An In-depth Look at Nova Scotia’s New Community Interest Companies

Earlier this month, Nova Scotia announced the coming into force of the long awaited Community Interest Companies Act (“CICA”).  This new law allows new and existing businesses incorporated under the Companies Act (Nova Scotia) (“CA”) to apply for designation as a Community Interest Company (“CIC”).  Following the model used in BC’s Business Corporations Act for Community Contribution Companies (“C3s”) and the UK’s Companies (Audit, Investigations and Community Enterprise) Act for its CICs, the CICA provides a governance framework for social enterprises incorporated in Nova Scotia. 

Below is a description of the features of Nova Scotia’s CICs and a summary of the requirements for designation under the new legislation and its Regulations.

Features

As a hybrid corporate vehicle, CICs combine certain characteristics of for-profit businesses with the social purpose nature of non-profit entities.

            Business Activities

Under the CICA, CICs, like any other business corporation, are permitted to engage in their activities with a profit motive and are established with share capital.  The latter feature specifically distinguishes CICs from registered charities and non-profit organizations.

            Community Purpose

CICs must have a community purpose.  The CICA defines “community purpose” as a purpose beneficial to:

1. society at large; or
2. a segment of society that is broader than the group of persons who are related to the CIC.

Importantly, a CIC may not carry on any of its activities with a political purpose.  Unfortunately, “political purpose” has not been defined in either the CICA or its Regulations.  We query whether Nova Scotia will turn to the Canada Revenue Agency’s definition of “political activities” in determining whether a CIC is offside this prohibition.  

            Shares

The most obvious business-like feature of a CIC is its ability to issue shares to shareholders.  This makes CICs attractive as a way for people to invest in community projects and receive a return on their investment (“ROI”).  Importantly, however, as described below, there is a limit to the ROI that shareholders (and debtholders) may receive.

            Cap on ROI

Investors may invest in a CIC by purchasing shares or providing the CIC with a loan.  What makes a CIC different from a typical business corporation, however, is that CICs are restricted on the annual amount of dividends that they may declare on their shares or the amount of interest that they may pay under their debentures. This effectively places a cap on their investors’ annual ROI. 

Under the Regulations to the CICA, the maximum aggregate dividend that a CIC may declare on its shares (less the amount of any exempt dividends) as an amount equal to 40% of its distributable profits.  The Regulations define an exempt divided is a dividend declared on shares held by, or on behalf of, a qualified entity.  A qualified entity is described below.

Where a debenture has been issued by a CIC, the interest payable under the debenture in a  given year may not exceed 15% of the average amount of the CIC’s debt or the sum outstanding under a debenture issued by the CIC during the 12-month period immediately before the interest becomes due.

Restriction on Asset Transfer

CICs are also prohibited from transferring their assets for less than fair market value unless the transferee is a qualified entity.  Further, CICs may not transfer their assets at all unless such transfer is in furtherance of their community purpose.  Qualified entities include the following:

• non-profit associations within the meaning of Section 61A of the Co-operative Associations Act (Nova Scotia);
• societies incorporated under the Societies Act (Nova Scotia);
• Canadian registered charities; or
• prescribed entities.

Prescribed entities include:

• a number of Universities located in Nova Scotia
• Nova Scotia Community College
• a school board within the meaning of the Education Act (Nova Scotia)
• a hospital within the meaning of the Hospitals Act (Nova Scotia)
• a health authority within the meaning of the Health Authorities Act (Nova Scotia)
• the Nova Scotia Museum
• the Art Gallery of Nova Scotia
• a municipality with the meaning of the Municipal Government Act (Nova Scotia)
• the Nova Scotia Provincial Government
• the Federal Government

Asset Lock

Further, upon dissolution, the assets of a CIC may only be distributed to one or more qualified entities established for a similar community purpose.  When considering whether a qualified entity has been established for a similar community purpose, the qualified entity must meet at least one of the following criteria:

• the qualified entity benefits the same segment of society that benefits from the CIC;
• the community purpose of the qualified entity is in the same general category as the community purpose of the CIC; or
• the qualified entity benefits the same community or geographical area that benefits from the CIC.

This restriction ensures that the assets of the CIC continue to be used for their specified social purpose. 

            Taxable

As a business corporation, the income of a CIC is taxable at the rate applicable to all other business corporations.  This means that CICs will be required to file T2 – Corporation Income Tax Returns with the Canada Revenue Agency.

            Annual Community Interest Report

Each year, on or before the date of the company’s annual general meeting (“AGM”), a CIC is required to place before its shareholders a Community Interest Report (approved by its directors) pertaining to its most recent fiscal year.  The Community Interest Report must include:

1. a description of the manner in which the company’s activities benefited society or advanced the community purpose of the company;
2. the assets that were transferred in furtherance of the company’s community purpose and the purpose for such transfer(s);
3. the amount of dividends declared in that fiscal year;
4. the assets that were transferred for redemptions or purchases of shares or other reductions of capital; and
5. details (including identity of transferee, purpose of transfer, and amount transferred) of any transfers of the company’s assets made:
1. with a  fair market value exceeding the prescribed amounts noted above;
2. to a qualified entity;
3. by way of financial assistance; or
4. to a person related to the company.

The Community Interest Report must be signed by at least two directors and filed with the Registrar of Community Interest Corporations (“Registrar”) within 90 days after the company’s AGM.

            Requirement to File Financial Statements

The financial statements of a CIC must be filed with the Registrar at the same time that the company files its Community Interest Report.  At this point it is unclear whether the financial statements and/or the Community Interest Reports will subject to public disclosure.

The Application Process

Companies not yet incorporated under the CA that wish to be incorporated and then designated as a CIC may submit one application containing all of the necessary documents for incorporation and designation to the Registrar of Joint Stock Companies.  Provided that all of the incorporation documents are in order, the Registrar of Joint Stock Companies will automatically forward the application to the Registrar for designation. 

The application must include:

• the incorporation documents required under the CA;
• the designation documents; and
• the prescribed fees.

Companies already incorporated under the CA must similarly submit an application directly to the Registrar of Joint Stock Companies.  However the application must include:

• a copy of a resolution passed by all voting and non-voting members of the company to alter the company’s memorandum of understanding and to change its name as noted below;
• a certificate of an officer of the company attesting to the approval;
• a copy of the company’s memorandum of understanding as altered;
• the designation documents; and
• the prescribed fees.

The “designation documents”, which must be signed by each of the company’s directors, include:

• a community interest plan, comprised of:
• a statement that the company will carry on its activities for a community purpose; and
• a description of the company’s community purpose and how it proposes to carry out activities in support of that community purpose;
• a declaration that the company does not (or will not) carry on activities with a political purpose; and
• a declaration that each of the directors will perform his or her function as a director in accordance with the company’s community purpose.

To be eligible for designation as a CIC, a company must meet the following criteria:

1.  its memorandum of association must include a statement confirming its community purpose and the restrictions associated with such purpose;
2. it must have at least three directors;
3. its name must end in the words “Community Interest Company” or “société d’intérêt communautaire” or the abbreviation “ C.I.C.”, CIC”, S.I.C.” or “SIC”; and
4. the Registrar must conclude that the company has a community purpose.

It will be interesting to see the extent to which Nova Scotia businesses seek designation as a CIC.  While there has been limited use of C3s in British Columbia to date, as of May 2016 there are over 12,000 CICs registered in the UK, including, notably Timewise Foundation, Wellbeing Enterprises, and Frame of Mind (Vocational Training).

As previously reported, Ontario has initiated the process of considering whether to introduce hybrid corporate legislation, however this initiative appears to have been placed on hold.

Miller Thomson’s Social Impact Group would be pleased to work with you to assist in determining whether a CIC might be a beneficial corporate vehicle for your organization.