How Can Nonprofits Borrow Money Under ONCA?

The Ontario Not-for-Profit Corporations Act (ONCA) has introduced several changes to the way nonprofits operate in Ontario. One significant change is related to borrowing money. This article will explain what this change is, why it matters, and how it affects nonprofits in Ontario. [ADD:] Whether your organization needs financing for expansion, equipment, or operational needs, understanding your borrowing powers under ONCA is essential for effective financial planning.

Understanding the Change: Old Rules vs. ONCA

Under the previous rules, nonprofits in Ontario needed to specify their borrowing powers in their letters patent or bylaws. This meant that if a nonprofit wanted to borrow money or issue debt, they had to explicitly include this power in their governing documents. If they didn't, they had to go through the process of amending these documents, which could be time-consuming and cumbersome.

With the new ONCA rules, nonprofits automatically have the power to borrow money and issue debt. This power is granted by default, meaning that nonprofits no longer need to specify it in their articles or bylaws. However, if a nonprofit's articles or bylaws specifically state that they do not have this power, then they must follow those restrictions.

What Types of Borrowing Are Available to Nonprofits?

Under ONCA, nonprofits can access various types of financing to support their operations and growth. Understanding these options helps organizations choose the right financing solution for their needs:

Short-Term Loans and Lines of Credit

These provide quick access to funds for managing cash flow gaps, covering unexpected expenses, or bridging the time between grant payments. Lines of credit offer flexibility, allowing you to borrow only what you need when you need it.

Long-Term Mortgages

If your nonprofit is purchasing or refinancing property, such as an office building or community center, long-term mortgages spread the repayment over many years, making large purchases more manageable.

Equipment Financing

This type of loan is specifically designed for purchasing equipment, vehicles, or technology. The equipment itself often serves as collateral, which may make it easier to obtain approval.

Bridge Financing

Bridge loans help nonprofits cover short-term funding gaps while waiting for expected revenue, such as government grants or fundraising proceeds. These loans are typically repaid quickly once the anticipated funds arrive.

Social Financing and Impact Investments

Some lenders specialize in providing financing to organizations with social missions. These impact investors may offer more favorable terms because they value your community impact alongside financial returns.

Why Does This Matter?

This change is important for several reasons:

1. Easier Access to Funds: Nonprofits often need to borrow money for various purposes, such as expanding their services, purchasing equipment, or covering short-term cash flow gaps. With the power to borrow by default, nonprofits can access funds more quickly and efficiently.
   
   
2. Timely Securing of Repayable Capital: In the past, the process of amending bylaws to include borrowing powers could delay the ability to secure needed capital. This change eliminates that delay, allowing nonprofits to secure repayable capital on a timely basis.
   
   
3. Operational Flexibility: The ability to borrow money by default provides nonprofits with greater flexibility in their financial planning and operations. They can respond more swiftly to opportunities and challenges without being hindered by administrative hurdles.
   
   
4. Cost Savings: Amending articles or bylaws to include borrowing powers often involves legal fees and other costs. By having the power to borrow by default, nonprofits can save on these expenses and allocate more resources to their core missions.

Board Responsibilities When Borrowing Money

While ONCA grants nonprofits the automatic power to borrow, the board of directors still has important responsibilities to fulfill before taking on any debt. Understanding these obligations ensures your organization borrows responsibly and protects its long-term financial health.

Passing a Board Resolution

Before borrowing any money, your board must pass a resolution authorizing the loan. This resolution should specify the amount to be borrowed, the purpose of the loan, who is authorized to sign loan documents, and any conditions or limits on the borrowing.

Conducting Due Diligence

Board members have a fiduciary duty to act in the organization's best interests. This means carefully reviewing loan terms, comparing offers from different lenders, and ensuring the organization can realistically repay the debt without compromising its programs or mission.

Understanding Repayment Ability

The board must analyze the organization's current and projected cash flow to confirm that loan payments can be made on time. This includes creating realistic financial projections and considering what happens if fundraising falls short or expenses increase.

Reviewing Required Documentation

Lenders typically require financial statements, budget projections, articles of incorporation, bylaws, board resolutions, and sometimes personal guarantees from directors. Your board should understand what documentation will be needed and ensure it's accurate and complete.

Considering Security and Collateral

Some loans require the nonprofit to pledge assets as security. The board must carefully consider whether putting organizational assets at risk is appropriate and what the consequences would be if the loan couldn't be repaid.

Restrictions and Limitations on Nonprofit Borrowing

While ONCA provides broad borrowing powers, nonprofits must still navigate several important restrictions and considerations before taking on debt.

Registered Charities Face Additional CRA Restrictions

If your nonprofit is also a registered charity with the Canada Revenue Agency (CRA), you face additional rules beyond ONCA. The CRA's 10-year loan rule requires that loans to charities must be repaid within 10 years. Charities must also ensure that borrowed funds are used exclusively for charitable purposes and that any interest paid represents reasonable compensation.

Bylaws May Override Default Borrowing Powers

Even though ONCA grants automatic borrowing powers, your organization's specific bylaws may restrict or prohibit borrowing. Always review your governing documents before pursuing financing. If your bylaws contain restrictions that no longer serve your organization, you may need to amend them through the proper procedures.

Security and Collateral Considerations

Lenders often require security for loans, which means your nonprofit may need to pledge assets such as property, equipment, or future revenue. Consider carefully whether putting these assets at risk aligns with your fiduciary duties and mission. Some funders and donors may also have concerns about organizations carrying significant debt.

Differences for Federally Incorporated Nonprofits

If your organization is incorporated federally under the Canada Not-for-Profit Corporations Act rather than provincially under ONCA, different rules may apply. Federal nonprofits should review their specific governing legislation and consult with legal counsel about borrowing powers.

Member Approval Requirements

Some nonprofit bylaws require member approval for borrowing above certain amounts. Check your bylaws to determine whether board authority alone is sufficient or if you need to seek member approval at a general meeting.

How Does This Affect Nonprofits in Ontario?

For nonprofits operating in Ontario, this change means a shift in how they approach financial planning and governance. Here are some key considerations:

1. Review Governing Documents

Nonprofits should review their articles and bylaws to ensure they understand their borrowing powers. If their documents explicitly prohibit borrowing, they may need to consider whether to amend them to align with their current needs.

2. Board Policies

While the power to borrow is now granted by default, it is still essential for nonprofits to have clear policies and procedures in place. The board of directors should establish guidelines for when and how the organization can borrow money, ensuring that decisions are made responsibly and transparently.

3. Financial Management

With the ability to borrow money more easily, nonprofits need to have strong financial management practices. This includes maintaining accurate financial records, preparing realistic budgets, and having a clear plan for repaying any borrowed funds.

4. Communication with Stakeholders

Nonprofits should communicate this change to their stakeholders, including donors, members, and volunteers. Transparency about how the organization manages its finances and the reasons for borrowing can help maintain trust and support.

Real-World Example: How ONCA Borrowing Powers Work in Practice

To illustrate how these changes work in practice, consider this scenario:

A community arts center in Toronto wants to install energy-efficient heating and cooling systems that will reduce operating costs by 30% annually. The project costs $75,000, but the organization doesn't have enough in reserves to cover the expense.

Under the old rules, the board would first need to check if their letters patent or bylaws included borrowing powers. If not, they would need to amend these documents—a process that could take several months and involve legal fees. This delay might cause them to miss grant deadlines or seasonal installation windows.

Under ONCA, the board can act immediately (assuming their bylaws don't prohibit borrowing). They would:

1. Pass a board resolution authorizing the loan
2. Compare financing options from banks and social lenders
3. Choose a 5-year loan with affordable monthly payments
4. Sign the loan agreement and proceed with the installation

The simplified process allows the organization to start saving on energy costs sooner, and the energy savings help cover the loan payments. This is exactly the kind of operational flexibility ONCA was designed to provide.

Conclusion

The ONCA has made a significant change by allowing nonprofits in Ontario to borrow money and issue debt by default. This change simplifies the process, providing easier access to funds and greater operational flexibility. However, it also requires nonprofits to have strong governance and financial management practices in place to ensure that borrowing decisions are made responsibly.

By understanding your borrowing powers, restrictions, and board responsibilities under ONCA, your nonprofit can make informed financing decisions that support your mission while protecting your organization's long-term sustainability. Whether you're considering a small line of credit or a major capital loan, proper planning and professional guidance ensure you borrow wisely.

Need Help with ONCA Borrowing Powers and Compliance?

Understanding ONCA's borrowing provisions is just one aspect of ensuring your nonprofit complies with Ontario's legal requirements. At B.I.G. Charity Law Group, we help nonprofits and charities across Ontario navigate ONCA compliance, including:

• Reviewing your bylaws to understand your borrowing authority
• Drafting board resolutions authorizing loans
• Amending bylaws to remove outdated borrowing restrictions
• Advising registered charities on CRA requirements for borrowing
• Ensuring your financing plans align with your charitable purposes

Our team has helped over 5,000 charities and nonprofits achieve compliance and operational excellence. With 915+ five-star Google reviews, we're recognized as leaders in Canadian charity law.

Ready to discuss your organization's borrowing needs? Contact B.I.G. Charity Law Group today to book a consultation.

Phone: 416-488-5888
Email: ask@charitylawgroup.ca
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Frequently Asked Questions 

Can a registered charity borrow money under ONCA?

Yes, registered charities incorporated in Ontario can borrow money under ONCA, but they must also comply with Canada Revenue Agency (CRA) requirements. The CRA's 10-year loan rule requires that any loans to charities be repaid within 10 years, and the borrowed funds must be used exclusively for charitable purposes. Charities should consult with both legal and tax advisors before borrowing.

Do we need member approval to borrow money?

It depends on your bylaws. ONCA grants the board of directors the authority to borrow money, but your organization's specific bylaws may require member approval for loans above certain amounts or for specific types of borrowing. Always review your governing documents to understand your approval requirements.

What happens if our bylaws prohibit borrowing?

If your articles or bylaws specifically prohibit borrowing, that restriction overrides ONCA's default borrowing powers. You would need to amend your bylaws through the proper procedure (typically requiring member approval) before your organization could take on any debt.

Can we use our assets as collateral for a loan?

Yes, nonprofits can pledge assets as security for loans. However, the board must carefully consider the risks involved. If the loan cannot be repaid, the lender could seize the pledged assets, which might include your building, equipment, or other property essential to your mission. Some bylaws may restrict what assets can be used as collateral.

How does borrowing affect our charitable status?

Borrowing itself doesn't affect charitable status, but charities must ensure borrowed funds are used exclusively for charitable purposes. The CRA monitors how charities use debt and may have concerns if an organization carries excessive debt relative to its assets or if interest payments consume a large portion of the charity's resources.

Can we borrow from our own directors or members?

Yes, but proceed with caution. Loans from related parties must be at arm's length terms (market rate interest, proper documentation, and reasonable repayment schedule). The CRA scrutinizes related-party transactions carefully, and such loans must benefit the charity, not the lender. Proper documentation and transparency are essential.