This resource has been prepared by Nicholas dePencier Wright of Wright Business Law for educational purposes. This information is current as of the date of writing and does not constitute legal advice, which should be obtained prior to relying on anything herein.
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Incorporating a not-for-profit organization and obtaining charitable status in Canada is a multi-step process that allows organizations to operate legally, access public funding, and gain tax benefits. Whether you are starting a community initiative, a social service organization, or a cultural project, understanding the legal requirements and the process for incorporation and obtaining charitable status is crucial.
This article will guide you through the steps involved in incorporating a not-for-profit in Canada, obtaining charitable status, and addressing key legal considerations.
What is a Not-for-Profit Organization?
A not-for-profit organization (NPO) is an entity created to carry out activities that benefit the public or a specific group of people, rather than generating profits for its members or shareholders. While NPOs are not intended to make a profit, they can generate revenue from activities such as fundraising, grants, or providing services. The critical distinction is that any surplus funds generated by the organization must be reinvested into the organization’s activities, rather than distributed to members or stakeholders.
Charitable organizations, a subset of NPOs, must meet additional criteria set by the Canada Revenue Agency (CRA) to qualify for tax exemptions and to issue official receipts for donations that can be claimed as tax credits by donors.
Step 1: Incorporating a Not-for-Profit Organization
A. Choose a Legal Structure
In Canada, not-for-profits can be incorporated federally or provincially, depending on the scale and geographic scope of the organization.
Federal Incorporation: If your organization intends to operate across Canada or if you want to establish a national presence, federal incorporation may be preferable. Under the Canada Not-for-profit Corporations Act (NFP Act), a federally incorporated not-for-profit has the authority to operate in every province and territory.
Provincial Incorporation: If your organization operates primarily in one province, you may choose to incorporate under the relevant provincial legislation. In Ontario, for example, the Ontario Not-for-Profit Corporations Act (ONCA) governs the incorporation of not-for-profits.
The process for incorporation is relatively similar for both federal and provincial incorporation but involves filing specific documents with the appropriate authority (e.g., Corporations Canada for federal incorporation or the Ontario Ministry of Government and Consumer Services for provincial incorporation).
B. Choose a Name for Your Organization
Your organization must have a unique name that complies with the applicable legislation. The name should:
• Not be misleading or similar to other organizations.
• Reflect the purpose of the organization.
You can perform a name search through Corporations Canada or your provincial corporate registry to check if your preferred name is available.
C. Draft and File Articles of Incorporation
The Articles of Incorporation outline the purpose of your organization, its legal structure, the rules for governance, and the powers of its directors. When drafting the Articles of Incorporation, consider:
• The organization’s mission statement and goals.
• The types of activities the organization will engage in.
• The distribution of assets (ensuring that in the event of dissolution, assets are distributed to another NPO or charity).
• The structure of governance, including the number and powers of directors.
The Articles must be drafted using certain language and provisions in order to be eligible for registration as a charity. Once the Articles are drafted, they must be submitted to Corporations Canada or the provincial government. The incorporation process typically includes submitting a form, the Articles of Incorporation, and the required fee. Upon approval, the organization will receive a Certificate of Incorporation, which formally establishes the entity.
Step 2: Obtaining Charitable Status
A. Eligibility for Charitable Status
To apply for charitable status with the Canada Revenue Agency (CRA), your not-for-profit organization must meet specific criteria under the Income Tax Act. The organization must be established for one or more of the following charitable purposes:
• The relief of poverty.
• The advancement of education.
• The advancement of religion.
• Other purposes beneficial to the community, such as promoting health or the arts.
Additionally, charitable organizations must demonstrate that they operate exclusively for these purposes, and any income generated must be used to further those purposes, rather than benefiting any individual or member.
B. Application Process for Charitable Status
To obtain charitable status, an organization must apply to the CRA using Form T2050: Application to Register a Charity Under the Income Tax Act. This form requires detailed information about the organization’s:
• Structure: Who is involved in governance and how decisions are made.
• Activities: A description of the activities the organization will undertake to achieve its charitable objectives.
• Financials: How the organization will raise and manage funds, and how those funds will be used to further its charitable goals.
• Membership: If the organization has members, the CRA requires information about who is eligible to be a member and their role within the organization.
In addition to Form T2050, you must submit:
• Your organization’s governing documents (e.g., Articles of Incorporation, bylaws, and any other relevant documents).
• Financial projections for the first two years of operation.
• A copy of your mission statement and evidence of your intended charitable activities.
It is important to demonstrate to the CRA that your organization meets the legal requirements for charity registration and is not pursuing non-charitable purposes.
CRA Review and Approval
Once the CRA receives your application, they will review your submission and may request additional information or clarifications. If your application is successful, the CRA will issue a Registration Number, and your organization will be granted charitable status under the Income Tax Act. This allows the organization to:
• Issue official donation receipts for tax purposes.
• Qualify for tax-exempt status, meaning the organization is not required to pay income tax on its revenues.
• Apply for grants and other funding opportunities available to registered charities.
Ongoing Compliance Requirements
After receiving charitable status, your organization will have ongoing compliance obligations, including:
• Annual returns: Charities must file a T3010 form annually with the CRA, which provides details of the charity’s activities, revenues, and expenditures.
• Financial statements: Charities must prepare and maintain proper financial records and statements.
• Public transparency: The CRA requires charities to make certain information available to the public, including financial details and their charitable activities.
Failure to comply with these requirements can result in penalties or even the revocation of charitable status.
Key Considerations for Not-for-Profits and Charities
Governance: Ensure your organization has a clear governance structure and well-defined roles for directors, officers, and members. Effective governance is critical to maintaining compliance and ensuring the organization operates in line with its charitable purposes.
Fundraising and Grant Eligibility: Once your organization is a registered charity, you can apply for government and private grants. However, there are strict rules about how funds are raised and used. Ensure that your fundraising activities comply with CRA regulations.
Legal Advice: Given the complexity of both incorporating and obtaining charitable status, it’s wise to consult with legal professionals who specialize in nonprofit and charity law to ensure your organization is structured properly and in compliance with the law.
Conclusion
Incorporating a not-for-profit organization and obtaining charitable status in Canada is a rewarding process for individuals and groups dedicated to creating a positive social impact. By following the required steps, ensuring eligibility, and complying with legal requirements, your organization can operate effectively and access tax benefits and funding opportunities. With the proper structure, governance, and oversight in place, your not-for-profit or charity can thrive while making a difference in the community.
Sources:
Canada Not-for-profit Corporations Act (NFP Act), RSC 2009, c. 23
Ontario Not-for-Profit Corporations Act (ONCA), SO 2010, c. 15
Canada Revenue Agency (CRA) – Charities and Giving
CRA – Form T2050: Application to Register a Charity Under the Income Tax Act.