Why would an organization register as a charity with the CRA? What are the advantages?
A registered charity has considerable advantages under Canadian income tax law.A registered charity
- is exempt from income tax
- is able to issue official donation receipts. Individual donors use these receipts to reduce the income tax they would otherwise have to pay, while corporate donors use them to reduce their taxable income. This, in turn, may result in more gifts to the charity.
- enjoys a favourable position under other federal taxes such as the Goods and Services Tax
- can receive money from foundations and other charities because the organization is officially recognized as a “qualified donee”.
- can have increased credibility in the community because the public knows that the charity has to follow rules in order to have charitable status.
- can get publicity on websites and listings of charities in Canada.
What are the responsibilities of a registered charity?
In return for the advantages of being a registered charity, a charity must follow certain rules.
There are three general categories of responsibility:
1. A registered charity can only do a limited range of things. It can advance religion, relieve poverty, carry out education, or undertake programs and activities of benefit to the community that the law considers charitable.
2. It must follow detailed rules under the Income Tax Act (ITA) for spending money, receiving income, and reporting.
3. It cannot engage in a range of activities that the law considers political.
As part of its responsibilities, a registered charity must:
- ensure that all its activities are charitable and within its objects
- demonstrate that it is devoting its resources to its stated charitable purposes
- keep accurate, detailed and complete records, books and receipts
- ensure that it does not pay, or otherwise make available, its income to any of its members
- ensure that at least 50 per cent of its directors are at arm’s length (that is, not in a close relationship) with each other. (Excepting private foundations )
- meet its spending requirement (disbursement quota)
- ensure the accuracy of all official donation receipts and ensure that all such receipts are in accordance with the ITA and its regulations
- file a yearly T3010 Information Return on time (within six months of the organization’s fiscal year-end)
- engage only in permitted political activity. A charity cannot
- engage in any political activities to support or oppose a political party or a candidate;
- try to influence public opinion on a broad social question; or
- advocate for a change in law or policy.
However, a charity can spend up to 10 per cent of its resources on non-partisan political activities that help to accomplish the charity’s purpose. All political activity must also be ancillary and incidental to the objects of the charity.
- not make any changes to its constitution without the approval of the Canada Revenue Agency (CRA)
- allow the CRA to audit its books and activities, if asked
- carry out all other obligations under the ITA.
These responsibilities are to be taken very seriously, as any violation could result in public embarrassment, the loss of reputation, and a range of sanctions by the CRA (such as financial penalties, the loss of privileges until corrective action is taken, or ultimately the revocation of charitable status). If an organization’s charitable status is revoked, it can no longer issue tax receipts for donations and will no longer be a qualified donee.
Is there only one type of “registered charity”?
No. There are three types of registered charities under the Income Tax Act: charitable organizations, public foundations, and private foundations. This designation is issued by the CRA at the time of registration. Different rules apply to each type.
A registered charity is designated as a charitable organization if:
- it devotes its resources mainly to charitable activities carried on by itself
- more than 50 per cent of its directors, trustees, officers, or similar officials deal with each other and with each of the other directors and/or trustees at arm’s length
- in general (there are some exceptions), not more than 50 per cent of the funds that the charity has received have come from one person or organization or from a group of people or organizations that do not deal with each other at arm’s length.
A registered charity is a public foundation if:
- it is constituted and operated exclusively for charitable purposes
- it is a corporation or a trust
- it gives more than 50 per cent of its income annually to qualified donees.
A registered charity is a private foundation if:
- it is constituted and operated exclusively for charitable purposes
- it is a corporation or trust
- it is not a charitable organization or a public foundation.
Generally, charitable organizations focus on carrying out charitable activities, while public foundations focus on raising funds to support operating charities. An entity is designated as a private foundation rather than a charitable organization or a public foundation because those who fund or control it are not necessarily operating at arm’s length.
What rules govern registered charities?
A registered charity is permitted to do only certain kinds of activities:
- advance religion
- advance education
- relieve poverty
- undertake activities which are generally beneficial to the community as a whole and which the courts have determined to be charitable.
Other rules pertaining to registered charities include that:
- it must devote its resources to charitable purposes and activities
- it cannot pay, or otherwise make available, its income to any of its members
- it must issue official donation receipts in accordance with the Income Tax Act and the Income Tax Regulations (and an organization that is not a registered charity may not issue official receipts)
- it is required to keep proper books and records, and provide these and other relevant information to the CRA
- each year, the charity must file an annual information return
- each year, the charity must spend its “disbursement quota” (spending requirement). Generally speaking the disbursement quota is the minimum amount a registered charity is required to spend each year on its own charitable activities, or on gifts to qualified donees (for example, other registered charities). The disbursement quota calculation is based on the value of a charity’s property not used for charitable activities or administration. See: Meet annual spending requirement (disbursement quota).
For a checklist read Basic Guidelines for Maintaining Charitable Registration
How can my organization register as a charity?
In order to qualify as a registered charity under the Income Tax Act with the Charities Directorate of the Canada Revenue Agency (CRA), your organization has to
- be resident in Canada
- be established and operated exclusively for charitable purposes that are within the four categories of charity identified by the courts
- devote all its resources (financial, personnel, and property) to charitable activities
In considering registration, an organization has to review its governing document that describes its purposes (objects). The purpose of an organization is the why and the what (end results) of its existence. These purposes have to be within the four categories identified by the courts:
- to relieve poverty
- to advance education
- to advance religion
- other purposes beneficial to the community that the courts have found to be charitable.
If your organization’s purposes do not fall within the four categories, it cannot be registered unless you change its purpose. If it is provincially incorporated, changes have to be filed with the provincial regulatory body.
If the organization does not have a governing document, it will need to draft one. The CRA has a list of model objects that would be acceptable.
Key information that an application for charitable status must include
- the name and address of the organization
- the signature of two persons who are authorized to sign on behalf of the organization
- a statement of each of the organization’s purposes listed in the governing document and the activities to accomplish each purpose. The activities must be specific in order to clearly state what the organization intends to do.
- an explanation of how the organization will make decisions
- an estimate of the organization’s income and expenses (financial statements)
- a governing document that describes the organization’s purposes (also called objects). A governing document is a deed of trust, a constitution, or articles of incorporation (a not-for-profit organization that is incorporated under provincial, territorial, or federal law). This includes bylaws, a current list of directors, trustees, or other similar officials who make up the charity’s elected or appointed governing body with their full names, addresses, and occupations.
- The organization’s bylaws need to contain a clause stating that if the registered charity is dissolved, its remaining asset will be given to a qualified donee.
- information on fundraising activities, keeping in mind that fundraising activities cannot be the main object of a registered charity
- information on political activities. The charity is allowed to spend 10 per cent of its resources on non-partisan political activities to influence law, policy, and public opinion on matters related to its charitable purposes.
- a certificate of good standing. The name of this certificate varies from province to province. The incorporating authority issues this to certify that the organization is duly incorporated and is in good standing with the authority.
Additional information on completing the application form can be found here.
SEE ALSO: Thinking of Becoming a Registered Charity: Tools to Help published by the Centre for Public Legal Education Alberta.
How can I find out about the status of my application?
After sending in your complete application, if you are an authorized representative of the charity and are identified on the application form, you can call the CRA’s toll-free line at 1-800-267-2384 (English) or 1-888-892-5667 (bilingual) to inquire about the status of your application.
What are the consequences of not meeting the obligations of a registered charity?
If a registered charity does not meet its obligations, it may be subject to a penalty or revocation (that is, lose its charitable status).
The Charities Directorate of the CRA uses a scale to determine whether a charity is meeting its obligations. In increasing severity, the Charities Directorate may use the following tools:
- education (explaining the rules to a charity)
- compliance agreements (a formal document signed by the charity and the CRA identifying the problem, the solution, and the consequences if the charity does not solve the problem)
- financial penalty
- suspension of the charity’s right to issue official donation receipts (for example, for one year)
What would stop an organization from being registered as a charity?
The factors that prevent organizations from being registered as a charity are:
- not resident of Canada
- not established solely for charitable purposes
- not devoting all its resources to charitable activities
- giving gifts to organizations that are not qualified donees (that is, other registered charities)
- providing personal benefits directly or indirectly to members, shareholders, directors, and/or trustees. This does not include benefits to such persons who are legitimate recipients of a charitable program.
- private benevolence, that is providing benefit to a particular individual or private group
- political purposes, that is, furthering the interest of a political party or candidate for public office, or retaining or changing the laws of any level of government in Canada or in foreign countries
- commercial purposes with the intent to make a profit
- activities that are illegal or contrary to Canadian public policy
Detailed information on Factors that will prevent an organization from being registered as a charity
Does CRA have an established application review process?
For more detailed information see:
Canada Revenue Agency – Application Review Process
For links to more information and resources on “Becoming a Registered Charity“