Non-Profits Vs. Charities: The difference

The terms “non-profit,” (or “not-for-profit”) and “charity” are frequently used interchangeably. However, from a legal viewpoint, they are very different entities.

The term “non-profit” typically refers to

·         social clubs;

·         professional groups;

·         golf and other recreational clubs;

·         sporting clubs;

·         fraternal organizations;

·         trade groups;

and the like.

The term "charity" or “charitable organization” refers to entities whose objects promote:

·         Religion;

·         Education;

·         Providing care to disadvantaged members of society.

Many registered charities are incorporated as non-profits, but they need not be. Canadian charities can also be trusts, partnerships, or unincorporated associations.

Overlap

To be registered as a charity in Canada, the charity must be operated on a not-for-profit basis. However, not all non-profit organizations are charitable.

Benefits of Charity registration

While both not-for-profits and charities may qualify for exemption from income tax, being a registered charity provides the extra incentive that it can offer donors with charitable receipts.

What dates should be noted on a Not-for-Profit's Calendar?

B"H

Dear Charity Lawyer,
I was just appointed as secretary to a mid-size Canadian Non-Profit and Charity. I'm somewhat new to this whole thing. Could you advise what dates in the organizational calendar should be marked off?

Answer: Congrats on your new role! Below is a list of the most critical dates that should be marked off on every Not-for-Profit organization's calendar:

·         Deadline for filing annual T1030 charitable returns

·         Deadlines for filing annual provincial return (where applicable) or federal return

·         Notice of Annual General Meeting (AGM)

·         Reminder to review governing statute yearly before AGM

·         Date of AGM

·         Reminder to update board members’ contact info after AGM

·         If bylaw amendments have been made, a reminder to file amendments with federal government

·         Reminder to review policies yearly at the first board meeting after AGM

·         Notice of special meetings

·         Contract commitments

·         Deadlines related to grant and/or funding agreements

·         Renewal dates for lease and/or rental agreements

·         Deadlines or renewal dates for insurance

Should I agree to sit on the Board of a Non-Profit in Canada?

B"H

A close friend is starting a Not-for-Profit with the hopes of receiving Charitable status from the Canada Revenue Agency (CRA). She has asked me to be a Director. Should I agree?

Answer: Do you know what becoming a Director of a Not-for-Profit entails? Below are 6 questions you should ask your friend, and another 6 questions you should ask yourself, before you consent to sit on the Board of Directors of a Canadian Not-for-Profit.

SAMPLE QUESTIONS FOR PROSPECTIVE DIRECTORS TO ASK THE ORGANIZATION

 I.        Will the organization be incorporated, and, if so, in what jurisdiction and under what legislation?

II.        Is the corporation primarily for the mutual benefit of its members, or is it primarily for public benefit?

III.        What is the mission of the organization?

IV.        Who will be the members of the corporation?

V.        Who will the corporation serve – the members or some other constituency?

VI.        To whom will we be, as directors, accountable?

 

QUESTIONS FOR PROSPECTIVE DIRECTORSTOASK THEMSELVES

I.            Am I committed to the mission of the organization?

II.            Can I contribute the time necessary to be an effective board member?

III.            Am I comfortable with the approach and tone of the organization’s fundraising efforts?

IV.            Can I contribute financial support consistent with the organization’s expectations of board members and with my own means and priorities?

 V.            Can I place the organization’s purposes and interests above my own professional and personal interests when making decisions as a board member?

Should I incorporate a Canadian Not-for-Profit?

B"H

You are considering incorporating a Not-for-Profit in Canada. Is it a good idea? Read further for a list of 6 advantages and 6 disadvantages to incorporating a Not-for-Profit, whether federally or provincially, in Canada.

6 advantages to incorporating a (federal or provincial) Canadian Non-profit:

1. Continuity: A not-for-profit corporation has a legal status separate and distinct from its members. Members may come and go, but the corporation continues until it is dissolved or wound up.

2. Purchase power: The not-for-profit corporation can enter into   contracts, and can buy property.

3. Limited Liability: Individual members of a corporation are generally shielded from liability (generally, though there are exceptions to this; more on these exceptions in a future blog post).

4. Structure: The formal corporate structure facilitates ongoing operations and decision-making.

5. Credibility: There may be increased credibility with the government, funders, and the public.

6. Governance Powers: The not-for-profit corporation has an enhanced ability, through its governing documents, to address membership status issues (e.g., removal for unpaid dues or death, and expulsion for disciplinary reasons).

6 disadvantages to incorporating a Canadian Non-profit:

1.       Most jurisdictions require an annual corporate filing related to the location of the head office as  well as director information.

2.      Some not-for-profit entities must  file an annual information return with the Canada Customs and Revenue Agency.

3.        Incorporated not-for-profits must file an annual corporate income tax return.

4.      Federal corporations incorporated under the NFP Act must get ministerial approval  to change certain bylaws.

5.      There are some constraints placed on the type of activity that the group or entity may engage in.

6.      There is a need to devote time and resources to maintaining corporate structure that would otherwise go to carrying out the desired activities of the organization.

COMMON MYTHS ABOUT NOT-FOR-PROFITS​

There is a lot of misinformation out there about not-for-profit organizations and the not-for-profit sector in general. To help you separate fact from fiction and better understand how not-for-profits operate, we have provided a list of common myths  that people often have regarding not-for-profits. If you have further questions, please do not hesitate to contact B.I.G. Charity Law Group today to learn more!

Misconception # 1: All not-for-profits are charities

A not-for-profit is simply a business entity that does not distribute profits. It is not necessarily a charity. The purpose of charities is to engage in some sort of relief operation to benefit society, which will always be the purpose of that charity. Not-for-profits, on the other hand, can later choose to become for profit ventures. A notable example of this is the National Football League. Up until last year, the NFL operated as a not-for-profit organization. As you probably know, the NFL is not an organization whose purpose is to conduct charitable activities.

Misconception # 2: Not-for-profits do not make a profit

The term “not-for-profit” is often a major source of confusion. People assume it means the company cannot or does not make profits. Not-for-profits are absolutely allowed to engage in business that produces profits, but the profits cannot be distributed to private individuals. They must instead be used to pay company costs like overhead, salaries, etc, or they can be set aside to further improve or grow the company, commonly to contribute to community services the not-for-profit provides at no or reduced cost.

Misconception # 3: Non-for-profits are volunteer organizations

This misconception stems from the previously mentioned misconceptions that non-for-profits are only charitable organizations and that they do not make money. Many not-for-profits may utilize volunteers, but most of them are staffed by regular, paid employees.

Misconception # 4: Non-for-profit legal strategies are the same as a for-profit business

Many who recognize that not-for-profits are indeed business ventures are under the mistaken belief that they can approach a not-for-profit’s legal foundation the same way they would approach the legal strategy of a for-profit business. There are certainly some similarities, but not-for-profits are faced with unique legal challenges, particularly if they are interested in becoming tax exempt. They must adhere to strict regulations regarding things like business structure, and it can be difficult to stay compliant. It is important that you enlist the guidance of a lawyer who understands the legal nuances inherent in founding and operating a not-for-profit organization.

If you are interested in starting a not-for-profit, or if your existing nonprofit needs skilled and effective legal guidance, please contact B.I.G. Law Group now. 

Can a Charity issue a Donation Receipt for a year prior to when the Donation was received?

B"H

Q. Can a Charity issue a Donation Receipt for a year prior to when the Donation was actually received? 

Answer: A registered charity must indicate the year in which it actually received the gift when prepaing its charity receipts. If the gift is dated, mailed, and postmarked in one year but received in the next year, the charity can issue a receipt indicating the year appearing on the postmark as the date it received the gift.

But note: A charity may not issue a charitable receipt until it has actually received the donation.

What information must be included in a Canadian Charity receipt?

A Canadian Charity receipt must include, in a manner that cannot be easily changed, at minimum, the following information:

  1. That it is an official receipt for income tax purposes;
  2. The charity’s BN (Business Registration Number), name, and address in Canada as recorded with the Canada Revenue Agency;
  3. The serial number of the receipt;
  4. The place where the receipt was issued;
  5. If it is a cash donation, the day and year on which the charity received the donation;
  6. If the donation is a gift other than cash, that is, a gift in kind;
  7. The day on which the charity received the donation;
  8. A brief description of the gift and the name and address of the appraiser of the property - if it is a gift in kind;
  9. The day on which the charity issued the receipt;
  10. the full name, including middle initial, and address of the donor;
  11. The amount of a cash donation, or if the donation is a gift other than cash, the amount that is the fair market value of the gift at the time it was made;
  12. The signature of an individual authorized by the charity to acknowledge donations;
  13. The name and website address of the Canada Revenue Agency www.cra.gc.ca/charities.

For a sample Charity Reciept that includes all the mandatory elments of a Canadian Charity Reciept, click here:  FAQ R12 – Sample Receipts.

Does an Executor's discretion in choosing a Charity prevent claiming of a donation tax credit?

Q. I am a Trustee of a Will which allows me, the Trustee, the discretion of how to disburse a certain amount of money, by giving to any Charity of my choosing. My question is whether a tax receipt can be issued for the amount I decide to donate.

Short Answer: Yes, a tax receipt can be issued.

Comprehensive Answer: Even where the Trustee excercises his or her discretion to donate an asset or funds to a specific charity, a donation reciept can be issued for the fair market value (FMV) of the donation and a donation tax credit can be claimed on the Trust Return filed by the Estate. 

Where the terms of the Will provide that a specific amount of the individuals Estate is to be gifted to a charity, even if a particular Charity was not specified, a donation tax credit can still be claimed on the deceased taxpayer's final return. 

Q. I am a Trustee of a Will which allows me, the Trustee, the discretion of how to disburse a certain amount of money, by giving to any Charity of my choosing. My question is whether a tax receipt can be issued for the amount I decide to donate.

Short Answer: Yes, a tax receipt can be issued.

Comprehensive Answer: Even where the Trustee excercises his or her discretion to donate an asset or funds to a specific charity, a donation reciept can be issued for the fair market value (FMV) of the donation and a donation tax credit can be claimed on the Trust Return filed by the Estate. 

Where the terms of the Will provide that a specific amount of the individuals Estate is to be gifted to a charity, even if a particular Charity was not specified, a donation tax credit can still be claimed on the deceased taxpayer's final return. 

Has your Canadian Registered Charity or Federal Not-for-Profit received a "Notice of Pending Dissolution" from Industry Canada?

B”H

Are you on the board or are a Member of a Not-for-Profit formed under the Canada Corporations Act (“CCA”) that has failed to transition to the Canada Not-for-Profit Corporations Act (“CNCA”)? If yes, it is likely that you have received, or will be receiving shortly, a notice of pending dissolution.

We have assisted many Not-for-Profits and Charities with continuance to the CNCA and would be happy to do so for your organization too. Our fees are generally 50% lower than other lawyers, so don’t hesitate; give us a call or send us an email now!

120 days following the “Notice of Pending Dissolution” from Industry Canada, the Corporation is dissolved and if the Corporation is a Registered Charity, its status is generally revoked within one or two years by the Canada Revenue Agency. We can work with you to get your Charity reinstated, but it is much better to prevent the dissolution of the Corporation, rather than dealing with reinstating it later on.

Do you want to check on the status of your Federal Canadian Corporation? Click on the link below to search: https://strategis.ic.gc.ca/app/scr/cc/CorporationsCanada/fdrlCrpSrch.html?locale=en_CA

 

The "Public Benefit" test

B"H

Q. We are a small mosque in Vancouver looking to apply to become a Registered Charity in Canada. In reviewing the Canada Revenue Agency's requirements we found that all Charities in Canada must be established for the "Public Benefit." How do show that we are benefiting the public as a faith based Charity? 

Answer: That's an excellent question. You are right that faith-based Charities cannot tangibly show "Public Benefit" as their sister Charities in the poverty and eductional sectors usually can. However, historically the CRA and the courts of Canada have assumed that faith based Charities provide a "Public Benefit."

For more information on the "Public Benefit" test, see Here. 

Directing a Charitable donation

Q. I want to give a donation to my synagoue so that my son can participate in a program run by the synagogue abroad. Can I ask for a tax receipt from the synagogue? 

Short Answer: No. 

Explanation: Donors cannot direct their donations to a particular volunteer and receive a tax receipt. You can, however, stipulate that your donation should be directed to the general Charitable program, and still be elibible for a tax receipt. 

The synagogue or other Charitable organization must be the one who decides and documents why it decided which participants are eligible for the program without interference by the donors.  

 

Faith based Charity helping the poor

Q. A woman in the community has come upon hard times and she asked our mosque to help her out. Can the mosque set up a fund to help this woman in distress? 

Short Answer: Yes, but with 3 qualifications.  

Long Answer: Faith based organizations are often called open to help those in distress. They can do so if:

The stated Purposes of the Registered Charity allow for the alleviation of poverty;
The activities must be available to a wide segment of the public; not just to members of the organization;
A donor cannot stipulate that the donation go directly to an individual or family.

Charging for programs

Q. Is our synagogue allowed to charge fees for programs we offer?

Short Answer: Yes.

Comprehensive Answer: Many Charities in Canada charge fees for programs, and doing so does not make them "not Charitable." A Charity may charge fees as long it maintains the following two Charitable charactaristics:

1. Public Benefit;

2. Altruism.

CRA provides the following guidelines for when it will be allowable for a Charity to charge fees:

  1. Where the fee structure is designed to cover the costs of the program rather than generate a profit;
  2. The fees are set according to a charitable objective rather than a market objective;
  3. The program does not offer services which are comparable to services available elsewhere;
  4. The activity or program is authorized by the Charity's purposes and objects.

Examples of permissible program fees include:

  1. University tuition fees;
  2. museum admission;
  3. rent in low-income housing programs.

    Q. Is our synagogue allowed to charge fees for programs we offer?

    Short Answer: Yes.

    Comprehensive Answer: Many Charities in Canada charge fees for programs, and doing so does not make them "not Charitable." A Charity may charge fees as long it maintains the following two Charitable charactaristics:

    1. Public Benefit;

    2. Altruism.

    CRA provides the following guidelines for when it will be allowable for a Charity to charge fees:

    Where the fee structure is designed to cover the costs of the program rather than generate a profit;
    The fees are set according to a charitable objective rather than a market objective;
    The program does not offer services which are comparable to services available elsewhere;
    The activity or program is authorized by the Charity's purposes and objects.

    Examples of permissible program fees include:

    University tuition fees;
    museum admission;
    rent in low-income housing programs.

B"H

 Thank you for your posts over the past week; they have been very informative.

 Q. Could you please give specific examples of items that do not qualify as donations for the purposes of issuing a Charitable Receipt? 

Answer:The following are examples of items that will not qualify for receiving a Charity Receipt under Canadian Charity Law:

  • Where the donor is given in return for their donation consideration which exceeds 80% of the original donation;
  • Payment of tuition fees -except as allowed, as can be reviewed at: Tuition Fees and Charitable Donations Paid to Privately Supported Secular and Religious Schools
  • Purchase of a lottery ticket;
  • Where the donation is court ordered;
  • Payment of a basic fee for admission to a program (an example of this would be daycare fees for nursery school)
  • Payment of membership fees that convey the right to attend programs and be eligible for services (note: Membership fees can be eligible for Charity Receipts where they only confer a right to vote and receive reports of the Charity's activities).

 

Returning a gift to a donor

B"H

We are a Canadian Charity in the poverty sector, operating out of British Columbia, Vancouver to be specific. We recently received a sizable donation from a shady individual who has proceeded to publicize his contribution to our Charity. We would like to return the donation and dissasociate from him.

Q. Are we allowed by Canadian Law to return a donation or gift to a donor? 

Short Answer: Generally, No...

Comprehensive Answer: Generally, a Charity cannot return a donation or gift that is has received. Why? Because a gift transfers ownership to the Charity, and the Charity's purposes in it's constating and governing documents will require it to use the donation to further its charitable purposes. For more detailed guidance from the CRA, see here: http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cgd/rtrng-dntd-prpty-eng.html

Follow up question: So what are our options? 

Answer: One option is to make a court application to return the donation to the donor. A second option is to transfer the donation to another Registered Charity. But note, a Charity may only do so if your governing or constating documents allow assistance to other Registered Charities. 

Note: Where a Charity fundraises for a special project and later reneges on the project, whether intentionally or because of matters beyond its control, the donations would have to be returned to the donors (unless the Charity made it clear to the potential donors that the donations will be used for other projects if the said project doesn't materialize). 

Final note on this matter: When a donation is returned to the donor, an amended tax receipt must be issued to the donor. 

A donation not eligible for a Charity Receipt

B"H

In order for a donation or gift to a Charity be eligible for a receipt, according to the Income Tax Act, it must satisfy the following 3 elements:

Voluntary: The gift must have been given by the grantor's free will. If the donor was obligated to give the gift as a result of a court order or contract, the donation would not qualify for charitable receipt;
Transfer of the donation to a Registered Charity;
Property, not services: Donations must be in the form of cash or "Gifts in Kind" (see yesterday's Q & A). Services, like cutting the lawn or lease of premises, are not "Property" and are therefore not considered gifts.   

Gift for Gift

B"H

Q. We are a religious Charity based out of Winnipeg and have a donor who just gave us a huge donation, the biggest our charity has seen to date. It's big, in the millions. We would like to show our appreciation by giving her a token gift. Is that allowed under Canadian Charity Law?

Short Answer: Absolutely, but...

Comprehensive Answer: In legal parlance, a token of appreciation is called "advantage" and "consideration." In some cases, depending on the value of the "consideration", the charity may have to reduce the amount of the receipt by the value of the gift. 

So what does it depend on? A Charity must determine the FMV (Fair Market Value) of the consideration (token appreciation) given to the donor. If the FMV of the consideration is minimal, then the value of the receipt will not have to be reduced. 

If however the gift given to the donor is significant, then the amount of the donation that appears on the official donation receipt will have to be reduced by the value of the consideration. Again, in legalese, this is called "split receipting." 

Note: Even if the gift the Charity is giving to the donor was obtained at no cost to the Charity, the Charity must still determine the Fair Market Value of the gift. 

What is a "Gift-in-Kind"?

B"H

Q. We are preparing to file our T3010 and there's a question about "Gifts in Kind". What is that? 

Short Answer: A Gift in Kind is a gift of property that is not cash. 

Comprehensive Answer: A Gift in Kind includes many types of property, including:

  • Real Estate;
  • Stocks;
  • Bonds;
  • Personal items;
  • Inventory;
  • Capital Property;
  • Depreciable Property.

Note: Hobby crafts and home baking, items of little value, will not qualify as Gifts in Kind, and the recipient Charity may not issue a tax receipt for them. 

For more detailed information about Gifts in Kind, click on http://www.cra-arc.gc.ca/E/pub/tp/it297r2/it297r2-e.html

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How do we avoid being a Soliciting Corporation?

,

B"H

Background: The B.I.G. Charity Law Group was recently approached by a successful charity, which is Federally incorporated under the CNCA, which raises and distributes millions of dollars annually. They were advised by their accountant that they are a Soliciting Corporation and therefore require an audit which will be filed with Industry Canada. 

Q. "How could we  circumvent the onerous Audit requirements under the CNCA. The accountant would invoice us $15,000.00 annually, and that is $15,000.00 that would have gone to feed the poverty-stricken and needy. What options do we have to avoid being subject to the Audit requirements under the CNCA?"

A. They have several options: 

  1. Reorganize the Corporation as a Charitable Trust or Association. The downside to organizing as a Trust or Association is the the Directors or Trustees would be exposed to personal liability for the actions and debts of the Organization. 
  2. If the Organization wants to retain its Corporate status, it can continue ("Export") under the legislation of another province. Provinces which allow importing from Federal jurisdiction are Ontario, Saskatchewan, Manitoba, and Alberta. But note, if continued under provincial legislation, the Corporation will be required to have a registered office in the province.
  3. A third option is to go to the root of what makes the Organization a "Soliciting Corporation" and modify and revise the by-laws or Articles accordingly. What do we mean?

For example, if the Organization became a Soliciting Corporation because it received donations of over $10,000.00 from the general public, the Organization can amend the Articles or by-laws to state that anyone who donated in the past year is deemed to be a member of the Corporation (a proficient lawyer will know how to draft the articles in a way that will provide for multiple classes of members, with variant voting powers). That way, donations will have been received from the Corporation's members, and will not satisfy the "Soliciting Corporation" test. 

There are other possible methods as well, but more about that in a future blog post.