Misconceptions about the legal requirements of Charities pervade the general public, creep their way into the media and impact charity governance and management. Below are a few such myths followed by a debunking overview.
Myth #1: Charities Can’t Engage in Revenue Producing Business Transactions Such as Selling Goods or Services
In general, Charities are free to sell goods or services for income to support their mission if it is a related business.
Myth #2: Charities are forbidden from Running a Yearly Surplus
Although charities cannot distribute surplus funds to board members or employees, and do not have share-holders, owners, or partners as do various types of business entities, they can run a yearly surplus. With surplus funds, a Charity can: 1) Carry the funds over to use as revenue for a future year’s budget on any allowable expense; 2) Hold the funds in savings as “reserves;” 3) Set it aside for a future major expense; or 4) Invest the funds with the goal of procuring additional currently expendable revenue.
Myth #3: CEO/Executive Directors Cannot Sit on a Charity Board
Employees of a Charity may sit on the board of directors/trustees, but it is recommended that a board “not be dominated” by employees, as by their nature they are not independent since they have an employment relationship with the organization, which would pose a conflict of interest on many board decisions.
Myth #4: Charities Cannot Pay Employees Competitively
Although some Charity corporations facilitate their mission entirely by relying upon volunteers, there is no regulatory bar to paying employees in order to attract and retain talented personnel for the sake of executing the mission. In fact, most charities will not be able to sustain themselves without paid staff. However, the CRA requires that employees be paid reasonably according to “the amount that would ordinarily be paid for like services by like enterprises, whether taxable or tax-exempt, under like circumstances.” Charity executive compensation is especially subject to regulatory and public relations scrutiny, and thus boards of directors should follow and document governance best practices in setting executive compensation.