Powers of a CNCA Corporation, and the Restrictions that Apply

The purpose of this post is to briefly explain how the Canada Not-for-profit Corporations Act ("CNCA") treats the capacities and powers of a corporation and what restrictions apply.

It is necessary to distinguish among (1) capacity and powers (which are essentially unlimited under the CNCA), (2) the purposes of the corporation (which must be set out in the articles of the corporation) and (3) and self-imposed restrictions on the corporation that may be set out in its articles.

Capacity and Powers of a CNCA Corporation

A corporation formed under a Special Act or a registration statute had a statement of objects and powers. In the case of a not-for-profit ("NFP") corporation, the function of the objects clause was to protect members and donors by allowing them to know the objects for which their contributions would be used and to, a lesser extent, protect creditors by ensuring that the funds of the corporation were not dissipated in unauthorized activities. This was known at common law as the ultra vires doctrine. It meant that any activity of the corporation not expressly or implicitly authorized by its objects clause was beyond the powers of the corporation and, therefore, absolutely void and of no effect.

So long as the ultra vires doctrine applied, it created traps for the unwary who wished to transact business with the corporation.

Section 16 of the CNCA states that a CNCA corporation has the capacity and the rights, powers and privileges of a natural person (that is, an adult of full mental capacity). The Supreme Court of Canada has held that this language is effective to abolish the ultra vires doctrine. Moreover, the CNCA generally abolishes the ultra vires doctrine for all federal NFP (or non-share capital corporations) formed by Special Act.

Statement of Purpose in a Corporation's Articles

As stated, the CNCA requires that every CNCA corporation include a statement of purpose in its articles (whether articles of incorporation, articles of continuance or articles of amalgamation). However, it is clear that the statement of purpose in the corporation's articles does not operate to invalidate activities carried on by the corporation outside the activities contemplated in the corporation's statement of purpose.

One might be forgiven for thinking that the statement of purpose takes the place of a corporation's objects clause. However, the statement of purpose does not give rise to an express or implied ultra vires limitation in another guise. The statement of purpose does not in any way qualify the capacity and powers of a CNCA corporation as set out in s. 16 of the Act.

Voluntary Restrictions in the Articles

If a CNCA corporation wants to restrict its activities in some way, the place to do so is in the articles. The CNCA gives the corporation the option to adopt restrictions on its activities. These restrictions must be set out at the appropriate place in the articles (Box 5 in Form 4001 - Articles of Incorporation, or Box 7 in Form 4031 - Articles of Continuance). No CNCA corporation is required to include restrictions.

If the corporation chooses to adopt restrictions, how do they work? Restrictions do not work like the ultra vires doctrine, which resulted in unwelcome surprises for those transacting business with the corporation.

Instead, under the CNCA, they work as follows. First, the corporation is prohibited from carrying on any activities or exercising any powers in a manner contrary to restrictions set out in its articles. However, this prohibition does not render invalid acts of the corporation (or transfers of property by the corporation) that are contrary to the restrictions. Furthermore, with two limited exceptions, the corporation cannot assert against any person dealing with the corporation that it has not complied with its articles. This does not apply to a person who has actual knowledge of the restriction, such a lender who has obtained a copy of the articles as a condition of opening a bank account for, or extending credit to the corporation. Nor does it apply to a person who ought to have knowledge of the restrictions - which typically would cover insiders such as directors, officers and members. Instead, a member, director or creditor aggrieved by the corporation's non-compliance with its articles can apply for a compliance or restraining order under the Act.

Why would an NFP corporation choose to adopt voluntary restrictions in its articles?

An NFP corporation may wish to adopt restrictions to reinforce its mission or purpose. For example, the Canadian Cancer Society restricts itself from investing any surplus funds in companies that manufacture or sell tobacco products. The articles of an industry trade association might wish to reinforce the fact that its purpose is not to fix prices or otherwise restrict competition in any way. While this will not protect the association or its members if they in fact engage in anti-competitive activity, the statement of restrictions may help to remind present and future members, directors and officers that there are boundaries beyond which the association and its members cannot stray.

Restrictions Imposed by the Income Tax Act

If an NFP corporation is a registered charity or a tax-exempt non-profit organization ("NPO") under the Income Tax Act, further restrictions apply. However, these are tax restrictions and do not have the character of restrictions at corporate law. The tax status of the corporation is conditional on abiding by the Income Tax Act.

Thus, for example, a registered charity may have its charitable status revoked by the Canada Revenue Agency if the corporation fails to devote its resources to its charitable purposes and activities. Likewise, an NPO can lose its tax-exempt status if it operates otherwise than exclusively for its non-profit purpose or if its income is distributed or made available to members.

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