What Are the Financial Reporting Obligations for Nonprofit Corporations Under the ONCA?

Under the ONCA, nonprofits must prepare financial statements and may need to appoint an auditor or conduct a review engagement depending on their revenue and type.

Understanding the financial reporting obligations of not-for-profit corporations can be complex, especially with new regulations introduced by the Ontario Not-for-Profit Corporations Act (ONCA). Let's break down these obligations to make them clear and easy to understand.

What Is the ONCA?

The Ontario Not-for-Profit Corporations Act (ONCA) is a set of laws in Ontario, Canada, that governs how not-for-profit corporations operate. It introduces several new rules and flexibilities regarding financial reporting.

Why Is Financial Reporting Important?

Financial reporting is crucial for transparency and accountability. It ensures that members and stakeholders know how the corporation's money is being used. This builds trust and helps in making informed decisions.

Who Needs to Appoint an Auditor?

Under the ONCA, at each annual meeting, the members of a not-for-profit corporation must appoint an independent auditor. However, there are exceptions to this rule based on the type of corporation and its revenue.

What Is a Review Engagement?

A review engagement is a type of financial review that is less thorough than an audit but more extensive than no review at all. It is usually cheaper than an audit.

When Can a Corporation Waive an Audit?

Some corporations may not need a formal audit or even a review engagement. This depends on the corporation’s annual revenue and whether it is classified as a public benefit corporation or a non-public benefit corporation.

What Are the Different Types of Corporations Under the ONCA?

1. Public Benefit Corporations (PBCs): These are organizations that operate for the public good, such as charities.
2. Non-Public Benefit Corporations: These are not considered public benefit corporations and may have different financial reporting obligations.

How Does Revenue Affect Financial Review Requirements?

The amount of revenue a corporation earns each financial year determines the type of financial review it needs. Here’s a simple breakdown:

1. Public Benefit Corporations (PBCs)
   
   • Revenue of $100,000 or less: Can waive both an audit and a review engagement (needs approval).
   • Revenue more than $100,000 but less than $500,000: Must have a review engagement (can waive audit with approval).
   • Revenue of $500,000 or more: Must have an audit.
2. Non-Public Benefit Corporations
   
   • Revenue of $500,000 or less: Can waive both an audit and a review engagement (needs approval).
   • Revenue more than $500,000: Must have a review engagement (can waive audit with approval).

What Is an Extraordinary Resolution?

An extraordinary resolution is needed to waive an audit or both an audit and a review engagement. This requires approval from at least 80% of the votes cast at a special members' meeting or if all voting members consent in writing.

What Are the Annual Financial Statement Requirements?

Members of the corporation are entitled to receive financial statements annually. These statements must be approved by the directors, and if there is an audit committee, they must review them first. After approval, the financial statements are presented to the members at the annual meeting.

The ONCA provides more flexibility for not-for-profit corporations regarding financial reporting. Understanding whether your corporation needs an audit, a review engagement, or can waive these requirements is crucial for compliance and effective financial management. By following these guidelines, not-for-profit corporations can ensure they meet their financial reporting obligations while maintaining transparency and accountability.

Understanding the ONCA and Not-for-Profit Corporations

The Ontario Not-for-Profit Corporations Act (ONCA) sets rules for how not-for-profit corporations are structured and governed. It defines types of corporations and their roles, especially regarding financial reporting and accountability.

Understanding these distinctions is important for compliance and effective management.

Purpose of the Not-for-Profit Corporations Act

The ONCA replaced the earlier Corporations Act to modernize and clarify rules for not-for-profit corporations in Ontario. Its main goal is to improve transparency, accountability, and governance while giving corporations more flexibility.

The Act applies to most not-for-profit corporations incorporated under Ontario law. It helps organizations comply with financial and legal requirements and operate responsibly.

By setting clear rules about financial reporting and board responsibilities, the ONCA supports good management and public trust.

Types of Not-for-Profit Corporations

The ONCA distinguishes two main types of not-for-profit corporations:

• Public Benefit Corporations (PBCs)
• Non-Public Benefit Corporations

Public Benefit Corporations operate for the public good, like charities and organizations serving the community. Non-Public Benefit Corporations usually serve private or member-focused purposes and may have different reporting needs.

This distinction affects which financial rules apply. PBCs usually face stricter reporting requirements because they often receive donations or public funds.

Non-PBCs often have more lenient financial obligations, depending on their revenue.

Distinction Between Charitable and Non-Charitable Corporations

Under the ONCA, not-for-profit corporations can be either charitable or non-charitable. Charitable corporations are a subset of public benefit corporations.

Charitable corporations use their resources exclusively for charitable purposes, such as helping the poor, advancing education, or promoting health. Non-charitable corporations may serve a public benefit but do not qualify as charities.

They might focus on broader social causes without official charitable status. This difference affects their financial reporting.

Charitable corporations must follow both ONCA rules and additional regulations from the Canada Revenue Agency. Non-charitable corporations under ONCA may have simpler reporting but still need to maintain transparency with their members.

Key Financial Reporting Requirements Under the ONCA

Nonprofits must prepare, share, and keep financial information according to specific rules. These rules ensure accountability and help members understand the corporation’s financial health.

Proper handling of financial documents strengthens trust and compliance.

Preparation and Delivery of Financial Statements

Nonprofits must prepare financial statements for each fiscal year. These statements must show the financial position, including assets, liabilities, revenues, and expenses.

The statements should follow recognized accounting standards. The board of directors must approve the financial statements before presenting them to members.

If there is an audit committee, it should review the statements first to ensure accuracy. Depending on revenue and type of corporation, an audit or a review engagement may be required.

Smaller organizations under certain thresholds can sometimes waive these requirements with member approval.

Distribution to Members and Annual Meeting

Nonprofits must provide financial statements to all members before the annual meeting. This allows members to review the financial status before discussing it at the meeting.

At the annual meeting, members vote on accepting the financial statements. If audits or review engagements are waived, this decision requires an extraordinary resolution with at least 80% member approval or unanimous written consent.

Access to Financial Records

Members have the right to access financial records. Nonprofits must keep these records organized and available during reasonable hours.

Access allows members to verify accuracy and ensures accountability. Governing documents may set rules about how and when this access is granted.

Nonprofits must also keep proper records to comply with ONCA and any funding agreements that require audited statements. This practice supports good governance and compliance.

Public Benefit Corporations: Criteria and Special Rules

Not all nonprofits are treated the same under the ONCA. Some have specific financial reporting rules because of their public roles or funding sources.

Understanding what makes an organization a public benefit corporation helps clarify the obligations it faces.

Defining Public Benefit Corporations

A public benefit corporation (PBC) is a specific type of nonprofit under the ONCA. To qualify, a corporation must be a charity or receive more than $10,000 annually from public sources like government grants or donations from outsiders.

This includes funding from the federal government, provincial authorities, or municipalities. PBCs serve the public good, focusing on charitable purposes such as alleviating poverty, advancing education, or supporting religion.

The ONCA separates PBCs from non-public benefit corporations, which do not meet these criteria and may have different rules.

Implications for Charities and Non-Charity Nonprofits

Charities automatically fall under the public benefit corporation category because their work benefits the public. They often have stricter financial reporting rules due to their charitable status.

Non-charity nonprofits can be considered PBCs if they get significant public funding or donations, even if they are not classified as charities. These organizations must follow similar reporting rules to charities because of their public funding.

Both charities and these funded nonprofits must follow stricter requirements under the ONCA to ensure proper use of public resources. Their revenue size affects whether they need audits or review engagements.

Distinction from Other Not-for-Profit Corporations

Not all nonprofits are public benefit corporations. Those that do not meet the charity definition or the public funding threshold are classified as non-public benefit corporations.

These have more flexible financial reporting requirements. Under ONCA, non-public benefit corporations with revenue below $500,000 can waive audits and reviews with membership approval.

This flexibility differs from PBCs, which have stricter rules based on smaller revenue limits. For PBCs, no more than one-third of directors can be employees, which helps keep control independent and maintains public trust.

These governance and financial rules mark a clear difference between PBCs and other nonprofits.

Audit and Review Engagements: When Are They Required?

Nonprofits need to know when audits and review engagements are necessary under the ONCA. The rules depend on revenue, type of corporation, and decisions made by members.

Specific voting requirements exist to waive certain reports.

Thresholds for Audits and Reviews

The need for an audit or review engagement depends on the nonprofit’s yearly revenue and whether it is a public benefit corporation.

• Public benefit corporations
  
  
  • Revenue over $500,000: Audit required.
  • Revenue between $100,000 and $500,000: Review engagement allowed.
  • Revenue below $100,000: Both audit and review engagement can be waived.
• Non-public benefit corporations
  
  
  • Revenue under $500,000: Both audit and review can be waived.

These thresholds guide when a full audit is mandatory or when a review engagement suffices. Funders may still require an audit regardless of ONCA rules.

Review Engagement Versus Audit

An audit is a detailed, independent check of a nonprofit’s financial records. It is thorough but more time-consuming and expensive.

A review engagement is less detailed and less costly. A certified public accountant performs it and provides limited assurance rather than full assurance.

Review engagements provide a middle ground for smaller nonprofits that want financial scrutiny but need to reduce costs. Both require an independent accountant and proper financial documentation.

Extraordinary and Ordinary Resolutions for Waivers

Nonprofits can waive audits or review engagements by passing specific member votes at meetings.

• Extraordinary resolutions require at least 80% approval by members voting.
• These resolutions are needed to waive audits or review engagements yearly and must be renewed at each annual meeting.

If members do not approve the waiver, the nonprofit must conduct the appropriate audit or review. An ordinary resolution, needing a simple majority, is not enough to waive these financial obligations.

Transitioning to ONCA: Compliance and Key Deadlines

Transitioning to the ONCA requires meeting deadlines and updating important documents. Keeping these timelines in mind helps avoid penalties and ensures smooth operation.

Transition Period and Timelines

The ONCA came into force on October 19, 2021. Not-for-profit corporations have a three-year transition period ending October 18, 2024.

During this time, organizations must review and adjust their governance to comply with the new rules. After the deadline, corporations that have not completed the transition may lose legal protections under the ONCA.

It is vital to complete all changes before the cutoff date. Organizations can check their progress using resources from ServiceOntario and Ontario government websites.

Timely action ensures compliance with ONCA standards and prevents disruption to operations or legal standing.

Updating By-Laws and Governing Documents

To comply with ONCA, organizations must revise their by-laws and other governing documents. These updates reflect changes in corporate powers, membership rules, and financial reporting obligations.

Draft, approve, and file amendments according to ONCA standards, usually with ServiceOntario. Updated by-laws should include provisions such as:

• Member rights and meeting rules
• Director roles and election processes
• Financial transparency requirements

These changes take effect once approved by members, typically by an extraordinary resolution or majority vote, depending on the amendment.

Consequences of Non-Compliance

Failing to transition before October 18, 2024, can lead to serious consequences. Non-compliant corporations might lose protection from certain legal liabilities and the ability to enforce contracts under ONCA.

Invalid governing documents can affect the ability to operate, raise funds, or enter agreements. Penalties or legal disputes could arise from outdated or missing filings.

The Ontario government may also impose fines or sanctions. To avoid these issues, organizations must act promptly, complete all required updates, and keep documentation current through ServiceOntario filings.

Oversight, Enforcement, and Special Cases

Directors and officers are responsible for overseeing financial reporting and ensuring compliance under the ONCA. Some exceptions exist, such as co-operative corporations and social clubs, and special government offices supervise certain nonprofits.

Role of Directors and Officers

Directors and officers must ensure that financial statements are prepared, approved, and presented to members annually. They must maintain accurate records and make sure the organization follows audit or review requirements based on revenue and corporation type.

They have a duty to act in the best interest of the corporation, being honest and careful when handling finances. If there is an audit committee, directors must ensure the committee reviews statements before approval.

Failure to meet these duties can result in legal consequences for directors and officers personally.

Exceptions: Co-Operative Corporations and Social Clubs

Not all organizations follow the same rules. Co-operative corporations and social clubs often have different financial reporting requirements.

Co-operatives are regulated by their own specific legislation. They may not need to follow all ONCA financial rules.

Social clubs are not-for-profits created mainly for members’ social interests. They may also have exemptions from certain requirements.

Usually, social clubs do not need strict audits or review engagements unless their revenue exceeds certain thresholds. They may also need to comply if they choose to become public benefit corporations.

Understanding these exceptions helps you avoid unnecessary steps.

Supervision by the Office of the Public Guardian and Trustee

The Office of the Public Guardian and Trustee (OPGT) oversees some nonprofits, especially public benefit corporations. This office ensures that charities and other public benefit organizations use funds properly and follow Ontario’s legal requirements.

The OPGT reviews financial reports and intervenes in cases of misconduct. The office can also take legal action if necessary.

They provide guidance and support to directors and officers about their duties. This supervision protects donors and the public by promoting transparency and accountability.

Conclusion

Clear financial reporting under the ONCA is important for nonprofit corporations. Knowing when to conduct audits, review engagements, or seek waivers keeps your organization compliant and trustworthy.

If you have questions or need guidance on your financial reporting, contact us at B.I.G. Charity Law Group. Email us at dov.goldberg@charitylawgroup.ca or call 416-488-5888.

Visit CharityLawGroup.ca for more information. Schedule a FREE consultation to discuss your specific needs.

We are here to help you navigate ONCA requirements with confidence.

Frequently Asked Questions

It is important to understand the rules that govern nonprofit corporations under ONCA. This includes the legal framework, financial responsibilities, and the roles of directors and members in financial reporting and approval.

What is the ONCA law in Ontario?

The Ontario Not-for-Profit Corporations Act (ONCA) is legislation that regulates how nonprofit corporations operate in Ontario.

It sets updated rules for governance, financial reporting, and transparency. These rules improve accountability within nonprofit organizations.

What are the new rules for nonprofit organizations in Ontario?

ONCA introduces clearer financial reporting requirements. Nonprofits can choose audits or financial reviews based on revenue levels.

Nonprofits must follow specific procedures for appointing auditors or waiving audits. Members must approve these changes.

What are the responsibilities of directors on a not-for-profit corporation in Ontario?

Directors must keep accurate financial records and prepare yearly financial statements. They also review and approve the financial statements before presenting them to members.

What financial reports must nonprofits prepare under the ONCA?

Nonprofits must prepare annual financial statements. These statements may need an audit or review, depending on revenue and type.

The financial statements must clearly show the corporation’s financial position. Members must have access to these statements.

Who is responsible for approving nonprofit financial statements?

The board of directors approves the financial statements after reviewing them. If there is an audit committee, it must review the statements before the board’s approval.

Are audits required for nonprofit corporations under the ONCA?

Public benefit corporations with revenues over $500,000 must have audits.

Nonprofits with lower revenues can choose a review engagement. Members can also approve an extraordinary resolution to waive both the audit and review.