WHAT IS A NOT-FOR-PROFIT ORGANIZATION?
A not-for-profit organization is defined as an unincorporated association or corporation that operates solely for the purposes of social welfare, civic improvement, pleasure, and recreation. In general, the organization’s primary motivation is not to make a profit, but to help a specific social cause.
SO, MY NOT-FOR-PROFIT ORGANIZATION CANNOT EARN A PROFIT?
On the contrary, a not-for-profit organization is allowed and even encouraged, to receive funds to further its social purposes. The not-for-profit organization may even engage in commercial activities as long as these activities are incidental to its not-for-profit purposes. However, the funds cannot be used to provide the owners and members of the organization with financial benefits. Instead, they must be reinvested into the organization to ensure that it can continue to run.
UNINCORPORATED NOT-FOR-PROFIT ORGANIZATION
Not-for-profit organizations can be unincorporated associations or not-for-profit corporations. What is the difference between the two?
An Unincorporated Association is a group structure where a collection of people act together to accomplish a social purpose without any intention to earn a profit. These organizations are not governed by a federal or provincial statute and are easy to establish which makes them enticing business structures for people who want their organization to exist with little government oversight.
An Unincorporated Association also allows for a flexible internal structure as the members of the organization may create their own constitution which established the rules of how the organization is run, who the members are, and how to settle any disputes that may arise. It is important to note that the organization’s constitution will not be legally binding unless the members treat it like a legal contract. To do so, you should visit a lawyer to help you create a legally binding contract.
Another important aspect of an unincorporated not-for-profit organization is that is not considered a “separate entity” under the law. In other words, it will not have the same rights as a distinct person in law. There are several repercussions of not having such rights. For example, not being considered a “separate entity” under the law means that the organization will not be allowed to enter into legally binding contracts in its own name, be sued or sue in its own name, hold property, or bring an action without first obtaining leave or permission from the courts. Instead, the members of the organization will have to do these acts themselves.
Additionally, the members in charge of the unincorporated not-for-profit will be personally liable for any acts or liabilities of the organization if any issues arise. As a result, this structure should typically be used when the activities the organization is carrying out do not put the members of the organization at risk of liability. As an additional precaution, the organization should also obtain insurance to protect itself and its members from personal liability.
Examples of un-incorporated not-for-profit organizations include Trade Unions and Political Parties.
NOT-FOR-PROFIT CORPORATIONS
For many people, the word corporation signifies a business that intends to make a profit. However, corporations can be created for not-for-profit purposes as well. To become a Not-for-Profit Corporation in Canada, the members must incorporate the organization under the federal Canada Not-for-profit Corporations Act or a similar provincial statute such as the Ontario Not-for-profit Corporations Act.
After the incorporation, the Not-for-Profit organization becomes a “separate legal entity” that is distinct from its members such as the shareholders, directors, and officers. Being a separate legal entity allows the corporation to enter into contracts, buy, hold, and sell property in its own name, and sue and be sued as a corporation. It also limits the liability of the shareholders, directors, and officers from any actions.
A Not-for-Profit Corporation will have formal governing rules, such as the Articles of Incorporation, describing the structure of the corporation. Another advantage to having a corporation status is the increased credibility with the public, the government, and any donors.
One disadvantage of incorporating a Not-for-Profit organization is the increased time and effort needed to manage the corporate structure (i.e. formal meetings, documentation filing, etc.). There may also be more constraints on the type of activities the organization may perform. However, these are insignificant disadvantages in comparison to the challenges unincorporated organizations may face.
Examples of not-for-profit corporations include Soccer Foundations, Golf Club Societies, Hockey Associations, Baseball Leagues and Festival Organizations
WHAT IS A CHARITY?
Although similar to a not-for-profit corporation, a Registered Charity has many more requirements in addition to operating for a not-for-profit purpose. To be considered a charity, the charity must meet 3 additional criteria. It must (1) be exclusively dedicated property, (2) for a charitable purpose, and (3) that is for a public benefit.
AN EXCLUSIVE DEDICATION OF PROPERTY
To qualify as a charity, the organization must exclusively be devoted to charitable purposes. If the organization is created for a charitable and a non-charitable purpose, the charity will be void. The charity must be 100% charitable, 99% is not sufficient.
CHARITABLE PURPOSE
According to the Charities Accounting Act, to be considered a charity, the organization must utilize its resources to further one of four allowable charitable purposes:
- relief of poverty
- advancement of education
- advancement of religion
- any purposes beneficial to the community
This criterion is usually the most challenging for people to meet as the courts have established many strict rules throughout the years on what activities fit the four charitable purpose heads.
For example, courts have interpreted relief of poverty to mean more than providing for the basic necessities of life. In a recent 2022 case, the court confirmed that beneficiaries of such charities do not exactly have to be on the brink of starvation as long as the charity helps alleviate even temporary financial challenges arising from emergencies (Re Jim Crerar Charitable Trust).
For the advancement of education criterion, courts have concluded that the simple provision of information or the broadcasting of news programs is not sufficient to be considered an advancement of education even though the information might be subjectively educational (News to You Canada v MNR).
When it comes to the advancement of religion, the court has established some Guidelines to help identify what are acceptable activities. Specifically, for religious charity law purposes, the religion must encompass faith in a supreme being and have a comprehensive system of worshiping this supreme being. If the purpose and activities do not meet the guidelines, you may be at risk of the courts declining your charity’s registration application under the advancement of the religion criteria.
It is most difficult to fit the fourth criterion: the “other purposes beneficial to the community” as courts do not like to expand the definition of what is “beneficial to the community” for fears that an extremely broad definition will open the floodgates to a drastic increase of opportunistic and improper charities. To ensure your charity application will be successful, it is best to see an experienced charity lawyer who knows what purposes will be acceptable and how to formulate the application properly.
FOR A PUBLIC BENEFIT
No matter what criteria the charitable purpose falls under, it must provide a public benefit. The public benefit must be directed towards a sizable part of the community or the community as a whole. This means that the beneficiaries of the charitable purposes cannot be a list of named individuals.
EXAMPLES OF CHARITABLE ORGANIZATIONS IN CANADA
- Food Banks
- Soup Kitchens
- Places of Worship
- Animal Shelters
- Libraries
- Disaster Relief Organizations
- Cemeteries
THE DIFFERENCES BETWEEN A NOT-FOR-PROFIT AND A CHARITY?
REGISTRATION WITH THE CRA
To be recognized as a Charity in Canada, the charity must be registered with the Canada Revenue Agency (CRA). In contrast, Not-for-Profit organizations do not have to complete any further registration after incorporation.
SPENDING REQUIREMENT
Unlike charities, Not-for-Profit Corporations are not required to spend a minimum amount of money annually on charitable activities or gifts to qualified beneficiaries. The spending amount is based on the value of the charity’s property and assets that were not used to administer the activities. The assets may include stocks, bonds, lands, and money in bank accounts. If you believe that your not-for-profit corporation may not be able to raise sufficient funds to meet the spending requirement, you may want to rethink becoming a charity.
REVOKED CHARITY STATUS
It is possible for a charity to lose its charity registration status. If this occurs, the former charity would be required to pay 100% of the fair market value of all the organization’s assets which will cause much strain on the organization and its members. If the charity was also not incorporated, it may result in the members and owners of the organization being liable for the tax in their personal capacity.
OFFICIAL DONATION RECEIPTS
One significant advantage of Charities, unlike Not-for-Profit Corporations, is that the Charities are allowed to issue official donation receipts to their donors. These donors will then be able to receive tax credits for their donations. This may incentivize donors to donate to Charities instead of Not-for-Profit organizations.
TAX EXEMPTIONS
Charities are tax-exempt under Part I of the Income Tax Act. This means a Charity does not have to pay tax on any income received. The Charity is also exempt from charging any GST or HST on the services and goods they offer to the public and can sometimes claim a partial rebate on purchases.
HOW LONG DOES A CHARITY REGISTRATION APPLICATION TAKE?
The CRA usually responds to requests for registered charitable status within six months, depending on when the request is submitted. If the CRA requires more documentation, they would notify you to make any changes or additions which will delay the process.
DO I NEED A LAWYER TO REGISTER A NOT-FOR-PROFIT CORPORATION OR CHARITY?
Although starting such an organization can be a rewarding experience, there is a lot of planning and work involved in making sure the organization is successful. Unfortunately, many charity registration applications in Canada are unsuccessful because the requirements are difficult to meet, and the application process is quite hard to understand. To ensure a successful application, it is good practice to hire an experienced not-for-profit or charity lawyer who understands the requirements and process and can help you complete the application in a detailed and efficient manner.
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