Module 3 - Non-Profit Organizations
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Toronto Metropolitan University *
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Course
603
Subject
Law
Date
Feb 20, 2024
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docx
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8
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This week's readings are
not
in the Textbook. You will access the readings
by going to the website links set out below:
Council on Foundations.
Nonprofit Law in Canada
Government of Canada.
What is the Difference between a Non-Profit Organization and a Registered Charity
Government of Canada.
What are the different types of registered charities?
Government of Ontario. New Ontario Not-for-Profit Corporations Act (effective Oct. 19, 2021)
https://www.ontario.ca/page/guide-not-
profit-corporations-act-2010#section-0
Government of Canada.
How to Create a Federal Non-Profit Corporation
Government of Canada.
What are the different types of registered charities?
Government of Canada.
How do you Draft Purposes for Charitable Registration
Government of Canada.
Federal Government’s By-law Builder Tool for Not-
for-Profit Corporations
Government of Ontario,
Guide to the Non-For-Profit Corporations Act, 2010
Introduction
The charity and non-profit sectors are a significant part of the Canadian economy and have a big impact upon Canadians through job creation, volunteering opportunities, consumption and production of goods and services, and social benefits. In this module we will discuss non-profit organizations and charities. Although many consider a charity to be merely a type of non-profit organization, legally that is not correct. Charities are governed by strict rules that if adhered to gives them the privilege of being able to issue official donation tax receipts to donors. Non-profit
organizations do not have that privilege. As a result, from a tax standpoint, it is more desirable to
donate to a charity than it is to a non-profit organization. Among other things, we will discuss the
differences between non-profit organizations and charities and the different legal structures that may be used for these entities.
Topics and Learning Objectives
Topics
This module will cover the following topics:
Non-Profit Organizations and Charities
o
Non-Profit Organizations
o
Charities
o
Non-Profit Organization vs Charity
Charities
o
Types
o
Charitable Purposes
Federal Non-Profit Corporation
Learning Objectives
By successfully completing this module, students will be able to:
Non-Profit Organizations and Charities
o
Demonstrate an understanding of the difference between a charity and a non-profit organization.
Charities
o
Describe the different available legal structures for a charity and for a non-
profit organization.
o
Demonstrate an understanding of the 4 different charitable purposes.
o
Explain the 3 types of registered charities.
o
Demonstrate a basic understanding of how a charity becomes registered.
Federal Non-Profit Corporation
o
Apply the steps in creating a federal non-profit corporation.
Non-Profit Organizations
Non-profit organizations (“NPO”) and charities operate on a not-for-profit basis, but are very different. We will start by looking at the characteristics of NPOs. Some key points about NPOs are set out below:
They are associations, clubs, or societies that are
not charities
;
They are organized and operated exclusively for social welfare, civic improvement, pleasure, recreation, or any other purpose except profit;
Activities may generate profits provided it is clearly not the NPO’s purpose;
All their resources must be used for their activities;
Income cannot be distributed to their members, officers, directors or trustees;
They are tax-exempt (with limited exceptions); and
There are no limits on political activities.
If an organization is operating as a charity (whether it is registered as a charity or not) it
cannot
be an NPO.
A few examples of NPO are:
Amateur sports organization (e.g., basketball association; hockey league; soccer league)
Social, recreational, or hobby groups (e.g., chess club; golf club; community social club)
Festival organizations (e.g., jazz festival; holiday parade)
Professional association (e.g., Canadian Medical Association; Canadian Real Estate Association)
Political Party
Generally, an NPO can be legally structured in the following ways:
Trust
A fiduciary relationship where a donor or settlor allows a trustee to hold property for the benefit of other persons or for some stated purpose.
Unincorporated association
Group of 2 or more persons with a mutual objective, but not for profit.
Corporation without share capital
A corporation without share capital is a creature of legislation. It may be created under the federal
Canada Non-Profit Corporations Act
or under a similar provincial statute. This type of corporation does not have shareholders but has members. Members cannot benefit financially from the corporation.
Co-operative without share capital
A co-operative is a creature of statute. It may be created under the federal
Canada Cooperatives Act
or under a similar provincial statute. The co-operative will have members. No surplus or dividends can be paid to members.
Charities
Charities, like NPOs, operate on a non-profit basis, but as noted earlier are very different. A few important points about a charity are:
it is
not
an NPO;
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very limited as to their purposes and activities (to be discussed further below);
must be registered with the Canada Revenue Agency (“CRA”), otherwise they will be subject to taxation; and
can issue official donation tax receipts (if registered).
Charities must use their resources for charitable activities and have a charitable purpose that falls into one or more of the following 4 purposes:
1.
Relief of poverty
(e.g., food bank)
2.
Advancement of education
(e.g., university);
3.
Advancement of religion
(e.g., place of worship); and
4.
Other purposes that benefit the community
(e.g., libraries).
A charity must apply and receive registration from the CRA in order to be able to issue official donation tax receipts. If a charity does not obtain such registration it cannot issue such tax receipts. Furthermore, a charity that is not registered cannot be an NPO, and therefore will be subject to taxation.
In response to the case
Canada Without Poverty v AG Canada
2018 ONSC 4147 (CanLII) the federal government amended the Income Tax Act to clarify the extent of political activities that a charity can be involved in. As a result of the amendment, a charity is permitted unlimited
“public policy dialogue and development activities” to support or promote one or more of its charitable purposes
. However, to be clear, a charity
cannot
support or involve themselves in any
partisan political advocacy
. If you’re interested in learning more about this important issue please see the CRA Guidance,
Public policy dialogue and development activities by charities
.
Charities can take one of 3 legal structures: charitable organization, public foundation or private foundation. This will be discussed in a later section.
NPO vs Registered Charity
Please carefully review the article
What is the difference between a registered charity and a non-profit organization?
found on the Government of Canada website.
Question: How would you know whether that organization is a registered charity and will be able to give you an official tax receipt? Would you accept the organization’s assurance that they are registered or could you independently verify it?
Answer:
You can independently verify whether an organization is a registered charity. The CRA maintains a list of registered charities. You can search the list by going to the
Charities Directorate
on the Government of Canada website.
The
Canadian Donor’s Guide
contains interesting and informative articles related to
charities and non-profit organizations.
Types of Registered Charities
There are 3 types of registered charities:
1.
Charitable organization;
2.
Public foundation; and
3.
Private foundation.
A charitable organization is a “doing” organization – it devotes all its resources to the fulfilment of the charitable purpose. It can be set up as a corporation, unincorporated association, or a trust. On the other hand, a charitable foundation (public or private), in general, is a “granting” organization, meaning that it provides funds to other charitable organizations. A charitable foundation can be a corporation or a trust.
Please see the article
Types of registered charities (designations)
for an explanation of these 3 types of registered charities.
Charitable Purposes
As you have learned, charities must use their resources for charitable activities and have one or more of the following 4 charitable purposes: relief of poverty, advancement of education, advancement of religion, or other purposes that benefit the community. A charity must clearly state its purpose(s) in its governing documents to satisfy the CRA’s requirements for registration.
Remember, if a charity is not registered it will be subject to taxation.
Please carefully review the CRA’s Guidance on
How to draft purposes for charitable registration
.
Please review the above link before trying the questions below.
A charitable organization with properly drafted purposes can issue official tax receipts to donors.
Question: True or False? Why?
Answer:
False
. Only
registered
charities can issue official tax receipts to donors. In other words, the charity must apply to the CRA for registered charity status and actually receive it.
A charity that is not registered is in the worst situation – it cannot issue donation tax receipts; it is not
a non-profit organization; and it is subject to taxation.
A “two-part test” is used by the CRA to determine whether a charity should be permitted to be registered.
Question: What are the “two-parts”?
Answer:
The “two-part test” is:
1.
The organization is constituted for
purposes
that are
exclusively
charitable
and define the
scope of
activities
that can be engaged in by the organization; and
2.
Subject to limited exceptions,
devotes its resources to charitable activities that further
those purposes
.
To be registered as a charity an organization’s stated purposes must be exclusively charitable meaning that they must fall within one of 4 categories of charity.
Question: What are the 4 categories? (You should know this one. It was assessed earlier.)
Answer:
1.
Relief of poverty;
2.
Advancement of education;
3.
Advancement of religion; and
4.
Other purposes beneficial to the community in a way that the law regards as charitable.
CRA will also assess whether a charitable purpose satisfies 3 elements.
Question: What are the 3 elements?
Answer:
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A charitable purpose should identify the following 3 elements:
1.
charitable purpose (i.e., relief of poverty; advancement of education; advancement of religion; other purposes beneficial to the community in a way that the law regards as charitable);
2.
means of providing the charitable benefit; and
3.
eligible beneficiary group.
Tommy and Sophia are siblings and university students. Growing up they experienced the physical and emotional toll of not knowing whether there would be enough food to feed their family. They know that many in their community face this challenge every day. They want to play a role in eliminating hunger in their community. They want to start an organization that collects and distributes food to individuals, families, single parents, and homeless people. They will be actively involved, but they will need donations and volunteers to help.
Question: Tommy and Sophia want your advice as to how to set up such an organization.
Answer:
Here are some suggestions:
Charitable Purpose
– It appears that the purpose is exclusively charitable. It appears to fall within the first category, the relief of poverty.
Means of Providing the Charitable Benefit
– The relief of poverty will be achieved by collecting food and distributing it to those in need of food.
Eligible Beneficiary Group
– The benefit is focused upon individuals, families, single parents and homeless people that are experiencing hunger. Tommy and Sophia should specifically identify the community they are serving (e.g., City of Toronto).
Apply to CRA for Registration as a Charity
– Since the organization will require donations, it will be easier to raise donations if it can issue official tax receipts to donors. It appears that the organization should be able to satisfy CRA’s “two-part test” for registration as a charity:
1.
The organization is constituted for purposes that are exclusively charitable and they must define the scope of activities that can be engaged in by the organization; and
2.
Subject to limited exceptions, the organization must devote its resources to charitable activities that further those purposes.
Organization Structure
– A non-profit corporation (federal or provincial) will provide Tommy and Sophia with limited liability.
Creating a Federal Non-Profit Corporation
Different legal structures can be used to create an NPO or charity; however, a common structure is the non-profit corporation. This type of corporation can be created federally or provincially. The Ontario legislation on non-profit corporations is in the process of being up-dated. However, the federal legislation on non-profit corporations has been recently updated, so in this section we will focus upon the federal non-profit corporation. For those of you that are interested in Ontario non-profit corporations you can find useful information on the Ontario government’s website.
In this section you will be looking at how to incorporate a federal non-profit corporation under the
Canada Not-for-Profit Corporations Act
(S.C. 2009, c. 23). Please review the article
Creating a not-for-profit corporation
found on the Government of Canada website. Please ensure to review the following links within that article:
Incorporate now
Next steps following incorporation
Your reporting obligations
Model by-laws – Not-for-profit corporations
By-law builder: not-for-profit corporations
Apply to become a registered charity
By-laws are rules that regulate the activities or affairs of the corporation. They set out the rights and responsibilities of the members, directors and officers. They also set out the procedure for decision-making. Create a set of by-laws using the interactive tool
By-law builder: not-for-profit corporations
on the Government of Canada website.
Ontario Non-Profit Corporation
As of October 19, 2021, Ontario's Non-for-Profit Corporations Act, 2010 is in force. Read here about this new Act: Government of Ontario,
Guide to the Non-For-Profit Corporations Act, 2010
Summary
In this module we looked at the differences between a non-profit organization and a charity. We also looked at the different legal structures available for charities and for non-profit corporations,
how to register a charity, and how to incorporate a federal non-profit corporation.