Nonprofit organization and Registered Charity in Canada

Nonprofit organization and Registered Charity in Canada

Nonprofit organization generally refers to an organization that uses its accumulated surplus or excess funds for its self-preservation, expansion, or plans to achieve its stated objectives rather  than to distribute them as profit or dividends to its members 

Generally Nonprofit organizations are exempted from income taxes but are not necessarily exempted from other taxes such as consumption (GST/PST) and properties taxes

In Canada or elsewhere, Nonprofit organization are two kinds Charitable or Non-Charitable

A charitable organization centers on generous giving (philanthropic) to help poor and needy, educational, religious, or other activities serving the public interest or common good.   Examples churches, mosques, soup kitchen, food banks, some university and schools  

Some example of non-charitable organization are municipalities, Federal and provincial crown corporations, professional associations, trade unions etc.

A Charity in Canada may apply for registered status with the Charities Directorate of the Canada Revenue Agency.  There are three types of registered charities - charitable organization; public foundation, or private foundation.

Types of registered charities (designations)

Advantages of Charity Registration

The main advantages of being a registered charity are in Canada:

• Registered  charity  are allowed  to issue official donation receipts for gifts it receives; and donor can used it to reduce their income tax payable
• In most situations, registered charities can claim a partial rebate (50%) for the GST/PST/HST they paid.
• Registered charities are eligible to receive or give gifts to other registered charities

In Canada a Nonprofit organization generally cannot register for consumption taxes GST/PST/HS and cannot claim input tax credits, However, a registered charity can apply for GST/PST/HST rebate usually 50%  of amount paid. 

In Canada, a registered charity must be resident in Canada and there are four seprate categories of charity:

1. Relief of poverty

Examples: operating a food bank, providing non-profit residential accommodation for persons of low income; providing clothing, and other basic amenities to persons of low income; providing the necessities of life to victims of disasters or sudden catastrophes.

2. Advancement of education

Examples: establishing and operating schools; providing scholarships, bursaries, and prizes for scholastic achievement; childbirth education classes that focus on preparation for parenting and nutrition; increasing the public's appreciation of Aboriginal culture; and doing research in a recognized field of knowledge and making the results available to the public.

3. Advancement of religion

Examples: establishing and maintaining buildings for religious worship and other religious use; organizing and providing religious instruction; carrying out pastoral and missionary work.

4. certain other purposes that benefit the community in a way the courts have said is charitable. 

Examples: relieving a condition or disability associated with old age; providing facilities for the care and rehabilitation of the elderly; preventing and relieving sickness and disability, providing certain public amenities to benefit the community;
providing counseling services for people in distress; operating an shelter
operating a volunteer fire department.

In addition a charity must meet the public benefit test 

• it demonstrate that it provides a measurable benefit to the public; as a whole, or a significant section of it.  
• The beneficiaries cannot be a restricted group or one where members share a private connection.  
• An organization that wants to limit its beneficiaries unreasonably, or offer an unreasonable benefit to a group or individual, will not qualify for registration.

Application Process:

To qualify for a charity status, an organization must fill out Form T2050 and show in its application that it devotes all of its resources (funds, personnel, and property) to charitable activities that directly further its charitable purposes.  It should explain, in detail, the specific activities it will undertake to achieve each of the purposes stated in its governing document (letter of patent, constitution or bylaws, trust document, or other establishing documents).

Application review process

Charities Registration (Security Information) Act, under Part 6 of  The Anti-terrorism Act, re-defined the role and importance of protecting the integrity of Canada's registration system for charities in terms of Canada's anti-terrorism objectives to prevent terrorist financing through front organizations that have, or claim to have, charitable goals.

The legislation has been specifically designed to protect the use of very sensitive information that may reveal an organization's ties to terrorist groups.  This allows the Charities Directorate to make proper use of all information relevant to deciding whether an organization should be registered as a charity under the Income Tax Act.

If there are a reasonable grounds to believe, based on criminal and security intelligence reports, either that an organization makes its resources available, directly or indirectly to a terrorist group that is a listed entity under the Criminal Code, or to any other organization engaged in terrorist activities or in activities that support terrorist activities.

Charities Registration (Security Information) Act

A charity's stated  objectives must be set out clearly in its governing document such as letter of patent or bylaws.  Any stated objectives described which are not recognize by the common law as charitable is not eligible for registration.

When stating the formal objective(s) or purpose(s), an organization must keep in mind a number of important factors:

The stated objectives must be precise and clear and it must relates to the organization's current  goals that must be achievable.   Avoid using stated objectives which are wishful list of some where the organization has presently no resources or experience to achieve such objectives. 

see example  Model objects

What is a governing document?

A registered charity need not be incorporated, however, if a charity intent to borrow money, will acquire a immovable property (ensuring the continuity of the organization while the membership changes) or wish to limit any liabilities of its membership, it is  advantages in most cases mandatory to incorporate the organization  

Incorporation documents. 

See next article How to start a Nonprofit Organization in Province of Quebec