Registering your organization as a charity with the Canada Revenue Agency (CRA) brings certain advantages, but also several complications and regulatory obligations. Before applying for registration, you should be confident that these benefits outweigh these complications and obligations and that this is the best solution for you.
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Benefits of being a charity
Registered charitable status has three basic advantages. Registered charities:
- may issue official donation receipts to donors;
- enjoy favorable tax treatment for their income;
- benefit from the good reputation of the charitable sector.
Issuance of official donation receipts
Donation receipts are a benefit to donors and can be an important factor in promoting fundraising activities. Here are the implications of issuing donation receipts for the types of possible donors below.
- Individual donors . Many people take advantage of donation receipts to reduce the amount of income tax they have to pay.
- Companies . Some companies can benefit from the reduction of their taxable income by making donations for which a receipt is issue. But many businesses support charities through sponsorships , rather than donations, and these expenses are often tax-deductible business expenses. In this specific case, a donation receipt offers no additional benefit to companies.
- Foundations and charities . Foundations and charities can only, as a general rule, make donations to register charities. On the other hand, charities that receive donations of this type do not have to issue donation receipts in this case.
- Governments . Governments can fund any type of organization they want, but funding under some government programs may be restricted to register charities.
Favorable tax treatment
Registered charities are not subject to income tax on any earnings.
For the goods and services tax (or for the harmonize sales tax or the Quebec sales tax), the situation of charities is, in truth, less favorable than that of businesses. Businesses generally recover all the GST/HST/QST they pay through input tax credits, while charities are only reimburse half of the amount of this tax. This problem can be more serious, in some situations, than income tax, especially if a charity does not anticipate excess revenues over its expenses, since it must pay the GST/HST/ PST applicable.
Benefit from the good reputation of the charitable sector
Registered charity status is view favorably by many Canadians. This positive image encourages people to support charities. It also motivates the person behind the establishment of a charity.
Some Canadians also assume that registered charities are more regulate and monitored than other nonprofits, which instills more confidence in Canadians in donating to charities. Although charities are truly more regulated, meeting the regulatory obligations to maintain their charitable status is no small feat. The weight of these obligations must be weigh against the advantages presented above.
Control of charities
One motivation is common to many people who wish to found a charity: to maintain control, either of “their” program or activity, or of “their” funds. This motivation, although generally base on good intentions, is often mistaken.
It is the board of directors that exercises control of the organization, since it has legal responsibilities towards the organization itself and its charitable purposes and not towards the founder. In addition, several regulatory constraints govern the activities that any charity can legally carry out .
If the founder primarily wishes to tightly control planned activities (in the case of a charitable program) or ongoing funding (in the case of a private foundation), options other than registration as a charity are likely to suit him better.
Favorable tax treatment
Registered charities are not subject to income tax on any earnings.
For the goods and services tax (or for the harmonized sales tax or the Quebec sales tax), the situation of charities is, in truth, less favorable than that of businesses. Businesses generally recover all the GST/HST/QST they pay through input tax credits, while charities are only reimburse half of the amount of this tax. This problem can be more serious, in some situations, than income tax, especially if a charity does not anticipate excess revenues over its expenses, since it must pay the GST/HST/ PST applicable.
Benefit from the good reputation of the charitable sector
Registered charity status is view favorably by many Canadians. This positive image encourages people to support charities. It also motivates the person behind the establishment of a charity.
Some Canadians also assume that registered charities are more regulated and monitored than other nonprofits, which instills more confidence in Canadians in donating to charities. Although charities are truly more regulated, meeting the regulatory obligations to maintain their charitable status is no small feat. The weight of these obligations must be weighed against the advantages presented above.
The Complications of New Charities
People who want to start a charity want to establish, as a general rule, either a charity (which mainly manages charitable activities) or a foundation (which mainly makes donations to other charities that correspond to its objectives ). Both types of organizations face common and unique challenges.
A charity must:
- have legal personality. A charity is often a corporation. As a corporation, a charity should, in principle, have bylaws , policies and procedures, convene its members, have minutes of meetings, maintain necessary books and statements of accounts and so on.
- be governed by a board of directors. At least three directors are often required; they must meet regularly and minutes must be drawn up on each of these meetings. Directors’ civil liability may be incurred to some extent by the actions of the charity, which means that there is a risk associated with the duties of a director.
- have only eligible directors who sit on its board.
- comply with various legislative and regulatory requirements, including those of the CRA.
- have the resources necessary to effectively carry out its mission, whether it is the management of charitable programs or the awarding of grants.
In addition, an operating charity must also raise all funds necessary to administer its programs, as well as to carry out the responsibilities set out above. Fundraising is a specialized function that may require dedicated volunteers or staff to fundraise in order for the organization to raise enough money. These fundraising activities entail responsibilities to funders, such as consistently respecting the wishes of funders in the use of funds, being accountable and formally thanking funders, among others.
On the other hand, for a foundation, fundraising may not be a concern, if it has been endow by its founder. However, it must:
- spend part of its funds to finance the exercise of the above responsibilities;
- manage and invest its funds effectively; ,
- research and grant with caution;
- monitor to ensure that these funds are use appropriately and in accordance with the foundation’s mission. The specific conditions stipulated for its grants.
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The regulatory obligations of new charities
Registered charities are governed by the relevant requirements of the Income Tax Act. Registered charities must:
- Only perform permitted activities. A charity is require, as a general rule. To carry out only charitable activities that enable it to achieve its charitable objectives.
- maintain adequate records. Although there is no requirement specifying what records to keep. They must be clear and complete so that the CRA. Can verify that the activities carried out are consistent with its charitable purposes. Generally the records should be the following documents:
- governance documents – corporate records, meeting minutes and reports;
- financial information – bank statements, journals, general ledger, duplicate donation receipts, payroll records, investment records, and financial statements and reports ;
- supporting documents – invoices, cashed checks, deposit slips, credit card statements and notes, contracts, emails and memos.
- issue complete and accurate donation receipts . The CRA precisely defines the information that must appear on a donation receipt. All calculations and information supporting the value of donations and benefits must also be kept.
- comply with annual spending requirements .
- file a T3010 annual information return . An annual form must be completed and filed with the CRA within six months of the end of the fiscal year . Failure to file this return results in revocation of the charity by the CRA.
- maintain legal charitable status. This status must be maintain, typically by holding an annual general meeting, electing directors, appointing auditors, and so on.
- notify the Charities Branch of the CRA of any change in the charity’s activity or legal structure. Charities should notify the CRA in writing of material changes to their activities, legal status, or contact information.