Charities and non-profit organizations contribute to the life and economy of the country. They perform various activities that complement the efforts of the government.
As with any other entities, they are also subject to regulations according to the appropriate Canadian laws for charities.
What are charities in Canada?
Charities in Canada are organizations or foundations registered with the Canada Revenue Agency (CRA) that use their resources for charitable activities. They operate for charitable purposes only.
These organizations or foundations must also be based in Canada and created under its laws for charities.
What are the laws for charities in Canada?
Aside from the requirements set by the CRA and other federal statutes, the Canadian laws for charities also include provincial or territorial legislation.
Foundations and organizations must be aware of these federal laws on charities:
Canada Not-for-Profit Corporations Act
This law applies to not-for-profit organizations (NPOs). The NFP Act outlines:
- process and requirements for incorporating
- the capacities and powers of NPOs, including the authority of their directors and officers
- process of liquidation and dissolution
Watch this video to find out how to register an NPO in Canada:
Entities that wish to register as NPOs in Ottawa or Toronto may consult with Lexpert-Ranked charities and not-for-profit lawyers in Ontario.
Charities Registration (Security Information) Act
Also known as the CRSI Act, this is another Canadian law for charities which foundations and organizations must comply with to maintain their status as registered charities.
It aims to prevent these entities from becoming vehicles of financial support to those who engage in terrorist activities in Canada or abroad.
Under this law, the Canadian government may use national security and intelligence information in deciding whether to allow an entity to be registered as a charity.
Income Tax Act
One of the most important Canadian laws for charities is the Income Tax Act. The Act defines the three types of registered charities and the tax treatment of registered charities. It also distinguishes between registered charities and NPOs, especially for taxation and other purposes.
“Charitable purposes”
Registered charities in Canada must operate according to a “charitable purpose”.
Under the laws for charities in Canada, there are four charitable purposes that an entity can use when registering before the CRA:
- relief of poverty
- advancement of education
- advancement of religion
- other purposes that benefit the community
Three types of registered charities
For the purposes of taxation, there are three types of registered charities in Canada under the Income Tax Act:
- charitable organization
- public foundation
- private foundation
It is the CRA that decides which type of charity an entity falls under.
Foundations vs. Charitable organizations
There are differences among the types of registered charities in Canada. These differences may be broken down into the following categories:
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Charitable Organizations |
Public Foundations |
Private Foundations |
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Number of directors |
has one or more directors, trustees, or officials |
has only one director, trustee, or official |
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Dealings of directors |
more than 50% of its directors, trustees, or officials deal with each other at arm's length (act independently of each other or those who are not related by blood) |
50% or more of its directors, trustees, or officials do not deal with each other at arm's length |
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Related businesses |
can carry out related businesses |
cannot carry out related businesses |
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Donors |
receive funding from donors at arm's length |
more than 50% comes from donors who control the charity in any way, or make up more than 50% of the directors etc. of the charity |
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Establishment |
as a corporation, trust, or under a constitution |
either as a corporation or a trust |
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Disbursement of funds |
do not need to make donations to other qualified donees |
required to give more than 50% of its annual income to qualified donees |
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Incurring debts |
can incur debts for non-operating expenses |
prohibited from incurring debts for non-operating expenses |
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Investments |
can purchase and sell any investments |
prohibited from purchasing and selling any investments |
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There are also similarities among these three types:
- they are established only for charitable purposes
- they carry out their own charitable activities (which is a must for charitable organizations)
- they can issue official donation receipts for income tax purposes
Non-profit organizations vs. Registered charities
While both NPOs and registered charities operate on a non-profit basis, both still have differences under the Canadian laws for charities.
One of the main differences between the two is the power to issue official receipts. NPOs cannot issue official donation receipts for income tax purposes, while registered charities can.
NPOs are also not covered by the laws’ impositions that must be followed by registered charities. For example, NPOs:
- are not required to register for income tax purposes
- don't have a spending requirement
- are not required to run exclusively for charitable purposes
As for its tax implications, both NPOs and registered charities are tax exempt. However, NPOs may still have to pay taxes on their property income or on their capital gains.
Even though both NPOs and registered charities may seem similar, they are treated differently under Canada’s laws for charities.
Provincial laws for charities
Whether an entity is a registered charity or an NPO, some provincial or territorial laws may also apply to them.
In this case, if an entity wants to be incorporated only at the provincial or territorial level, it may do so under a provincial or territorial law for charities.
Its dissolution and liquidation will also follow the law based on when it was incorporated.
As for its taxation, the applicable tax system (i.e. GST or HST) will also depend on the province where it operates. Tax matters, in general, still fall under the Income Tax Act.
To know more about Canada’s laws for charities, contact one of the best charities and not-for-profit lawyers in Canada as ranked by Lexpert.