The other day you got a call from Mutts on a Mission, a group that trains search and rescue dogs. You were told that, for a $50 donation to the group, you would get an official tax receipt for your donation, because the group is a registered charity.
You're wondering what it means to be a "registered charity" and what advantage you'll get from an official tax receipt.
In this article, Éducaloi explains the basics of registered charities.
What is a "registered" charity?
There are lots of groups doing charitable work in Canada, but not all are registered charities. To be registered, a charity must meet some legal tests and be accepted for registration by the Canada Revenue Agency, a government body.
Charities that have been accepted for registration by the Canada Revenue Agency and have activities in Quebec must also register with Revenu Québec, but this is a much more simple process.
Registration gives charities some benefits, such as the right to issue official tax receipts for donations. But the benefits come with obligations. To learn more about these obligations, see the question "Do registered charities have to follow any rules?"
The registration process is explained in our article How to Apply to Be a Registered Charity.
Can any charity register?
No. To be accepted for registration, a charity must meet these tests:
1) The "purposes" of the organization must fit into 1 of 4 categories. Purposes mean the organization's mission, or the reason it was created. Purposes are different from the programs and projects a charity uses to carry out its mission.
Here are the 4 purposes:
- relief of poverty (food banks, groups that provide clothing and furniture to the poor, etc.)
- advancement of education (operating schools and universities, providing scholarships, advancing science, operating museums, etc.)
- advancement of religion (performing missionary work, operating buildings for religious worship, etc.)
- certain other purposes that benefit the community (operating drop-in centres for troubled youth, helping victims of floods, protecting the welfare of children, operating animal shelters, etc.)
2) The organization must show it provides a real benefit to the public. The "public" can be either the public as a whole, or a significant section of it. A group that only provides a benefit to its members or to a restricted group will generally not qualify. To learn more, read the Canada Revenue Agency's explanation of the public benefit test.
3) The organization must have been incorporated or created in another way in Canada, and still be resident in Canada.
To learn more about incorporation consult our article Charity Inc. - Incorporation and Registered Charities.
Residency refers to a degree of connection with Canada. Note that the residency requirement does not prevent registered charities from carrying on activities outside Canada. To learn more, read the explanation of residency on the Canada Revenue Agency's website.
4) The organization must devote all its resources (money, property, employees and volunteers) to its charitable activities.
It can do this either by carrying on its own activities or giving resources to "qualified donees", which include other registered charities. For more information on giving resources to qualified donees, consult our article Rules Registered Charities Must Follow.
Also, a charity does not have to work directly with people it wants to benefit: umbrella groups that improve the charitable activities of other community organizations can sometimes qualify. Consult the information on umbrella groups on the Canada Revenue Agency's website.
What can disqualify a charity from registering?
Although they might do good work, some organizations don't qualify for registration.
Note that the rule against personal benefits does not prevent registered charities from paying reasonable salaries or expenses for the normal operation of their organizations.
Organizations that help individuals or that help private groups do not qualify. For example, these groups won't qualify:
- a group set up to help John, Sandrine and their children, who lost their house in a fire
- a group created to pay for Juan to travel to Canada for surgery
Social clubs, leagues and lodges don't qualify. Also, groups that have a mix of charitable and social purposes, such as service clubs, don't qualify.
However, a charity created and registered for purposes that are not social can use some of its resources for social activities in these situations:
- these activities are used to raise funds for its other activities
- the social activities are a very small part of the charity's main purpose
An organization will not qualify for registration if its purposes are political. "Political" includes the following:
- promoting the interests of a particular political party
- supporting a candidate for public office
- promoting a set of political beliefs
- trying to change or oppose changes in the law, government policy or a government decision
- trying to convince the public to adopt a particular point of view on a social question
To learn more, see the explanation of the Canada Revenue Agency about political purposes and activities.
Groups created for the purpose of promoting sport, such as minor hockey leagues, will not qualify.
However, groups created for another purpose that is recognized as charitable can carry out sporting activities in some situations:
- When sports are a reasonable way to carry out the group's purposes. For example, a group created to help youth at risk could use sport to carry out those purposes.
- When only a very small part of the group's resources are devoted to sports.
Note that there are special rules for amateur athletic associations that promote sport across Canada. These associations benefit from some of the same advantages as registered charities. To learn more, consult Canada Revenue Agency's explanation about amateur athletic associations.
What are the benefits of registration?
Here are the main benefits of being a registered charity:
- the right to issue official tax receipts for donations. These receipts can reduce the income tax owed an individual or business making a donation.
- exemption from federal and provincial income tax
- the right to a partial reimbursement of the GST and QST sales taxes in some situations
- the right to receive gifts from other registered charities, such as foundations
- credibility in the community (Since registered charities must respect rules about their finances and other matters, this can reassure the public that the charity is using its resources for truly charitable work.)
- some foundations, businesses and government agencies only give donations or funding to charities that are registered
- many provinces and municipalities give registered charities special advantages
What is the difference between a registered charity and a non-profit?
A lot of organizations do good work but don't meet the tests for being a registered charity. Others choose not to register. These groups can operate as "non-profit" organizations.
A non-profit is an organization created and operated for any purpose except making a profit.
For example, the purpose could be organizing recreational activities, improving community life or helping the poor.
Here are the main differences between registered charities and non-profits:
- Unlike registered charities, non-profit organizations cannot issue official tax receipts.
- Non-profits are not automatically exempt from paying income tax like registered charities. To be exempt, a non-profit must meet this test: money it generates cannot be paid to or used for the personal benefit of the non-profit's members, shareholders or owners. (This rule is a bit different for groups that promote amateur athletics in Canada.)
- When a registered charity stops operating, it must give any assets (money, buildings, equipment, etc.) it has left over to a "qualified donee". Qualified donees include other registered charities. Non-profits can distribute anything left over to their members or another organization.
For more information on non-profits, see the Canada Revenue Agency's comparison of non-profits and registered charities and Revenu Québec's information on non-profits.
Do registered charities have to follow any rules?
Yes. Registered charities must respect:
- rules directed specifically at registered charities
- other rules that might affect their activities, even if they are not specifically directed at registered charities
These rules are explained in our article Rules Registered Charities Must Follow.
Are all registered charities the same?
When it agrees to register a charity, the Canada Revenue Agency assigns the charity to 1 of 3 categories:
- charitable organization
- public foundation
- private foundation
The choice of category depends on how the charity carries out its activities, the structure of its board of directors and its sources of funding.
- Charitable organizations focus on carrying out their own charitable activities.
- Public foundations focus on funding activities carried on by other groups, usually other registered charities.
- Private foundations can either fund other groups, or carry out their own activities, or do both.
Registered charities must respect slightly different rules depending on which category they fall into.
To learn more about these 3 categories and the different rules for each, consult the Canada Revenue Agency's guide Registering a Charity for Income Tax Purposes.
Is registration right for my organization?
Here are some things to consider:
Respecting the legal obligations of being a registered charity takes people, money and an organizational structure. Handling the finances and reporting requirements of a registered charity is particularly complex.
Depending on the skills of the people working or volunteering for the charity, it might be necessary to hire outside help from accountants or other professionals to meet some of these obligations. It is therefore important to consider whether your organization has the resources to operate as a registered charity.
Sources of Funding and Tax Receipts
One of the main privileges of being registered is being able to issue official tax receipts for donations. These receipts can reduce income tax owed by people and businesses that donate. It is therefore important to consider whether your potential donors might want to get a tax receipt.
If your group hopes to get money from governments, you should check whether the government funding programs you are interested limit funding to charities that are registered.
As for businesses, sometimes they sponsor charities instead of making a donation. "Sponsorship" means giving money in return for the chance to advertise or promote a product or service. Since sponsorships can often be used as a deduction for tax purposes, getting a tax receipt will not be an advantage for businesses that want to sponsor instead of donating.
Registered charities must follow rules about their finances and other matters. This means that donors, funders, volunteers and others may have more confidence that a charity is well run and doing truly charitable work if it is registered.
It is true that registered charities do not have to pay income tax. However, many groups that do charitable work but are not registered are also exempt from these taxes, including some non-profits. (See the question "What is the difference between a registered charity and a non-profit?")
Also, income tax is only paid on profits. "Profits" means money left over after paying expenses. Many charities do not end up with profits at the end of the year, so this exemption might not be a big advantage.
Finally, businesses are actually in a more favourable position than registered charities when it comes to sales taxes: businesses can claim back the full amount of sales tax they pay when they buy goods or services. Registered charities can only claim half the sales tax they pay. It may therefore be a good idea for your group to consider operating as a business, especially if you expect that user fees will cover the costs of your programs and you expect to have small profits.
Recruiting Directors or Trustees
Registered charities need people to oversee the affairs of the charity ? either directors or trustees. Directors and trustees have legal duties, so it can be a challenge to find people to take on this role.
There are restrictions on the kinds of political activities registered charities can get involved in, such as supporting political parties or candidates for public office. Depending on the kinds of activities your group wants to get involved in, these restrictions might create problems. To learn more, consult our article Rules Registered Charities Must Follow.
If a registered charity stops operating, it must give any money or property left over to a qualified donee. It is therefore important to consider whether your group wants to accept this obligation.
Our video Introduction to Registered Charities
This article explains in a general way the law that applies in Quebec. This article is not a legal opinion or legal advice. To find out the specific rules for your situation, consult a lawyer or notary.