Written by Tracy Wu | Queen’s Venture Law Society | July 2021

Editors: Jakob Wildman-Sisk | Queen’s Venture Law Society, Nicolas Guevara-Mann & Mikela Page | Queen’s Business Law Clinic

Thinking of setting up a non-profit organization? There are different group structures that one may choose from to carry out their social, recreational, sports or educational objectives in Ontario. These group structures include – unincorporated associations, trusts, co-operative corporations, not-for-profit corporation (provincial or federal) and charitable organizations. In this blog post, we will be considering two of these group structures in detail – the not-for-profit organization and charitable organizations.

What is a not-for-profit organization?

A not-for-profit organization is an association or corporation committed to operating “exclusively for social welfare, civic improvement, pleasure, recreation, or any other purpose except profit”.^[1] This means that the not-for-profit organization helps a specific social cause without a pecuniary gain or “net profit”. While the not-for-profit organization may receive funds, the money must be used to further the not-for-profit’s cause and cannot be used to provide a monetary benefit to its members.^[2] The not-for-profit organization is not a charity.

Examples of a not-for-profit organization include social, recreational, or hobby groups (golf clubs, soccer clubs), certain amateur sports organizations (hockey associations, basketball leagues), and certain festival organizations (parades).^[3]

A not-for-profit organization can be an unincorporated association or a not-for-profit corporation. An unincorporated association is a collection of individual members acting together to achieve a common purpose without intending to make profit.  You may use this group structure where the activities carried out by the association do not carry the potential for liabilities, or when seeking as much independence as possible from government oversight.^[4] An unincorporated association can also apply to the CRA for charitable status. We shall discuss more about charities as we proceed. A few points to note about the unincorporated association:

• It is not established or regulated by a statute. This means more flexibility as to its structure, but also means that there is no formal statute addressing dispute resolution within the association. One way to address this gap is to prepare a constitution for the association.
• It is not a separate entity under the law – it cannot enter into legally binding contracts in its own name, sue or be sued and it cannot hold property in its own name. Where it wants to bring a legal action, it must first seek leave of a court for power to bring an action.
• Since it is not identified as a separate entity in law, the individuals in charge of the association are personally liable for any actions and liabilities of the association once the association has exhausted its insurance and assets.

To become a not-for-profit corporation, the not-for-profit organization must be incorporated. After incorporating, the not-for-profit will form a new separate legal entity as a corporation.^[5] A corporation is treated like a person; meaning that it has the same rights and liabilities as a person. A big advantage of incorporation is that this new legal entity is distinct from its shareholders, directors, officers, and agents.^[6] This limits the liability of the shareholders, directors, officers, and agents.^[7]      

A not-for-profit can be incorporated either federally or provincially. The following is an outline of the process to incorporate federally:

1. In order to incorporate a not-for-profit, a NUANS name search report must be done for the proposed name of the corporation. The report costs a small administrative fee^[8] and must not be more than 90 days old.^[9]
2. After obtaining a NUANS name search report, an application to file for incorporation needs to be submitted through Corporation Canada’s Online Filing Centre.^[10] The application requires applicants to complete Form 4001 – Articles of Incorporation, and Form 4002 – Initial Registered Office Address and First Board of Directors.^[11] Applicants are required to sign a copy of these two forms after they submit their application. They should keep these documents in the company records.

What is a charitable organization?

A charitable organization is similar to a not-for-profit, but it has extra requirements on top of the not-for-profit requirements. A charity must be “charitable in law.” This means that the charity is required to use their resources for a charitable purpose on which that charity focuses.^[12] The charitable purpose must be a matter of one or more of the following: relief of poverty (food banks, soup kitchens), advancement of education (universities, research institutes), advancement of religion (missionary organizations, places of worship), or other purposes that benefit the community (animal shelters, libraries).^[13] Some examples of charitable organizations are Food Banks Canada, the Toronto Humane Society, and Big Brothers Big Sisters of Canada. It is important that the purposes section of the application is properly drafted to fall within one of these categories and there must be well-detailed activities to support the said purpose. This is one of the most important parts of the charitable status application which many clients struggle with.

Other differences between a charitable organization and a not-for-profit?

Charities are required to spend a minimum amount of funds per year on their charitable activities or use the funds as gifts to qualified donees, while a not-for-profit organization does not have a spending requirement.^[14] This spending requirement or disbursement quota is based on the value of your organization’s property, which is not used for charitable activities or administration. Charitable property includes cash in bank accounts, investments such as stocks, bonds, mutual funds and GICs, land and buildings. There are other specific requirements that a charity must meet in this regard. It is advisable that you discuss with a legal practitioner before making a decision on applying for charitable status. This should be taken into account when deciding between starting a not-for-profit or a charity. If you believe that your organization will not be able to raise enough funds to meet this spending requirement, then it might be best to start a not-for-profit. It is always possible to register your not-for-profit as a charity later in the future (there is a separate fee though) so don’t feel as though you cannot change your mind.^[15] You can register your not-for-profit as a charity in the future if you think your not-for-profit can now raise enough funds to meet the spending requirement.

Another big difference is that charities, unlike not-for-profits, are able to issue official donation receipts which allow their donors to receive tax credit for their donation.^[16] A not-for-profit organization is not able to issue official donation receipts to their donors. Because of this, charities are more likely to receive donations. Potential donors have more incentive to give money to charities as they are able to receive tax credit for their donation. Not-for-profit organizations are not able to give donation receipts to their donors. This may affect potential donors’ decision to donate. It is then likely, but not guaranteed, that an organization will receive more financial donations if it is a charity.

Charities must be registered with the Canada Revenue Agency to be recognized as an official charity while not-for-profits are not required to have gone through a further registration process with the CRA after incorporation.^[17] Preparing a strong charitable status application requires consultation with a qualified lawyer as the CRA has very strict rules regulating the grant of the coveted charitable status. This may make it seem like registering an organization as a charity is more difficult, but it is not. CRA has a very convenient online application form and online filing center that makes the process very simple to complete.^[18]  All future amendments of one’s charity can also be done through the Online Filing Centre. Therefore, this difference between charities and not-for-profits seems like it would affect one’s decision between the two, but it should not. The convenience provided by the Online Filing Centre lessens the difficulty of the registration process of charities If the CRA determines that the charitable status application submitted does not meet its requirements for a charity, it will not hesitate to deny that applicant.

In conclusion, the one should consider carefully the business vehicle choice for their non-profit activities. While one may carry on their activities informally through an unincorporated association, they may soon realize the need to incorporate or apply for charitable status for any of the reasons set out above. It is recommended that one does so with a lawyer.

 

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