You sit on the board of directors of Altruists Anonymous, a charity that helps victims of earthquakes, floods and other natural disasters. Your application to become a registered charity has been approved. Now you want to know more about the rules registered charities must follow.
In this article, Éducaloi explains the legal responsibilities of registered charities.
Do registered charities have to follow any rules?
Yes. Registered charities must respect:
- rules directed specifically at registered charities
- other rules that affect their activities, even if these rules are not specifically directed at registered charities
Rules in the first category are found mostly in income tax laws. They are explained in the "Rules 1-11" part of this article.
Rules that fall into the second category are explained in the question "What other rules must charities follow?"
Why do registered charities have to follow rules?
Registered charities are allowed to give tax receipts for donations they receive. People and businesses that donate and get these receipts can use them to reduce the income tax they owe to the government.
Governments therefore give up large amounts each year that they would have collected in taxes if charities were not issuing receipts. Governments have therefore made rules to ensure registered charities are collecting donations, issuing receipts and carrying out activities for purely charitable reasons.
Where can I find a list of these rules?
Rule 1 - Stick to Your Mission
Registered charities must devote their resources to the charitable purposes and activities identified in their applications for registration.
Sometimes, registered charities unintentionally drift away from their original purposes and activities. A church running a religious camp may start offering more sporting activities than religious ones, for example. Also, sometimes charities make an intentional decision to change their purposes and activities.
Any new purposes and activities must also be recognized as charitable under the law. Charities should therefore contact the Canada Revenue Agency before making any changes to check that the new purposes and activities will not create problems.
Also, when changes are made, the charity must notify the Canada Revenue Agency and provide documents explaining the changes. To learn more, see the Making Changes section of the agency's website.
Rule 2 - Maintain Control Over Your Activities or Give to "Qualified Donees"
Registered charities are allowed to operate in two ways:
- by carrying on their own activities
- by giving resources to "qualified donees"
1. Own Activities
A charity can carry out its own activities either by using its own staff and volunteers or by working with outside individuals and groups. For example, a Canadian registered charity could ship supplies to a foreign country for disaster relief and hire someone in that country to distribute the supplies.
When a charity is working with outside individuals and groups, it must maintain direction and control over the use of its resources, and be able to demonstrate this direction and control. A registered charity cannot just hand over resources to another organization, unless that organization is a "qualified donee". (See the section below about qualified donees.)
To ensure the charity retains control and direction and can demonstrate this, it is a good idea to sign a written agreement. To learn more about things that should be included in these agreements, see the Canada Revenue Agency's explanation.
2. Qualified Donees
Registered charities can also carry out their missions by making gifts to "qualified donees". These gifts can include money and property but not services.The written agreements mentioned under point 1 above are not required when giving gifts to qualified donees.
Qualified donees include:
- other registered charities
- the United Nations and its agencies
- Canadian municipalities
- registered Canadian amateur athletic associations
- registered national arts service organizations
- certain housing corporations providing low-cost housing to the elderly
- some universities outside Canada that have students from Canada
- a few foreign charities
For a complete list of qualified donees, see the list on the Canada Revenue Agency website.
Rule 3 - Political Activities are not allowed
This is an area that is often confusing for registered charities or groups thinking about registering. Here are the basic rules:
1. Charities cannot have political purposes, only political activities. "Purposes" are the reasons for which a charity is created. "Activities" are the programs and projects a charity uses to achieve its purposes.
2. All "partisan" political activities are prohibited. Partisan means supporting or opposing a political party or candidate for public office. (A registered charity can take a position similar to that of a party or candidate on an issue as long as it does not directly connect its views to the party or candidate.)
For example: a registered charity cannot:
- publish an article in its newsletter supporting the re-election of a candidate who shares a position on an issue the charity is facing
- hand out pamphlets during an election campaign saying that a proposed law it supports did not become law because elected members of a minority party voted against it. (It would be acceptable if the pamphlet mentioned how politicians for all parties voted.)
- invite two candidates to speak at its annual meeting, but give one candidate more time to speak
3. Non-partisan political activities are allowed. These include participing in discussions on public policy aimed at influencing public opinion on issues related to a charity's purposes.
For example, a registered charity whose purpose is to improve the welfare of children can:
- take a position on laws in the area of child welfare
- hold rallies, organize mailing campaigns to politicians or the public
- publish a statement of its position in newspapers
Any positions taken by the charity must be informative, accurate and well-reasoned, that is, based on factual information that is fairly and fully analyzed.
4. Any non-partisan political activities must directly help the charity accomplish its purposes.
5. The law no longer limits the resources a registered charity can spend on non partisan political activities
To learn more about political purposes and activities, consult the Canada Revenue Agency's explanation about political activities.
Rule 4 - Avoid Prohibited Business Activities
A registered charity categorized as either a charitable organization or public foundation can carry on a business related to its purposes (mission).
Charities categorized as private foundations are not allowed to carry out any business activities.
Consult our article Introduction to Registered Charities for an explanation of these 3 categories of charities.
"Business" refers to activities carried out on a regular basis that generate money from providing goods or services with the intention of earning a profit.
Remember, only "related" businesses are allowed. What is a related business? There are 2 kinds:
- a business run 90% or more by volunteers
- a business linked to the charity's purposes and subordinate to those purposes ("Subordinate" means the business remains a minor activity in relation to the charity's other activities and that the business is carried out to support the charity's main mission.)
Here are examples of businesses that could be considered to be "linked and subordinate" and therefore allowed:
- a hospital operating a parking lot, cafeteria or gift shop
- a university running a student bookstores and dining halls
- a church renting out space in its parking lot on weekdays when it is not running activities
- a group running an animal shelter selling pens with the group's logo
Some activities are usually not considered to be a "business". This means that they don't have to fall within the two types of related businesses to be allowed:
- asking for donations
- selling donated goods
- fees charged for programs and services (for example, museum admissions), as long as the fees are to cover the cost of the activity, not make a profit
- fundraising activities, as long as they are not a continuous activity. But if the event is held often, for example, a weekly raffle, it might be considered to be a business.
- getting income from prudent investments
For more examples of businesses that are allowed or prohibited, consult the Canada Revenue Agency's explanation.
Rule 5 - Respect the Rules on Social Activities
A charity created for charitable purposes can devote some of its resources to social activities, but only if:
- the goal of the social activities is to raise funds for its charitable purposes, or
- the social activities are a very small part of the charity's activities. The general guideline is that up to 10% of a charity's resources can be devoted to social activities.
Rule 6 - Keep Proper Books and Records
Registered charities must keep adequate books and records, in English or French, at the Canadian address listed with the Canada Revenue Agency (CRA). It is a good idea to keep a back-up copy somewhere else.
Even if the charity has an outside person prepare some records, such as an accountant or bookkeeper, it is still responsible for meeting all the requirements regarding adequate records.
These books and records must allow CRA to:
- check the charity's revenues (money it brings in, such as donations)
- check that the charity's resources are spent on charitable activities
- check that the charity's purposes and activities continue to be charitable
What are "books and records"?
They include financial statements, bank statements, income tax records, expense accounts, copies of official donations receipts, governing documents (constitution, trust document, letters patent, etc.), minutes of meetings, annual reports, annual information forms, accounting ledgers, fundraising materials and written agreements.
Books and records also include the documents that are the back-up for records or provide proof a transaction took place. These include purchase orders and receipts, bank deposit slips, invoices, cancelled cheques, credit card receipts, work orders, delivery slips, emails and correspondence.
Do the books and records have to be in paper format?
They can be kept in paper format or in an electronic format that is readable.
How long must the books and records be kept?
Duplicate donation receipts must be kept for 2 years from the end of the calendar year in which the donation was made. For example, for a donation made April 1, 2010, a copy of the receipt must be kept until December 31, 2012. Other records must be kept longer. To learn more, consult the section on books and records on CRA's website.
Rules 7 - File an Annual Information Return
Each year, a registered charity must file a form called an information return, with the Canada Revenue Agency (CRA). The form must be accompanied by financial statements.
The form is called a "T-3010". It is mailed to charities, but can also be downloaded from CRA's website, filled out electronically and saved as you work through it.
The return must be filed within 6 months after the end of the charity's fiscal period. A fiscal period is the 12 months (for incorporated charities, this can be up to 53 weeks) covered by the organization's financial statements. For example, if a charity's fiscal period runs from April 1st to March 31, it must file an information return by September 30.
Note that most of the information on the return, and the accompanying financial statements, are available to the public on the CRA website.
CRA sends charities a summary of the return after it has been processed. The summary has some reported and recalculated financial numbers. Charities should make sure the summary is correct and keep a copy since it will be needed for filing the next year.
If a charity needs to correct information on a return after it is filed, it should file a Form T1240 to make the correction.
Here are some common problems with information returns:
- using the wrong form
- not providing all information requested
- not providing dates of birth of directors (These are required so 2 people with the same name are not confused.)
- not providing financial statements
- not providing all required attachments
- not including the Basic Information Sheet even if the information has not changed from the previous year
Rule 8 - Notify the Canada Revenue Agency of Changes and Get Permission if Required
Registered charities must notify the Canada Revenue Agency of changes to the following:
- the charity's name, mailing address, phone number, fax, contact person and address where records are kept
- governing documents (constitution, incorporating documents, etc.)
- status: for example, if the charity incorporates or ceases to be incorporated, becomes an internal division of a larger organization or ceases to be an internal division, is part of a merger, etc.
- purposes and activities
- by-laws (rules about an organization's structure and internal procedures)
Registered charities must get permission for the following:
- a change of fiscal period end. A fiscal period is the 12 months (up to 53 weeks for incorporated charities) covered by a charity's financial statements. The fiscal period end is therefore the date on which the period covered by the financial statements ends.
- a change of designation (charitable organization, public foundation, private foundation). To learn more about designations, consult our article Introduction to Registered Charities.
- to accumulate funds for a special project or to reduce its disbursement quota . To learn more about the disbursement quota, see the section on this topic in this article.
- to associate with another charity carrying out similar activities. To learn more, consult the Associated Status section of the agency's website.
Notifications of changes or requests for permission should be sent separately from the annual information return. Consult the Making Changes section of the agency's website to learn more.
Rule 9 - Meet Your Disbursement Quota (annual spending requirement)
The disbursement quota (DQ) refers to the minimum amount registered charities must spend each year on their own charitable activities or on gifts to "qualified donees", such as other registered charities.
The DQ rule was created to:
- make sure charities actively use most of their resources on their charitable activities
- discourage charities from collecting large reserve funds
Each year, charities must spend at least 3.5% of the value of assets they own that are not used directly in their charitable activities or administration of the charity. These assets include reserve funds, endowments, investments and buildings.
However, for charitable organizations, the requirement to spend the 3.5% only kicks in when their assets are over $100,000. For charitable foundations, the requirement kicks in after $25,000. (For more about the differences between charitable organizations and charitable foundations, consult our article Introduction to Registered Charities.)
The Canada Revenue Agency can give a charity special permission to spend less than the 3.5% if the charity wants to accumulate assets for a special project, such as a building project.
What Kind of Spending Counts
Only money spent directly on charitable activities (for example, providing educational scholarships) or gifts to qualified donees counts toward meeting the DQ. Paying salaries of people actually doing charitable work and buying equipment used in charitable activities counts toward meeting the DQ.
Spending on activities that do not directly accomplish charitable purposes does not count toward meeting the DQ. For example, spending on management and administration and on fundraising, social, political and business activities does not count toward the DQ.
Spending More or Less than the DQ
If a registered charity spends more than its required DQ one year, it can apply the extra amount to other years, within some limits. If it spends too little one year, it can use extra amounts accumulated or spend enough the following year to create an extra amount to cover the gap. But if a charity continually fails to meet its DQ, it can lose its registration.
For a detailed explanation of the DQ and how to calculate it, see the DQ section on the Canada Revenue Agency's website.
Rule 10 - Issue Proper Donation Receipts
Being able to issue an official donation receipt for income tax purposes is often seen as one of the main advantages of becoming a registered charity. These receipts can reduce the income tax owed by people or businesses that donate to registered charities, so they can encourage donations.
However, there is no legal requirement for a registered charity to issue receipts for donations. Issuing receipts involves an administrative burden, so some charities decide not to issue them. Other charities only issue them in certain cases, for example, for donations above a certain amount.
If your charity chooses to limit receipts, it can be a good idea to tell donors about your policy. You can also refer donors to the donor information section of the Canada Revenue Agency website.
If a charity does decide to issue receipts, there are rules to follow. Since the rules are quite detailed, they are discussed separately in our article Registered Charities - Donations and Receipts.
Rule 11 - Follow the Rules on Fundraising
The main rule to remember is that fundraising is not in-and-of-itself charitable and cannot become the main emphasis of a charity.
Spending on fundraising therefore usually cannot be reported as spending on charitable activities on the annual information return charities must file.
Also, the Canada Revenue Agency has suggested guidelines about how much can be spent on fundraising in relation to the money it brings in. There are also guidelines about certain fundraising practises, such as paying commissions to professional fundraisers.
To learn more, you can read these guidelines and our article Fundraising for Registered Charities.
Finally, charities raising money through lotteries, bingos, charity casinos and other similar activities should make sure they follow any provincial rules on these activities. In Quebec, the government agency responsible is the Régie des alcools, des courses et des jeux.
Are there other rules registered charities must follow?
In addition to the rules applied by the Canada Revenue Agency, registered charities must respect other rules created by various levels of government (provincial, territorial and municipal). Most of these other rules are directed at the community in general and not just registered charities. It is difficult to list all of these rules, but here are some important ones:
- If the charity has employees, it must respect the rules on payroll deductions, working conditions, etc.
- A charity with activities in Quebec or that issues tax receipts to Quebec residents must file an information form each year with that agency. To learn more, consult Revenu Québec's website.
- If the charity is incorporated under Quebec law, or is incorporated under the laws of another place and has its head office or activities in Quebec, it must register with a Quebec government agency called the Registraire des enterprises and file an annual information form with the Registraire. To learn more, consult our article How to Apply to Be a Registered Charity and the Registraire's website.
- Some registered charities must collect and remit sales taxes (GST and QST). For more information, consult the Canada Revenue Agency's GST guide and the website of Revenu Québec.
- Some charities may also have to pay other kinds of taxes, such as taxes on the sale of land.
- Charities operating in certain sectors (for example, hospitals, schools, daycares and seniors' residences) must follow rules specific to those sectors. These rules deal with building codes, safety and hygiene standards, permits, qualifications of employees, etc.
- In Quebec, there are provincial rules about gaming activities such as draws, contests and bingos, which charities sometimes use to fundraise. Sometimes, a permit is required to run these kinds of activities. The Régie des alcools, des courses et des jeux is the government agency responsible for these rules. To learn more, consult the Régie's website.
- Directors and officers of registered charities have a legal duty to properly manage a charity's activities. To learn more, consult our articles Duties of Directors - Incorporated Registered Charities and Duties of Directors - Unincorporated Registered Charities.
What happens if a charity doesn't follow these rules?
Penalties for not respecting these rules can include fines, suspension of the right to issue tax receipts for donations, and even cancellation of a charity's registration.
Our video Registered Charities - Rules on Business Activities
Our video Registered Charities - Rules on Political Activities
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.