May the 50% Rule Rest in Peace

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The time has come to repeal the 50% Rule (the “Rule”).  The Ontario Legislature took a step in this direction by exempting renewable energy co-operatives from the application of the Rule.  In so doing the Legislature recognized that if they did not act, the Rule would effectively prevent renewable energy co-operatives from existing in the Province.

I believe the Rule is a major impediment to the growth of co-operatives in this Province and that its repeal would be beneficial to the sector, not just renewable energy co-operatives.  Here are some reasons why the Rule needs to go:

Why 50%? 

What makes a co-operative that does more than 50% of its business with members a co-operative?  Why not 100%?  How about 75%?  A percentage is arbitrary.  I submit the essence of being a co-operative is not who you do business with, but how you do business.  It is the desire of members to be governed by the one member, one vote, distribution of patronage and other principles that are fundamental to co-operatives.

Compliance is Cumbersome

How do you comply with the Rule?  For some co-operatives (ie. childcare co-operatives) compliance is relatively simple.  If you are a retail co-operative, figuring out whether a cash sale was made to a member or non-member can be difficult.  Even if you have systems (membership cards, etc.) to facilitate this, there is an extra cost in both time and labour to maintain records to verify compliance – not to mention the extra time it may take at checkout!

The Co-Operative Disadvantage

Many co-operatives carry on business in direct competition with other businesses.  I had the manager of one co-operative tell me that to induce compliance with the Rule they offer a discount on a member’s first purchase.  That co-operative is in direct competition with a number of national retailers.  None of these national retailers have to do this.

Members for the Wrong Reasons

Let’s return to my discount example.  The person receiving the discount is not necessarily joining the co-operative because they want to be a member.  They may have joined because they want the discount.  The result is the co-operative has a number of inactive members.  This increases compliance costs in other areas such as mailing out notices of meetings to people who never show up, etc.

Success Could Mean the End

Your co-operative is successful.  Many people want to do business with you, but not necessarily join.  If a co-operative has failed to comply with the Rule for three years, the Minister can compel that co-operative to become a business corporation.  This business corporation will have to comply with the Ontario Securities Act when soliciting investors, which could be cost-prohibitive. Furthermore, is this fair to members who wanted to conduct business according to co-operative principles and, notwithstanding this, must now carry on as a business corporation?

It’s the Wrong Test

Every Ontario co-operative is required to carry on business on a “co-operative basis”.  Failure to do so results in the same penalty as failing to comply with the Rule.  For a co-operative to carry on business on a “co-operative basis”, each member has one vote, no member may vote by proxy, interest rates are capped and the enterprise is operated as nearly as possible at cost after providing for prescribed reserves and payments, including patronage.  This, I believe, is the right test.

I submit the Rule is not a rule but a restriction.  As long as a co-operative is carrying on business on a co-operative basis, it should not matter what percentage of its business is being conducted with non-members.