Should we set up a Canadian Charity?
Published under Charity Law In Canada
[For a more recent version of this post see Should We Set Up A Canadian Charity? in PDF format]
Every couple of days someone calls my office in Toronto to discuss whether they should set up a Canadian non-profit and obtain charitable status.
Below we will discuss some of the many factors that may be relevant to such a decision.
1) The first matter to contemplate is what you are trying to accomplish and your goals. There are approximately 85,000 charities in Canada registered with the Canada Revenue Agency (CRA). The CRA is the Canadian equivalent of the US Internal Revenue Service (IRS). Is there a charity currently in existence whose objects and activities are similar to your interests? If so, you may wish to consider joining such a charity nd providing financial support or volunteering or partnering with such charity instead of establishing a new charity.
2) Is the matter you are trying to deal with charitable? Setting up a golf club or trade group may be fun and interesting, but it is not charitable. In the 1891 Pemsel case there were identified four heads of charity namely: relief of poverty; advancement of education; advancement of religion; and other purposes beneficial to the community. The Income Tax Act, Court decisions and positions of the Canada Revenue Agency have over time expanded the definition of what is charitable. For an organization to be a charity, its objects need to be exclusively charitable. Also it cannot undertake any partisan political activities. A charity is also severely restricted in terms of the non-partisan political activities that it can undertake. If the organization’s objects and activities are not charitable it still may be useful to set up a non-profit or for profit limited liability corporation to conduct the activities.
3) Some people don’t realize that unlike a business corporation which can be setup in a few hours and the costs are minimal, a non-profit corporation typically takes about 25 days to setup and obtaining charitable status can take between 4-8 months, depending on a number of factors. The time, energy and cost required can be significant. Another item that some people are surprised about is that you should have 3 arms length directors to incorporate a non-profit unless it will be a Canadian private foundation. If you cannot find another two people interested in working with you then this is a good indication that you should abandon the attempt quite quickly!
4) As well are you looking for a short term solution or a long term solution? As a result of the time and expense of setting up a charity it is usually not worthwhile unless you are planning on having the organization last for a substantial period of time. Do you think your interest in this matter is going to wane in a few months? If you are attempting to establish a long term presence in Canada and will take on long term responsibilities such as employees, leases etc then establishing a non-profit and applying for charitable status may make sense.
5) The next issue that one needs to contemplate is funding. If you are only interested in obtaining Canadian corporate sponsors (as opposed to individuals) you may not need a corporate entity (non-profit) and a charitable registration because some businesses can write off certain reasonable business expenses for promotion, sponsorship etc. and they will not require a donation receipt. If you anticipate only receiving government funding you may not need to be a charity, perhaps being a non-profit corporation may be sufficient from the government funder’s perspective.
6) If you have some substantial individual donors and you want to create a charitable organization in Canada, it may be beneficial to incorporate a non-profit corporation AND also to obtain charitable status. Non-profits in Canada are a useful tool to carry on community work but they cannot issue tax receipts which individuals typically require in order to receive a tax credit in Canada. Also many companies, foundations and government agencies restrict funding to registered charities. Having charitable status can significantly increase the likelihood of certain types of funding.
7) Another matter to consider is the risk associated with an activity. The higher the risk, the more important it is to have limited liability that can be obtained by incorporation of a non-profit.
8) Costs. One of the big questions that clients are concerned with is the costs of setting up a non-profit or charity. The answer is of course that “it depends”. First, one does not require a lawyer to assist with the formation of the non-profit and the charitable registration. One can find large amounts of useful information at the Industry Canada website (as well the provincial equivalents such as in Ontario the Ministry of Government Services) and the Canada Revenue Agency website (see below). If you do it yourself the out of pocket costs should be in the range of $500 dollars. The amount of time required to understand the incorporation and application process is substantial and mistakes can be costly and frustrating.
Many people find that it is time consuming and confusing to set up a charity and legal help provided by a lawyer who is knowledgeable about non-profits and charities reduces the stress associated with the process, shortens the time required and increases the chances of success. The typical fee to set up a Canadian non-profit and to obtain charitable status is between $5000 - $7000 Canadian. The disbursements are approximately $500.
A simple rule of thumb is that if you have lots of time, lots of interest in the nuances of corporate and charity law, no money and the consequence of failure is minimal, then you may wish to try doing it yourself. If you are busy, your time is valuable, you want to avoid making mistakes and you want the process to move along more expeditiously then consider obtaining legal help. My preferred model is working closely with clients whereby the clients do a lot of the work and this keeps the costs down.
Some of the matters that result in difficulty for some people are decisions about whether to incorporate federally or provincially, choice of name, properly setting out the objects and ensuring they are charitable, organizing the corporation, understanding technical terms such as non-arms length, dealing with the statement of activities in the application for charitable status, deciding on structure and whether such choices result in a charitable organization, public foundation or private foundation, deciding on appropriate fundraising mechanisms, dealing with charitable activities outside of Canada and other operational issues.
Another matter to keep in mind is that the ranges above for a typical incorporation vary because of the complexity of the situation but also the degree of organization and responsiveness of the client. A well organized and highly motivated client who provides the lawyer with the information required can substantially reduce the amount of time required for a lawyer to incorporate the non-profit and prepare the application for charitable status.
A special note for charities outside of Canada thinking about having supporters in Canada set up a Canadian charity. In addition to the aforementioned concerns are issues such as right to use a name or trade mark, the relationship between the Canadian and foreign charity, the degree of control of the foreign charity and how funds from the Canadian charity can be used outside of Canada, whether to set up a Canadian charity or to partner with an existing charity. Recent Canadian cases such as the Tel-Aviv Foundation case and the Magen David Adom case show the importance of having proper “direction and control” by the Canadian entity including written agreements and following through with them when carrying on activities outside of Canada.
For further information on legal resources for Canadian Non-Profits and Charities please visit http://www.globalphilanthropy.ca
To subscribe to Blumbergs’ non-profit and charities law e-mail newsletter please go to http://www.blumbergs.ca/newsletter.php
If you wish to retain Blumbergs to assist with legal issues, such as a consultation or establishing a charity in Canada please contact Mark Blumberg at .(JavaScript must be enabled to view this email address) or at 416-361-1982.
Comments
My name is Luis Arthur M. Rosaroso, Canadian Citizen residing in Mississauga, Ontario, Canada. My family and I recently visited my elementary school in Paypay, DaanBantayan, Cebu, Philippines and after talking with the school principal we found it appropriate to extend some assistance to the school. since the need are in wide array, mywife and I with the support of our daughters 13 and 10 are planning to help restore, improve and maintain the elementary school library.
Please let us know, how may we be able to credit our charity expenses towards our taxes in Canada?
Please provide us some advise so that we may be able to continue with our family charity project for Paypay, Elementy School in Paypay, DaanBantayan, Cebu, Philippines.
Best Regards,
Luis Arthur"jet” rosaroso and family
Great resource. Thank you!
The CRA has just posted a helpful piece which will add to your understanding of whether one should apply for charitable status.
http://www.cra-arc.gc.ca/tx/chrts/pplyng/rgstrtn/mnd-eng.html
Make an informed decision
The decision to apply for registration as a charity is an important one. After a charity is registered, it will have many obligations to meet each year, such as filing an information return and meeting a spending requirement. A charity has obligations to the recipients of its charitable activities, to its volunteers, to its donors, and to the general public. There are also a number of legislative and regulatory obligations a charity must fulfill for the various levels of government (federal, provincial, and territorial).
If a charity changes its mind after registration and wants to wind up or dissolve, it must ask to have its registered status revoked. A revoked charity must give all its assets to another registered charity, or pay a revocation tax equivalent to the full value of its remaining assets.
Before you apply for registration as a charity, consider the following options:
You and your members can volunteer with, or raise funds for, an established registered charity that is doing the same work that your organization wants to do.
You and your members can contribute to a charitable fund of another registered charity with charitable activities you want to support.
You and your members can become board members of an existing registered charity that is carrying out similar charitable work.
Your organization may qualify as a non-profit organization. The purposes and activities of non-profit organizations are not as restrictive as those of registered charities.
Top of pageIf you are still interested in applying for registration, take the following mini-quiz to see if registration is right for you.
Is your organization resident in Canada?
Is it important that your organization is able to issue official donation receipts for income tax purposes or will your organization be receiving gifts from other registered charities?
Does your organization have exclusively charitable purposes?
Will your organization be able to recruit volunteers and staff members on an ongoing basis to carry out your charitable purposes and activities?
Does your organization have the necessary skills and resources to meet all of the obligations of registration?
Is your organization aware of the consequences of not continually meeting all of the obligations of registration as a charity?
Does your organization have enough support and reach that will result in the necessary donations or funding to fulfill your charitable purposes and carry out your activities?
Is your organization willing to give all its assets to another registered charity if, and when, your organization ends its operation?
If you answered yes to all these questions, registration may be right for you.
However, there are factors that will prevent an organization from being registered that you should be aware of before making a decision to apply for registration as a charity.
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