The opinions/views expressed by the author is theirs alone, and do not necessarily reflect the opinions or position of Endeavour.
Author: Nick G. Pasquino, Borden Ladner Gervais LLP
People often use the terms ‘not-for-profit’ and ‘charity’ interchangeably when describing organizations in the non-profit sector. In fact, from a legal perspective ‘not-for-profit’ and ‘charity’ mean very different things. The distinction between these legal concepts is misunderstood by many if not most people – likely because they come out of the federal Income Tax Act and, as everyone knows, our tax law is complex. But it doesn’t need to be!
Before I summarize Canadian tax law in an overly simplistic way, I must begin with the usual legal disclaimer: this article is short and simplistic; readers are cautioned to consult their professional advisers before making any decisions related to tax status.
I begin with not-for-profits. If (among other things) your organization is setup in a way that prevents any profits from being distributed, directly or indirectly, to members or to the benefit of its members, it is, for the purposes of tax law, a not-for-profit (note that while the purpose of a not-for-profit cannot be profit, it can earn income which must be used to further the objects). As such, you receive the privilege of not paying tax on the income you generate. If your organization is required to file a tax return (all corporations are required to file, but unincorporated associations are not) your organization will essentially file a ‘nil’ return and no income tax is payable.
If you are registered by the Canada Revenue Agency (the “CRA”) as a charity, in addition to the privilege of not paying taxes on your income, you are entitled to issue charitable donation receipts to persons who contribute funds to your organization. Donors get a tax break on their income taxes and the charity gets the benefit of an additional income stream.
To obtain this privilege, the CRA requires that the organization be devoted exclusively to “charitable” purposes, which are: the advancement of religion, the advancement of education, the relief of poverty, or other purposes beneficial to the community (note that the definition of what is charitable at law is surprisingly complex and the subject of a future article). The CRA also imposes other requirements on the organization (annual filings, record-keeping requirements, etc.) to make sure the organization is and continues to play by the rules and does not take advantage of, among other things, the receipting privilege.
In other words, registered charities are not, strictly speaking, not-for-profits. You are either one, or the other, and the tax treatment and regulatory compliance requirements of each type of organization are different.
When does it make sense for an organization to be setup as (or evolve into) a charity?
There are, in my view, three major pre-conditions required for an organization to make the decision to become a charity:
(i) its operations and activities are and will continue to be exclusively charitable;
(ii) it has or plans to have the resources to satisfy the CRA’s regulatory compliance obligations; and
(iii) it plans to benefit from the revenue stream associated with charitable donation receipts.
This does not mean the organization needs to be large in terms of staff or programming, or well endowed in terms of cash or other resources, but it does mean there needs to be a board of directors and others who are sufficiently sophisticated to ensure the necessary processes to maintain the organization’s compliance with the rules of the CRA are implemented.
How does one become a registered charity?
One can register as a charity by filing an application with the CRA.
The application includes information about the activities of the organization, information about its governance structure, its directors and officers, and certain financial information.
In recent experience, the registration process has ranged from four months to over a year. The length of review typically depends on the completeness of the application, whether the proposed “charitable” purpose has been previously accepted as charitable, and the volume of applications before the CRA.
Registering as a charity is a great idea for an organization that would benefit from the ability to raise funds by issuing donor receipts. If your organization does not need that revenue stream, or can not handle the compliance requirements, it would be in your best interest to become (or remain) a not-for-profit.
Nick G. Pasquino practices corporate, commercial and charity law in the Toronto office of Borden Ladner Gervais LLP. Nick has served as legal counsel to Endeavour and advised Endeavour on obtaining registered charity status. He can be reached at firstname.lastname@example.org or (416) 367-6253.