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.

The parties to a Joint Venture Agreement should have charitable purposes which are similar. The constating documents of both parties should be reviewed by counsel to ensure this similarity exists.

Key provisions that must be included in a Joint Venture Agreement are:

1. Management Committee: The agreement should set out the rights of each party contributing to the activities of the Joint Venture to appoint representatives to a governing body. The rights and duties of the management committee should be clearly outlined, and should include:

   1. Keeping proper records;

   2. Keeping proper financials;

   3. Prepare a budget for approval by the various parties;

   4. Identify projects; and

   5. Monitor project progress.

2. Voting Control: Some agreements provide for voting rights in proportion to the respective contributions of the parties. Many agreements require that all issues are to be determined by a 2/3 majority vote.

3. Meetings of Management Committee: This item covers notice requirements, frequency of meetings, and electronic meeting options.

4. Reporting Obligations: this provides that the minutes of the meetings are to be forwarded to the parties.

5. Financial Statements: Financial statements should be provided to all parties, including disclosure of all funds received and how they were disbursed..

6. Term: A provision that sets out how and when the Joint Venture is terminated.

7. Financial Arrangements: The manner in which capital assets are to be contributed should be included.

8. Liability: When possible, the consequences and costs of inappropriate misconduct of one party should be attributable to that party only and should not implicate the partners to the Joint Venture.

While most charities are incorporated as Not-for-Profits, most NFPs are not necessarily registered charities.

The two are defined differently under the Income Tax Act, as follows:

1. Tax Receipts: Charities may issue official donation receipts for income tax purposes; Not-for-Profits may not issue tax receipts.

2. Tax Exempt: Registered charities are tax exempt. Non-profits are exempt from paying income tax, but may be taxable on property income and capital gains.

3. Tax Return: Charities must file form t3010 with 6 months of their fiscal period end. Not-for-Profits however must file a T2 return, also within 6 months of their fiscal year end.

4. Registration: Charities must apply to the CRA-Charities Directorate, by filing a form t2050, to be approved for registration as a charity. There is no registration process for Income Tax purposes for Not-for-Profits.

5. Purposes: Charities must be established exclusively for charitable purposes (i.e., relief of poverty, advancement of education, religion, or other purposes beneficial to the community. Not-for-Profits however can operate for civic improvement, recreation, sport, social welfare, or any other purpose except for profit.