Industry Committee on March 12th, 2009

[Wayne Gray]

In the longer brief, we excerpt the statutory language.

[A voice]

It's in the recommendations.

[David Stevens]

On page 9 of the executive summary in the English version, recommendation 25, the statutory language is set out. It's a long description of a very simple idea and it's the idea I presented, which is that there's no liability and absolute immunity for any harm caused by a fault that doesn't have any bad faith in it. We think a rule like that, an immunity, will cause a lot of very good people to step up and volunteer to be directors, because that's the exposure they're typically worried about; that exposure can lead to long litigation with no positive result with a lot of cost.

These directors, as I think you're saying in your question, are not typically compensated in the non-profit sector. They're acting as volunteers, yet if we leave this in place they're taking on huge personal exposure. They're not like the directors of a public corporation who receive compensation, options, shares, etc. They're non-compensated. So we think that'll cause very good people to step forward and act on a more regular basis as volunteer directors of non-share capital corporations.

I think the other point is if the corporate legislation can make things easier and cheaper to reduce the compliance burden on non-share capital corporations, if the organizing statute, this statute, is easy enough for your average layperson to look at and read, if they want to know about directors they go to the section of the statute that lists all the rules about directors. If the statute is well expressed, well structured, and the rules are accessible, then they're going to have a much easier time complying, and they're going to see some very straightforward rules that correspond to what they expect the rules to be.

They don't have that facility now with the current law. The current law is almost impossible to read. As a lawyer, every time I have to go to that statute, I have to look at an index, which is from 1996. Then I have to make sure I haven't missed something in the old statute.

So just putting this new legislation in place facilitates the sector by giving them a legal infrastructure that'll allow them to operate on a daily basis in a much simpler fashion.

Under the old statute, if they're missing something legal, and if, for three or four years they haven't done something they're supposed to do, that could lead to intractable legal problems. One day when it surfaces--they need insurance, or they have to submit something to somebody--a lawyer could tell them they have all kinds of legal problems that have to be fixed, which would impose costs on them. But if you have a nice, simple statute that they can use, that will reduce the costs.

[Jim Maloway, NDP, Elmwood—Transcona, MB]

When you researched this, did you discover why Saskatchewan took this approach? Was there a problem?

[David Stevens]

I've done a bit of reading on it. There's Nova Scotia as well. It's for the reasons that I think we said.

[Wayne Gray]

The Saskatchewan Law Reform Commission came out with a study recommending that there be an immunity for directors. That's where it started. They looked at U.S. models. Nova Scotia has also done it with the Volunteer Protection Act. Nova Scotia has a different model. We're not recommending that one. Saskatchewan has a very good model.

[Jim Maloway, NDP, Elmwood—Transcona, MB]

But is there a model proposed anywhere where it would be absolute, where you could have a no-fault system?

[Wayne Gray]

But would you want that? For example--

[Jim Maloway, NDP, Elmwood—Transcona, MB]

I would.

[Wayne Gray]

Take such things as withholding taxes, and employment insurance, and Canada Pension Plan--for all those remittances, there should be no immunity for that. No one would seriously propose that there should be immunity for those types of things. Financing a not-for-profit corporation with that money is not on.

For things like fraud or breach of fiduciary duty or self-dealing involving taking money out of the corporation, no one would suggest that the perpetrators be immune from liability. So we're only talking about misfeasance.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Maloway and Mr. Gray.

Mr. Garneau.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you, Mr. Chair.

First, I'd like to commend both groups for spending so much time going over this complicated legislation and for coming up with something that certainly appeals to me personally, which is to simplify it wherever possible.

I only have one question, and it deals with what in your executive summary--in your parts I and II--where you're essentially saying that parts 6 and 7 could be deleted in favour of using provincial and territorial acts to cover those.

Are we saying here that with regard to the issues that parts 6 and 7 deal with, it is possible to use one or the other, and it's not necessary to do both? Or do you always have to, in any case, deal with the provincial or the territorial side of things?

[Wayne Gray]

The answer is that you don't have to do both, and you shouldn't do both. There are already securities transfer laws passed recently in the various provinces, starting in 1990, and in 2007 in Ontario and Alberta. All the other provinces have now come on board, except for a couple of maritime provinces and the territories.

Securities transfers are dealt with as property. They're instruments or property transferred in the system. As with personal property security laws, that's provincial law.

This bill proposes to take a part of that, a slice of the not-for-profit corporations, and treat that as federal law. Transferable membership interests remain in provincial law, but these transferable debt obligations of federal instruments--you wouldn't even be able to know that it is a federal issuer of this debt obligation, since it has the same name as a provincial one--are going to be treated both under this federal law and under the more modernized provincial law, which makes no sense.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

I have one follow-up question. If we go ahead with this, how does one decide, if one is dealing with a national not-for-profit corporation, which province's act applies? Or is it evident in each case which province you refer to?

[Wayne Gray]

That's an excellent question. The answer is that the laws in the provinces that have passed personal property securities legislation state that, for a federal corporation, the applicable provincial or territorial law relates to the province in which it has its registered office. It's a default rule that is provided there.

It also says that you can change it to any other jurisdiction you want. Even if your registered office is in one jurisdiction, you could put it another jurisdiction.

One of our more detailed recommendations is to put a provision in the act that gives the maximum flexibility to the corporations to choose the law of the jurisdiction of their choice to govern their securities transfers.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Garneau.

Madam Coady, did you have any follow-up questions?

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

No. All my questions have been answered. Thank you.

[The Chair, Conservative, Michael Chong]

Mr. Bouchard or Mr. Vincent, do you have any questions?

[Robert Vincent, Bloc, Shefford, QC]

I'd like to take my turn.

My question is one I have asked everyone who has appeared before us recently. The new bill does not contain anything defining what a not-for-profit corporation is. People can say whatever they like, they don't even have to say anything, because they don't need a definition in section 4.

The minister told us that it had become easy to create non-profit corporations, there are far fewer hurdles to overcome to form such an organization. If someone applies to create a not-for-profit corporation, he can get authorization to set it up without having to define its precise purpose.

Witnesses have since told us that, if a body has an operating budget of less than $25,000, no investigation is made and no one will audit the books. Awhile ago, I understood that, if a not-for-profit corporation ceases to exist, the assets can be redistributed to the members or to the corporation without share capital. The money can be taken back.

If someone wants to launder some money, he can take the $25,000 and do what he wants with it, since there won't be an audit. If he dissolves the corporation, he can distribute the money to the members, if there are any. If he is the only one occupying all the positions, he takes the money back and that's that, no one will audit his books.

Could this sort of situation arise?

[Wayne Gray]

It could happen theoretically, but they would never choose this statute in order to do that. Why not use a business corporation statute where there's an unlimited amount? There's no audit requirement for a business corporation statute and there's no monetary threshold. A private business corporation could be used, and you can go under any province federally.

The reason you'd never want to use this statute is that the promoters of the corporation, as Mr. Stevens explained, can receive no benefit until it liquidates. You're not going to set up this type of corporation in order to receive a benefit, because the statute prohibits you from receiving a benefit until it liquidates.

If that's a problem—I don't really think it is, frankly—it's not with this statute. It's really an irrelevant point.

[Robert Vincent, Bloc, Shefford, QC]

Mr. Stevens, I'd like to hear your opinion concerning this same principle. According to your explanations of awhile back, if the corporation is closed, the money is distributed. If it is less than $25,000, no one audits the books. Who knows where this money comes from, if there is no audit for amounts less than $25,000?

I'd also like to have your opinion on this, Ms. Presseault.

[David Stevens]

It could happen.

My first answer is that answer, is Mr. Gray's answer. But another approach is that if they want tax treatment as a non-share capital corporation, a non-profit corporation, they're going to have to file tax returns. They're going to be on the tax system's radar screen. If it's in Quebec, they'll be filing with the Ministère du revenu, and also federally, because they want the tax-exempt status of a non-share capital corporation. They'll be on that radar screen. They'll be caught up--not caught, but caught up--in the regulatory regime that applies to money laundering, and maybe they can work their way around it. That's a possibility.

However, you're right; it could happen. At that level of income or contribution, if there's no audit, it could be used for that purpose.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Likewise, if I receive $25,000 and I don't spend a penny of it during the year, I won't have to declare any income because I won't have done anything with this money. If I dissolve the corporation and redistribute the money there is no record anywhere.

[Carole Presseault]

Mr. Vincent, I don't have much to add. It's true that such a situation might arise. We assume that people are smarter than that, obviously.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

There are people a lot smarter than that too for money-laundering.