Liquidation Distributions by CNCA Corporations

The liquidation distribution rules applicable to a not-for-profit corporation, together with the prohibition against a distribution before liquidation or dissolution, is what fundamentally distinguishes NFP corporations from for-profit corporations. A for-profit corporation is intended to make a profit for its shareholders. Before dissolution, the shareholders receive this profit in the form of a dividend (or, in some cases, a repurchase of shares). On liquidation, any remaining property, after satisfying all debts and liabilities of the corporation, are distributed to the shareholders. In contrast, an NFP corporation is prohibited from distributing its surplus revenues or property before dissolution. On liquidation or dissolution, the corporation may distribute its remaining property in accordance with the distribution scheme of the legislation and, to the extent permitted, in accordance with the provisions of its articles.

1. Prior Claims

If a person has transferred property to the corporation on condition that it be transferred back on dissolution of the corporation, the liquidator's first priority is to transfer that property back to the original transferor. Also, the liquidator must discharge the liabilities of the corporation before distributing its residual property. These provisions apply to all types of NFP corporations under the Canada Not-for-profit Corporations Act.

2. Distributions of Residual Property

The Act makes a critical distinction between two types of corporations for purposes of the distribution of residual property on liquidation:

● corporations that may, for convenience, be called "extended soliciting corporations" which are restricted to distributing residual property to qualified donees under the Income Tax Act; and

● all other corporations, which are here called "other corporations". The Act does not restrict to whom these corporations may distribute their residual property (although the Income Tax Act could restrict the distribution of surplus gains to members if the corporation qualified as a non-profit organization under the Income Tax Act).

3. Extended Soliciting Corporations

(a) Meaning

An extended soliciting corporation is a soliciting corporation, a registered charity or corporations that would have been soliciting corporation if a look-back period of five years (rather than the usual three years) were applied.

Under the CNCA, the definition of "soliciting corporation" is based on whether aggregate receipts from a short-list of public sources during a financial period are in excess of $10,000. If a corporation's revenues from public sources exceeds $10,000 in, say, 2019 (FY1), the corporation would be a soliciting corporation commencing at its next ensuing annual meeting (held in 2020 or FY2) and ending (unless extended by its revenues in a subsequent financial period) at the annual meeting held three years later (i.e., in 2023 or FY5). In effect, this low financial threshold comprises a de minimus exemption. It is designed to filter out the inadvertent capture of corporations that do not receive significant public funds. The annual period to calculate revenues strikes a balance between continuity for an organization over time and flexibility where its funding sources have permanently changed.

The funding sources that determine whether a corporation is soliciting are:

(i) donations or gifts from persons who were, at the time of the request, public donors (i.e., more specifically, donors who are not members, directors, officers or employees of the corporation at the time of the funding request or persons who are related by blood, marriage or cohabitation arrangement to such persons);

(ii) grants or similar financial assistance from governments or governmental agencies (whether federal, provincial or municipal); and

(iii) donations or gifts from conduit entities (i.e., other soliciting corporations or other entities that have received funds in excess of $10,000 in their previous financial period from these same sources).

Funding source (c) is primarily intended to capture indirect funding from public sources, i.e., funds received through a conduit that is itself publicly funded (such as the United Way).

A donation from a person who is not an existing member at the time of the funding request, but who, in accordance with the articles or by-laws governing admission of members, becomes a member as a result of making a donation, is to be included in calculating the receipt of public funds. However, a donation from, or membership contributions or dues payable by, an already existing member do not count in determining the receipt of public funds. Similarly, unsolicited donations (such as a gift left to the corporation under a will) do not count in determining the amount of public funding.

Not all revenues received from governmental sources are included in calculating the receipt of public funds. For example, if the government pays for services or goods of the corporation at market rates, the payments would not be grants or similar financial assistance.

The test for determining whether a corporation is a "soliciting corporation" is effectively applied on the last day of its financial year-end. Thus, for example, assume that the financial period of corporation C ends on December 31 each year and that it only receives $6,000 in public funds on December 15, 2019 and a further $6,000 in public funds on January 15, 2020. C will not become a soliciting corporation by virtue of these receipts, because in no financial year did its receipts of public funds exceed $10,000. On the other hand, if C receives $6,000 on January 15, 2019 and a further $6,000 on December 15, 2019, it would become a soliciting corporation from the close of its 2020 annual meeting through to its 2023 annual meeting. A non-soliciting corporation becomes a soliciting corporation at the first annual meeting held after the financial period in which its revenues from public sources exceed $10,000.

An extended soliciting corporation can be considered as adopting the same general definition as a soliciting corporation, subject to two extensions. First, irrespective of the level of receipt of annual donations or public funding as described above, a CNCA corporation that is a registered charity under the Income Tax Act is subject to the same restrictive distribution rules as apply to a soliciting corporation. Every registered charity is listed on the website of the Charities Directorate of Canada Revenue Agency.

Second, the look-back rule for determining an extended soliciting corporation is extended to five years from the date of distribution of property remaining on liquidation. That is, to determine whether a corporation is subject to the more restrictive distribution regime, it is necessary to determine if, in any financial year ending five years before the distribution of the remaining property, the corporation received in excess of $10,000 in public revenues (defined in the usual way for soliciting corporations). Suppose, for example, that the corporation has a calendar year end and is making a liquidation distribution in November 2018. It will be subject to the restrictive distribution rule if it was a registered charity or if it was a soliciting corporation at any time after November 2013.

(b) Distribution to One or More Qualified Donees

If the corporation is an extended soliciting corporation, then its remaining property, after satisfying the prior claims described at Part 2 above, must be distributed to one or more qualified donees within the meaning of the Income Tax Act. The articles may further limit the pool of potential recipients of its residual property, as long as they are limited to qualified donees. The articles may not provide for a recipient outside the qualified donee pool. However, even if the articles are silent or provide for distribution to a person other than a qualified donee, the liquidator can only make a distribution of residual property to qualified donees or to those qualified donees set out in the articles.

Qualified donees under the Income Tax Act consist of the following:

● registered charities;

● registered national arts service organizations;

● registered Canadian amateur athletic associations;

● registered housing corporations resident in Canada set up exclusively to provide low-cost housing for the aged;

● the Canadian federal government or the government of a Canadian province or territory;

● Canadian municipalities (if registered);

● registered municipal or public bodies forming a governmental function in Canada;

● the United Nations and its agencies;

● registered universities outside Canada, the student body of which ordinarily includes Canadians; and

● registered charitable organizations outside Canada to which the Canadian federal government has made a gift in the donor's taxation year or in the 12 months before that period.

4. CNCA Corporations Other than Extended Soliciting Corporations

The restrictive regime described at Part 3(b) above does not apply to corporations other than extended soliciting corporations. For corporations not subject to the restrictive regime, the liquidation distribution is, subject to the prior claims described at Part 2 above, made in accordance with the corporation's articles. If the articles are silent, the default rule for a corporation not subject to the restrictive regime is that the net assets (subject as always to the prior claims) are distributed on a per capita basis to the members at the time of liquidation. Therefore, each member receives an equal share of any distribution of the net assets.

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