Charities and Non-profits

 

Canadian tax system effectively subsidizes the activities of registered charities both by exempting such organizations from the payment of tax and by providing a tax deduction or tax credit to companies and individuals that contribute to their charitable activities.

 

Charities Vs. Non-Profit

Although they are often referred to interchange-ably in everyday usage, charities are not the same as non-profit organizations, and vice-versa. Both operate on a non-profit basis and are generally exempt from income tax. A non-profit organization does not need registration with the Canada Revenue Agency (CRA). It cannot provide a charitable donations tax receipt for any donations it receives.

 

Activities of a non-profit organizations:

  • Promote or carry out any social welfare,
  • Civic improvement, pleasure, sport, or recreational endeavours.

 

Activities of a Charities:

  • Relief of poverty (food banks, soup kitchens, low-cost housing units)
  • Advancement of education (colleges, universities, research institutes)
  • Advancement of religion (places of worship, missionary organizations)
  • Purposes beneficial to the community (animal shelters, libraries, volunteer fire departments)

 

Conversely, the CRA provides the following examples of organizations which would qualify as not for profit organizations, but not as charities:

  • Social, recreational, or hobby groups (bridge clubs, curling clubs, golf clubs)
  • Certain amateur sports organizations (hockey associations, baseball leagues, soccer leagues)
  • Some festival organizations (parades, seasonal celebrations).

 

Registered vs. non-registered charities

CRA examines the activities and the structure of the organization and determined that it meets the requirements for registration.

 

A charity which has received registered charity status takes on a number of information filing obligations which keep the CRA apprised of its charitable activities and its finances.

 

Only a registered charity is entitled to issue a tax receipt for donations made to the charity and only donors who have received such a tax receipt can claim a tax credit for those donations on their annual tax return.

 

Deciding whether to become a registered charity

 

Advantages:

 

  • Registration allows a charity to issue official donation receipts for gifts it receives. These receipts can be used to reduce the income tax payable of an individual donor or the taxable income of a corporate donor.
  • Once registered, a charity is exempt from paying income tax.
  • Registered charities are eligible to receive gifts from other registered charities, such as foundations.
  • Registration provides increased credibility in the community, since registered charities must follow certain rules and guidelines in order to maintain their registration.
  • Many goods and services provided by registered charities are exempt from goods and services tax/harmonized sales tax (GST/HST). Also, in many situations, registered charities can claim a partial rebate for the GST/HST they pay.

 

Dis-advantages:

 

  • Lot of form of information filings with the federal government, which must be done on an annual basis.
  • Restrictions on how and to whom it can disburse the funds which it raises, and responsibility for seeing that funds disbursed are used in the intended way.
  • It will also be required to meet a disbursement quota—the minimum calculated amount that a registered charity is required to spend each year on its own charitable programs or on gifts to qualified donees (such as other registered charities).
  • Finally, an organization which seeks and obtains status as a registered charity must recognize that it will have to devote some portion of its resources—human and otherwise—to meeting all of its record-keeping, filing, and oversight obligations on an on-going basis, for as long as it maintains that status.

 

Applying for a charitable registration number

The process of obtaining a charitable registration number (and, consequently, the status of a registered charity) begins with making certain that the organization has put in place all of the organizational structures and documents which will be required by the CRA.

 

At a minimum, those documents will include

  • The organization’s governing documents include letters patent, articles of incorporation, a constitution, or a trust document, any bylaws
  • A description of the activities of the organization,
  • A proposed 12-month operating budget.
  • Form T2050

 

Fundraising and issuing donation receipts

 

The receipt of gifts by charities from either source, and particularly the issuance of charitable donation receipts for gifts from donors, are governed by a detailed set of rules which regulate what types of donations qualify for issuance of a charitable donation receipt and which do not.

  • Only the property may be eligible to receive a charitable donations tax receipt for the donation made.
  • Someone who donates services do not qualify as charitable donations.

 

The CRA provides the following list of property transfers which do not qualify as charitable donations:

  • a court ordered transfer of property to a qualified donee;
  • the payment of a basic fee for admission to an event or program;
  • the payment of membership fees that convey the right to attend events, receive literature, receive services, or be eligible for entitlements of any material value that exceed 80% of the value of the payment;
  • payment for a lottery ticket or other chance to win a prize;
  • the purchase of goods or services from a charity;
  • a donation for which the fair market value of any benefit provided to the donor exceeds 80% of the value of the donation;
  • a gift in kind for which the fair market value cannot be determined;
  • donations provided in exchange for advertising/ sponsorship;
  • gift certificates donated by the issuer (with some exceptions);
  • a pledge or promise to make a gift;
  • loans of property;
  • use of a timeshare; and
  • the lease of premises.

 

Where a donation of property does qualify as a charitable donation under the rules, the charity can issue a charitable donations tax receipt which will entitle the individual donor to claim a tax credit on his or her tax return for that year, or any of the five subsequent tax years. While the amount of any CPP disability benefit received will depend on the amount of contributions made, the maximum of such monthly benefit payable in 2016 is $1,290.81.

 

Disbursing funds

There are detailed rules which govern and limit the amount and types of disbursements which charities may make.

 

  • Disbursement quota—the minimum calculated amount that a registered charity is required to spend each year on its own charitable programs or on gifts to qualified donees, such as other registered charities. That disbursement quota, which is calculated separately for each charity, is based on the value of a charity's property not used for charitable activities or administration during the previous 24 months. While the calculation can be complex, the general rule is that if the average value of a registered charity's property not used directly in charitable activities or administration during the 24 months before the beginning of a particular fiscal year exceeds $100,000, then the charity is required to disburse 3.5% of the average value of that property during the fiscal year. Charitable organizations that qualify as private or public foundations are similarly subject to the 3.5% disbursement requirement, but for such foundations the threshold average property value which triggers that requirement is $25,000. The rules do provide some flexibility in that an excess of disbursements made during a particular year can be carried forward for 5 years or back for one year to cover any shortfalls. In other words, a registered charity can draw on disbursement excesses from the five previous fiscal periods to help it meet a shortfall. If no excesses are available to draw on, the charity can try to spend enough the following year to create an excess that it can carry back to cover the shortfall from the year before.

 

Filing information returns

  • Form 3010 - An annual information return in which it reports on its activities, sources of revenue, and expenditures for the year.
  • Must be filed with the CRA within 6 months after the end of a charity’s fiscal year.
  • Must also file its financial statements as part of a complete return.

 

Losing charitable registration status

  • Damage to the public image of the charity.
  • Will seriously impact its ability to raise funds.
  • Finally, a registered charity which has its status revoked must either transfer its assets to an eligible one (generally another registered charity which is in good standing) or must pay a “revocation tax” which is equal to the full value of the charity’s property at the time of revocation.

 

Most often, revocation of a charity’s status is the result of its failure to meet its information filing requirements. Less frequently, such revocation follows an audit by the CRA which discloses that the charity is not meeting its requirements for registration in that it is failing to devote its resources to charitable purposes and activities, is failing to maintain direction and control over its resources, or perhaps is not keeping adequate books and records. The revocation of a charity’s status is a last resort for the CRA.

 

Whatever the reason for the potential revocation, the charity will be given advance notice and an opportunity to remedy any defects identified by the CRA, or to appeal against the CRA’s finding of those defects. The time frames for those notice and appeal periods will differ, depending on the reason for the threatened revocation. Where the CRA determines that it is necessary to revoke an organization’s charitable registration (or where a charity has voluntarily asked for such registration to be revoked), a notice of that revocation, the reason for the revocation, and its effective date are all published on the CRA website.