Written by Reed Boothby
JD Candidate 2023 | UCalgary Law

 
On May 31, 2022, amendments to the Alberta Business Corporations Act (“ABCA”)[1] came into force. In line with Alberta’s Recovery Plan, the intention underlying the amendments is to attract investment and make Alberta a more appealing jurisdiction for incorporation. Three key benefits as a result of these amendments include: (1) streamlined administrative processes; (2) enhanced director and officer protections; and (3) corporate opportunity waivers.
 

1. Streamlined Administrative Processes:
   
   (a)  Shareholder Approval Requirements for Non-Reporting Issuers:
    
   There are a variety of matters specified in the ABCA that require shareholder approval by way of ordinary or special resolution. Shareholders may approve resolutions by: (1) voting at a shareholder meeting;[2] or (2) signing a written resolution.[3]
    
   Voting during a shareholder meeting was unchanged by the amendments. During a shareholder meeting, ordinary resolutions are still passed by a simple majority vote,[4] and special resolutions passed by a majority vote of not less than two-thirds of the votes cast.[5]
    
   The amendments did change the requirements to pass a written resolution, however. Prior to the amendments, written resolutions required the signature of every shareholder. If a single shareholder was unwilling or unable to sign a written resolution, the corporation was forced to call a shareholder meeting on at least 21 days’ notice (changes to notice periods are discussed below). This led to delays and an increased administrative burden on the corporation.
    
   Pursuant to the amendments, a non-reporting issuer (i.e., a private company)[6] may now pass a written resolution with the signatures of only two-thirds of the shareholders,[7] reducing the ability of any one shareholder to delay business activity.
    
   (b)  Reduced Notice Period for Shareholder Meetings for Non-Reporting Issuers:
    
   The minimum notice a non-reporting issuer is required to provide prior to a shareholder meeting has been reduced from 21 days to 7 days.[8] This change increases flexibility and enables the corporation to more quickly address issues as they arise.
    
   (c)  Electronic Signatures and Delivery by Electronic Means:
   
   A variety of changes were made to the ABCA to facilitate the use of electronic signatures and allow for delivery of documents by electronic means. For instance, security certificates may now be issued in electronic form, rather than paper.[9] Similarly, financial statements may now be signed by directors using electronic signatures, rather than requiring a wet-ink signature.[10] Furthermore, unless the corporation's bylaws or articles of incorporation indicate otherwise, any documents that must be sent to shareholders, directors or other stakeholders of the corporation may be sent by electronic means.[11]
    
   (d)  Revival of a Corporation:
    
   Corporations may be dissolved or wound-up for a variety of reasons. Prior to the amendments, the ABCA permitted the revival of a corporation within five years of its dissolution. Now, a corporation may be revived for up to 10 years after dissolution.[12] This provides interested parties with more flexibility to resume activity under a previously dissolved corporate entity.
   
   
   
2. Enhanced Director and Officer Protections:
   
   (a)  Expanded circumstances of “good faith” defense for Directors:
    
   The ABCA provides a defense wherein a director will not be liable for a breach of their duty of care if the director can demonstrate they relied in good faith on an opinion provided by a list of persons whose profession or expertise lends credibility to a statement made by that person.[13] Prior to the amendments, this list included only lawyers, accountants, engineers and appraisers. The amendments expanded the scope of this list to include employees of the corporation, meaning directors and officers may now benefit from the good faith defense by showing reliance on the opinions of employees who have credibility due to their profession or expertise.
   
   (b)  Enhanced Director and Officer Indemnification:
    
   The ABCA amendments expand the scope of director and officer indemnification. Pursuant to the amendments, directors and officers may now be indemnified with respect to:
    
        (i)    “investigative “ proceedings in addition to civil, criminal, and administrative proceedings;
        (ii)    investigations, actions and proceedings in which the director or officer is not named as a formal party but rather, is
                involved by reason of being (currently or formerly) a director or officer of the corporation.
    
   Prior to the amendments, a corporation was generally limited to indemnifying a director or officer for costs related to civil, criminal, or administrative actions or proceedings to which the director or officer was named as a formal party.
    
   Furthermore, the amendments now provide a corporation with the option to purchase directors’ and officers’ insurance benefiting directors and officers even where they have failed to act honestly and in good faith with a view to the best interest of the corporation.[14] Previously, liability caused by a director or officer failing to act honestly and in good faith with a view to the best interest of the corporation was excluded from insurance coverage.
   
   
   
3. Corporate Opportunity Waivers:
   
   As part of their fiduciary duty, directors and officers are generally prevented from personally exploiting business opportunities offered to the corporation. The amendments to the ABCA now give a corporation the option of including a “corporate opportunity waiver” (the first of its kind in Canada) within its articles of incorporation or unanimous shareholders agreement. Under a corporate opportunity waiver, the corporation waives any “interest or expectancy” of the corporation to participate in a business opportunity that has been offered to it.[15] This enables directors and officers to personally participate in a particular business opportunity they may otherwise have been prevented from participating in by virtue of their fiduciary duty.
   
   The waiver is beneficial for any directors or officers involved with multiple corporations. In particular, institutional investors, such as private equity or venture capital firms, commonly invest in multiple companies and consequently have representatives that sit on multiple boards of directors. The corporate opportunity waiver provides added certainty to these directors and officers that their actions will not violate the fiduciary duties they would otherwise owe to each individual corporation.

 
Conclusion:

The recent amendments to the ABCA make Alberta a more attractive jurisdiction in which to incorporate and operate a business by: (1) streamlining administrative processes; (2) enhancing director and officer protections; and (3) introducing a corporate opportunity waiver.

Note that a corporation's constating documents may require amendments to implement some of the changes outlined in this post. For assistance with amending constating documents, or for further information about the ABCA generally, please contact the BLG Business Venture Clinic.


[1] Business Corporations Act (Alberta), RSA 2000, c B-9. [ABCA]

[2] ABCA, s. 139.

[3] ABCA, s. 141.

[4] ABCA, s. 1(w).

[5] ABCA, s. 1 (ii).

[6] “non-reporting issuer” means a private corporation that is not required to file continuous disclosure documents pursuant to National Instrument 51-102 – Continuous Disclosure Obligations (NI 51-102).

[7] ABCA, s. 141(2.1).

[8] ABCA, s.134(1.1).

[9] ABCA, s. 48(7.1)

[10] ABCA, s. 158(1).

[11] ABCA, s. 255(5).

[12] ABCA, s. 208(1).

[13] ABCA, s. 123(3)(b).

[14] ABCA, s.124.

[15] ABCA, s. 16.1.

By Martika Ince | JD Candidate 2024, UCalgary Law
 
A social enterprise, or a benefit corporation, is one that pursues primarily social or environmental goals through an entrepreneurial structure. As social entrepreneurship gains popularity in Canada, it is crucial for entrepreneurs to be aware of and understand their options in structuring their business. This provides a brief overview of three different legal structures for those who are starting to think about how to organize their social enterprise.  
 
Registered Charity
 
Registered charities are organizations that have a charitable purpose and devote their resources for charitable activities. The Income Tax Act (ITA) provides that organizations can become a registered charity after applying and being approved by the Canada Revenue Agency (CRA).[1] The charitable purpose must fall into one or more of the following categories:
·       The relief of poverty;
·       The advancement of education;
·       The advancement of religion; or
·       Other purposes that benefit the community.[2]
 
Registered charities benefit from a general tax exemption under the ITA.[3] As a charity, you are also able to issue charitable donation tax receipts so that donors can claim tax credits or deductions for charitable gifts.[4]
 
Registered charities can generate revenue in two ways:

1. Charging fees for the charitable service provided, such as a community centre charging for their programming, and
   
2. Carrying on ‘related business’ activities, such as renting out community centre space to third parties.[5]

 
However, carrying on an unrelated business activity is grounds for revocation of charitable registration. This is an important consideration in deciding whether registered charity status is right for your social enterprise, as this rule can severely limit the organization’s activities.[6] Moreover, you may face difficulty in securing private investment as a charity. Venture capitalists and other investors are often less motivated to invest funds to support a social benefit activity that may generate a lower return than pure for-profit entities.   
 
Non-Profit Organization
 
Another structure often used for a social enterprise is a non-profit organization, which has a social benefit purpose and does not operate for profit. You can choose to operate as a non-profit after incorporating into a corporate structure. Non-profits are typically organized as a non-share capital entity to alleviate the concern that owners and shareholders are accumulating wealth.[7] As such, third parties cannot invest in the same way they would with a share capital corporation.
 
Non-profits are exempt from paying income tax, but they must fulfil certain requirements to do so.[8] A non-profit organization can generate revenue if the business is connected to its social mission. The CRA may revoke a non-profit’s tax-exempt status if it is found to carry out trade or business exclusively with a view to profit.[9]
 
The following may indicate that a non-profit is operating for profit:
·       Trade or business operating in a normal commercial manner;
·       Goods or services are not restricted to members and their guests;
·       Operated on a profit rather than cost-recovery basis; or
·       Operated in competition with taxable entities carrying on the same trade or business.[10]
 
In some cases, generating profit to be directed to a social benefit purpose can be considered a for-profit activity by the CRA, rendering the organization ineligible for the tax exemption.[11] As such, non-profit organizations are limited in the ways that they can make money.
 
Business Corporation
 
Corporations are arguably the most flexible vehicle for carrying on social enterprise. A business corporation or for-profit corporation is a legal entity that exists separately from its owners – it is treated as a natural person. Corporations can be incorporated under the Canada Business Corporations Act (CBCA) federally or under the provincial equivalents. In order to indicate your corporation is a social enterprise, you should include your social mission in your articles of incorporation or in a resolution passed by the executive board or shareholders.[12]
 
The benefits of choosing a business corporation for your social enterprise are many. You can conduct any business activities, collaborate with anyone you wish, and use the proceeds with more freedom. Business corporations also have a flexible capital structure, which can attract private investment with no formal limit on returns. If desired, share conditions can be used to establish a set percentage of earnings that will be directed to the social mission, and formal restrictions can be placed on shareholder returns.[13]
 
There are also disadvantages to consider in choosing the appropriate legal structure for your business. As corporations are not a qualified donee under the ITA, they cannot attract funding from the charitable sector. They also do not benefit from a tax-exempt status under the ITA. However, corporations can deduct a percentage of their annual income on account of charitable donations. Another disadvantage is that corporations can be perceived by the public as using the cover of a social purpose to create wealth and benefit themselves.[14] It is important to be transparent about how your social enterprise contributes to a social or environmental goal.
 
Conclusion
 
Many legal structures exist for a business, but registered charities, non-profit organizations, and business corporations are the most commonly used for a social enterprise, each with their respective benefits and disadvantages. If you have questions or require additional information about different legal structures for your social enterprise, please reach out to the BLG Business Venture Clinic.
 

​

[1] Innovation, Science and Economic Development Canada, “Start, build, and grow a social enterprise: Build your social enterprise” (26 November 2021), online: Government of Canada,  <https://ised-isde.canada.ca/site/choosing-business-name/en/start-build-and-grow-social-enterprise-build-your-social-enterprise#s2> [ISED].

[2] Ibid.

[3] Income Tax Act, RSC 1985, c 1 (5th Supp) [ITA] at s 149(1)(f).

[4] Susan Manwaring & Andrew Valentine, “Social Enterprise in Canada”, The 2012 Lexpert (Thomson Reuters Canada Ltd, 2012) [Manwaring].

[5] Ibid.

[6] Ibid.

[7] Manwaring, supra note 4.

[8] ITA, supra note 3 at s 149(1)(l).

[9] ISED, supra note 1.

[10] Ibid.

[11] Manwaring, supra note 4.

[12] ISED, supra note 1.

[13] Manwaring, supra note 4.

[14] Ibid.

Written by Charlotte Kelso
JD Candidate 2024 
UCalgary Law

Ordinary Partnerships

A partnership is a relationship between two or more people (i.e., partners) carrying on a business together with the aim of making a profit, excluding corporations.[1] A firm of any size in any industry can be classified as a partnership if it meets this definition.[2] There are three types of partnerships: ordinary partnerships, limited partnerships, and limited liability partnerships. This article focuses on ordinary partnerships, which I will refer to simply as "partnerships". In Alberta, the Partnership Act governs partnerships, with similar legislation in place across Canada.

The key risk associated with partnerships is that a partner may be personally liable for any debt or obligation that the firm is liable for.[3] For example, if the firm is in default of a bank loan, the bank can recover the debt from the partners' personal funds and assets if needed. Liability is shared amongst partners. This means that an individual partner is financially responsible for the actions and decisions of the other partners during the course of business. Given the liability risks, it is important to know if you are in a partnership.

Identifying a Partnership

To be a partnership, a business relationship between parties must meet the definition of a partnership. There are three “essential ingredients” of a partnership.[4] First, the parties must carry on a business. Carrying on a business includes the early and preparatory stages of a venture.[5] The duration of the business venture does not need to pass any certain threshold.[6] Second, the business must be carried on “in common” by the parties. In other words, they must be carrying out the same business in tandem. Finally, the business must be carried on with the aim of making a profit. Aiming to make a profit does not require that the firm actually make a profit.[7]

Whether the “ingredients” are present is determined by looking at the circumstances and facts of the relationship. Materials like business licences in the partners’ names, correspondence between the parties, and tax returns showing shared profits can point to a partnership. The parties may have an agreement in writing that they have formed a partnership. While this can be indicative of a partnership, it is not necessarily decisive.[8] A lack of evidence that the parties intended to divide profits or carry on a business together suggests that there is no partnership.[9] Where there is no written agreement, words and actions that are consistent with a partnership may establish a partnership.[10] In sum, a partnership is identified based on the circumstances of each business relationship.

Converting the Partnership to a Corporation
​
Partnerships often represent a phase in the legal structure of a business which parties may eventually wish to transition out of, especially given the liability risks of a partnership. The Income Tax Act provides an avenue for a partnership to convert to a corporation in conjunction with the wind-up process. First the partners set up a corporation for the purposes of the transition. Then the partnership transfers property to the corporation in exchange for shares. The shares are transferred from the partnership to the individual partners. Then the partnership wind-ups up. The former partners continue on their business venture under the corporation as shareholders. [11] [12] 
 


[1] Partnership Act, RSA 2000, c P-3, at s. 1(g).

[2] Ibid at s. 1(c).

[3] Ibid at s. 11(2) and 15.

[4] Spire Freezers Ltd v Canada, 2001 SCC 11.

[5] Miah v Khan, [2000] 1 WLR 2163.

[6] Supra note 2.

[7] Supra note 2.

[8] Sproule v McConnell (1925), [1925] 1 DLR 982, 19 Sask LR 319.

[9] Big Bend Construction Ltd v Donald, 1958 CarswellAlta 33, 25 WWR (ns) 281.

[10] Sabbaugh v Rawdah, 1978 CarswellAlta 409, 16 AR 326.

[11] Income Tax Act, RSC 1985, c 1, s. 85(2).

[12] Tingle, B. C.  Start-Up and growth companies in Canada - a guide to legal and business practice (3rd ed.). LexisNexis Canada Inc, p. 36.