Most Canadians understand that a charity is an organization that undertakes good deeds for the benefit of others or some cause understood to be charitable; however, the legal meaning of charity differs from the understood lay meaning, and an organization seeking registered charity status with the Canada Revenue Agency will not succeed without complying with the legal meaning.
The law does not assume that every organization that undertakes a cause for the public benefit is necessarily a charity. Fundamentally, if an organization wants to qualify as a charity under Canadian law it has two choices: either it finds a case which found that the cause in question was charitable in law, or it falls under some legal mechanism which effectively gives the organization the same benefits as other registered charities.
Charities vs not-for-profit vs for-profit
A registered charity is defined in the Income Tax Act as one formed for charitable purposes; but there is no statutory definition of "charitable purposes." A charitable purpose is one where a court has found that the cause to be undertaken falls within what the law understands to be charitable. Not all charities necessarily must be registered as such with the CRA.
It is important to understand that a not-for-profit is different from a charity, and different rules apply to such an organization. A not-for-profit is one which is not a charity at law but (like a charity) will not provide any benefits (generally payments) to the members of the group. Political groups (although not parties) and recreational organizations are typically not-for-profits. While in common parlance a not-for-profit and a charity are considered interchangeable, they are not the same thing and charities should be careful about referring to themselves as a not-for-profit as it implies that the group cannot issue charitable donation tax receipts.
A for-profit organization is one which is neither a not-for-profit nor a registered charity. Organizations should take care that they are not an unregistered charity as such groups might find themselves falling within the definition of for-profit organizations for tax purposes. Such organizations are subject to tax on all of their income and of course cannot issue charitable donation tax receipts.
Other qualified donees
Canadians understand that donations to registered charities result in tax receipts which can be used to create donation tax credits on their income tax returns. However, registered charities are only one of several groups which can issue tax receipts. These organizations are called qualified donees. The list includes the following types of organizations:
a) Registered Charities
b) Registered Canadian Amateur Athletic Associations
c) The United Nations or an agency of the United Nations
d) Federal, provincial or municipal governments, or a public body performing a function of government (generally refers to the government of an Indian reserve)
e) Certain not-for-profit housing corporations
f) Certain foreign universities listed in Schedule VIII to the Income Tax Act Regulations
g) Certain other foreign organizations that have been granted this status
The actual list of prescribed universities worldwide is very long and includes most of the universities in the USA and most other universities which have at least some Canadian students. There is a process available for universities that wish to be included on this list. Such universities should contact qualified legal counsel if they seek to be included.
The purposes for which a charity must be organized are known as charitable objects. They can be found in the organizing documents of every type of charitable entity. Typically, these statements serve to limit the organization’s ability to engage in any activity other than what is included in the objects. Over the past 400 years the law in this area has been divided into four categories, or heads. A proposed object that does not fall within one of the four heads is not eligible for registration.
There are two fundamental elements to a charitable object. The first is that the object itself must be found to have been charitable at law in a previous case, or the object must otherwise be analogous to some previously decided case. The second element is that the manner in which the object is to be fulfilled must be for the public benefit. It is not sufficient that the cause to be undertaken is to benefit the public - it must meet the element of having been decided to be charitable at law.
Entities will only get registered as charities if their objects allow them to pursue charitable purposes and nothing but charitable purposes. The CRA will also refuse registration where it finds that the entity has an unstated collateral purpose as evidenced by the entity’s activities. So, it is important that the objects be broad enough to encompass the organization’s activities but tightly worded to prevent the organization from pursuing activities which would not qualify as charitable. For this reason most successful organizations have between one and four objects and no more.
Properly drafted charitable objects are critical to a successful application for registered charity status. It is not sufficient to rely on the fact that there are other organizations out there that do similar work, or to provide a listing of the things you intend the organization to do. Rather, a considered, researched approach should be employed to ensure that the charity has the right to do what it needs – and to give the CRA confidence that the organization is deserving of registration.
This is an excerpt from Adam Aptowitzer’s new book, Starting and Maintaining a Charity in Canada now available through Civil Sector Press. Order your copy today.