments).

The limitations on the NFP corporation arise under the Income Tax Act. For example, a non-profit organization must be operated exclusively for non-profit purposes and its income must not be available to members. However, a non-profit organization can accumulate income as a reasonable buffer for cash-flow variance or to permit the acquisition of a capital property (such as a building or equipment) or other anticipated expenditures necessary for the corporation's purposes.

Borrowing

Under the CNCA, the rules on borrowing authority applicable to business corporations are extended to NFP corporations. Thus, directors have the default power to borrow and grant security on behalf of the corporation, subject to any contrary restrictions imposed by the articles, by-laws or, in the case of a non-soliciting corporation, a UMA. The directors may also delegate these powers to a director, officer or committee of directors.

The practical reality, however, is that commercial lenders require security for their loans. The issue becomes whether the NFP corporation has any assets that offer a commercial lender reasonable collateral for a loan.

An NFP corporation that is purchasing a building to be used in its operations (such a church, clubhouse, golf course) can provide a long-term mortgage on its real property in the same way as any other corporation. NFP corporations can also lease vehicles, computers and other durable equipment in the same way as other corporations.

However, the nature of an NFP corporation's operations do not usually lend themselves to providing security on inventory and accounts receivable and, therefore, operating loans are seldom available to NFP corporations.

As well, if the NFP corporation is a tax-exempt registered charity, RCAAA or non-profit organization, the after-tax cost of borrowing will be higher than it is for a taxable business corporation because, in the case of the tax-exempt corporation, there is no taxable income against which to deduct any portion of the interest and other borrowing costs.

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