The terms “charity” and “non-profit” are often used interchangeably, but these terms actually have very different meanings.
A registered charity is a specific type of non-profit organization that has received “registered charity” status from the Canada Revenue Agency (the “CRA“). A non-profit must formally apply to the CRA and undergo a vetting process to obtain registered charity status.
Attaining status as a registered charity provides many benefits such as increased public recognition; the ability to qualify for certain grants only available to registered charities; the potential for a partial rebate of GST/HST incurred on goods and services consumed by the charity in the course of operations; and perhaps most importantly, the ability to issue charitable tax receipts to donors.
The ability to issue charitable tax receipts to donors is particularly valuable where the organization solicits donations from individuals. A charitable tax receipt allows an individual to claim the charitable donation tax credit in their personal income tax return. This credit significantly reduces the after-tax cost to an individual of making a charitable donation. Corporate donors tend to be less concerned about receiving a charitable tax receipt as they can often claim the donation as a marketing expense.
The privileges available to registered charities are not without some drawbacks. Registered charities are required to file a Registered Charity Information Return (Form T3010) with the CRA on an annual basis, and to maintain books and records acceptable to the CRA. Further, charitable status results in some of the charity’s financial information becoming public. This can include things like the charity’s total annual revenue, amounts paid to external fundraisers or the number of employees and their salary ranges.
Registered charities are also required to meet stricter requirements regarding their utilization of assets and employees. In short, a registered charity is required to devote its funds, personnel, and property to its charitable purposes. Charities are also required to spend a minimum amount each year on their charitable activities or on gifts to other “qualified donees” (for example, other registered charities).
Additionally, registered charities are required to inform the Charities Directorate of any changes to their modes of operation or legal structures. Prior approval of the CRA may also be required if the charity wishes to amend its by-laws, its stated charitable purposes or the types of activities it carries on.
If a registered charity fails to meet the applicable regulatory requirements it can be penalized or have its registered status revoked by the CRA. If a charity’s status is revoked, it may become subject to a “revocation tax”, a highly punitive tax which will be discussed in a future blog post.
Non-profit organizations are encouraged to consider whether registered charity status would be beneficial to their operations. Considerations include whether the organization has exclusively charitable purposes, if the organization has sufficient volunteer or staff support to satisfy the applicable regulatory and administrative requirements on an ongoing basis, and the importance of the ability to issue charitable donation tax receipts to the non-profit’s operations.