By Raz Toor, Business and Corporate Lawyer, Falcon Law PC
Starting a charity in Ontario involves more than simply incorporating a non-profit organization. If your organization wants to become a registered charity, issue official donation receipts and operate within Canada’s charitable tax regime, there are usually two distinct legal steps: establishing the organization itself and obtaining charitable registration from the Canada Revenue Agency (CRA).
The distinction matters. We regularly speak with founders who have already incorporated a non-profit and assume that they have created a charity. Incorporation does not, by itself, give an organization registered charitable status.
This guide explains the process of registering a charity in Ontario and some of the legal issues that should be considered before an application is submitted. Falcon Law PC also assists organizations with non-profit and charity incorporation, registration and governance matters throughout Ontario and Canada.
Step 1: Decide Whether a Registered Charity Is Actually the Right Structure
Before incorporating anything, the first question should be whether the organization should be structured as a registered charity at all.
A non-profit organization and a registered charity are not the same thing.
Registered charities are subject to a more specific regulatory regime and must be established and operated for exclusively charitable purposes. In return, registered charities can generally issue official donation receipts and receive the tax treatment available to registered charities.
An organization may instead be better suited to operate as a non-profit without applying for registered charity status. This can depend on what the organization will actually do, how it will be funded, who will benefit from its activities and whether issuing charitable tax receipts is important to its model.
This is one reason we often recommend dealing with the structural analysis before preparing incorporation documents. It can be expensive and time-consuming to incorporate first and discover later that the purposes or governance structure need to be changed for the CRA application.
Step 2: Determine What Kind of Charity You Are Creating
The CRA recognizes three designations of registered charity:
- charitable organizations;
- public foundations; and
- private foundations.
The designation depends on matters including the organization’s structure, sources of funding and manner of operation.
A charitable organization will commonly carry out its own charitable programs, while foundations may have a greater focus on funding charitable work. The distinction, however, is more nuanced than simply asking whether the organization intends to make grants.
The organization’s directors, funding sources and degree of control can also affect its classification. This becomes particularly important where an individual or family wants to establish a foundation using their own funds.
In those situations, we would normally consider the proposed funding, governance and activities before determining how the organization should be established and how the charitable registration application should be approached.
Step 3: Identify the Organization’s Charitable Purposes
This is one of the most important parts of the entire registration process.
To qualify for registration, an organization must be established for legally charitable purposes. Broadly speaking, charitable purposes fall within four traditional categories:
- relief of poverty;
- advancement of education;
- advancement of religion; and
- other purposes beneficial to the community that the law recognizes as charitable.
It is not enough for an organization to have a good intention or to provide something that generally benefits society.
For example, an organization may want to “help the community,” “support vulnerable people” or “raise awareness.” Those may be worthwhile objectives, but they do not necessarily constitute adequately drafted charitable purposes.
The purposes contained in the organization’s governing documents should clearly address the charitable benefit being provided, the way in which that benefit will be provided and the group of people intended to benefit.
The public-benefit requirement is also important. Generally, the organization must provide a recognizable benefit to the public or a sufficient segment of the public rather than primarily providing a private benefit to particular individuals or members of a closed group.
The Charitable Purposes Must Match the Actual Activities
A common mistake is treating the charitable purposes as legal boilerplate and dealing with the organization’s actual programs separately.
The CRA looks at both.
If an organization states that its purpose is to advance education, for example, its proposed programs need to actually further that educational purpose. The application should be able to explain what the organization will do, who will deliver the programs, who will participate, how the programs will operate and how those activities advance the stated charitable purposes.
At Falcon Law PC, this is an area where we tend to spend considerable time with clients before an application is filed. A well-drafted purpose does not fix a fundamentally non-charitable activity, and an otherwise charitable activity can still create difficulties if the corporation’s purposes were drafted too broadly or incorrectly.
Step 4: Choose the Legal Structure and Incorporate
Many Ontario charities are established as corporations under Ontario’s Not-for-Profit Corporations Act, 2010 (ONCA). Organizations intending to operate more broadly across Canada may instead consider incorporation under the federal Canada Not-for-profit Corporations Act.
Incorporation and charitable registration remain separate legal processes.
The corporation will generally need articles of incorporation dealing with matters such as its name, purposes, directors and other required provisions. An Ontario not-for-profit corporation must have at least three directors.
The organization should also consider its by-laws and governance structure. By-laws can address matters such as director and officer appointments, meetings, voting, membership, decision-making and other internal governance rules.
Falcon Law PC assists clients with both incorporation and corporate structuring and the additional requirements that arise when the corporation is intended to operate as a charity.
Although incorporation is common, it is not the only possible legal structure for every charity. Certain organizations may operate through a trust or another form of governing document. The appropriate structure depends on the organization, its assets and what it intends to do.
Step 5: Organize the Corporation Properly
After incorporation, the organization should complete its initial corporate organization rather than simply obtaining articles of incorporation and stopping there.
Depending on the structure, this may include adopting by-laws, confirming the initial directors and officers, dealing with memberships, approving banking arrangements and completing initial organizational resolutions.
The organization should also establish and maintain an appropriate corporate minute book.
The minute book will generally contain the corporation’s governing documents, by-laws, director and member resolutions, registers and other important corporate records.
This becomes increasingly important as the organization grows. Charity registration creates additional compliance obligations, but it does not replace the organization’s separate corporate-law obligations.
Step 6: Prepare the CRA Charity Application
Once the organization and its governing documents are properly established, it can apply to the CRA for registration as a charity.
The application is much more than a request for a charitable registration number.
Among other things, the CRA will want to understand the organization’s:
- governing documents and charitable purposes;
- current and proposed charitable activities;
- intended beneficiaries;
- directors and other officials;
- financial information and anticipated revenues and expenses;
- fundraising arrangements;
- relationships with other organizations; and
- arrangements for carrying out activities through other persons or organizations.
The activity descriptions are especially important.
The CRA expects applicants to describe sufficiently developed programs rather than merely repeating the organization’s purposes. An applicant should be able to explain how its programs will actually operate and how they further one or more of its charitable purposes.
In our experience, this is often where the difference lies between an application that presents a coherent charitable model and one that generates extensive CRA questions or requires substantial revisions.
Step 7: Submit the Application and Deal With CRA Follow-Up
Applications for charitable registration are generally submitted to the CRA electronically.
After submission, the CRA reviews the organization’s governing documents, purposes, activities and other information to determine whether it qualifies for charitable registration under the Income Tax Act.
The CRA may request clarification, supporting information or amendments before making its decision.
A request for additional information does not necessarily mean that the application will be refused. However, substantive concerns about the organization’s purposes or activities can require revisions to the application and, in some cases, amendments to the corporation’s governing documents.
That is another reason we prefer to identify potential registration issues before incorporation and filing rather than attempting to fix them after the CRA has raised them.
Step 8: Understand That Registration Is the Beginning, Not the End
Once registered, the charity receives a registration number and can generally issue official donation receipts in accordance with the applicable rules.
It must then continue complying with both charity law and its corporate obligations.
Among the most important ongoing requirements is the annual T3010 Registered Charity Information Return. A registered charity must file its T3010 no later than six months after the end of its fiscal period.
The organization must also maintain appropriate books and records and ensure that its resources continue to be used in furtherance of its charitable purposes.
Changes to the charity’s activities, governance, purposes or operating model should be considered carefully. Registration based on one set of purposes and activities does not mean the organization can later move into substantially different activities without considering the legal and regulatory implications.
For organizations that need assistance with these ongoing requirements, our corporate lawyers can also advise on governance, corporate changes and ongoing organizational compliance.
Where Charity Applications Commonly Go Wrong
The biggest issue we see is usually not a missing form. It is a mismatch between what the founders want to accomplish and the legal structure that was created.
For example, founders may incorporate using broad non-profit purposes and only later decide that they want charitable registration. Others may create purposes that sound charitable but cannot clearly explain how their proposed programs will advance those purposes.
Private and family foundations can raise their own issues because the funding, control and governance arrangements may look significantly different from those of a charity intended to be supported by a broad donor base.
These issues are generally easier to address before the organization is incorporated and before the CRA application is submitted.
A sensible registration process therefore starts with the proposed mission, activities, beneficiaries, funding model and governance. The legal documents should then be built around that model rather than the other way around.
Do You Need a Lawyer to Register a Charity in Ontario?
There is no general requirement that an organization retain a lawyer simply to submit an application for charitable registration.
However, legal assistance can be particularly valuable where the charitable purposes need to be drafted, the proposed activities do not fit neatly within a traditional charitable category, the organization is being established as a private or family foundation, significant donations or assets are involved, or an existing non-profit wants to pursue registered charitable status.
The more complicated the proposed model, the more important it becomes to resolve the structural issues before submitting the application.
How Falcon Law PC Can Help
Falcon Law PC advises charities, foundations, non-profit organizations and community organizations across Ontario and Canada.
We can assist with the initial assessment of whether charitable registration is appropriate, Ontario or federal incorporation, drafting charitable purposes and by-laws, establishing the corporate minute book, preparing CRA charitable-registration applications and advising on ongoing governance and compliance.
You can learn more about our Non-Profit & Charity Lawyer services.
If you are at the early stages and are not yet sure whether you should establish a registered charity, non-profit organization or private foundation, we can also assess the proposed model before you incur the cost of incorporation and a full charity application.
Contact Falcon Law PC to discuss your proposed charity, foundation or non-profit organization.
This article provides general information only and does not constitute legal or tax advice. Charity and non-profit structures should be considered based on the particular organization’s purposes, activities, governance, funding and circumstances.