Tax lawyer for Charities, Small Business, and Individuals in Toronto, Canada

Most Canadians are aware that they are subject to innumerable and complex laws governing their every action. Unfortunately, those in the not-for-profit sector are rarely aware that there is an additional lawyer of complexity for charities and not-for-profit organizations. Besides complying with the appropriate corporate laws in the jurisdictions in which they are incorporated and operate, there is an entire legal regime designed to govern the operation of charities. The necessity of this extra layer of complexity is clear when one considers that the Federal government subsidizes every dollar a Canadian taxpayer donates to a registered charity (within certain limitations). Moreover, the nature of charitable giving in Canada puts individual citizens in control of funds to be spent on behalf of people who are generally unable to ensure proper use of such funds (usually a role reserved for government) .

Much of the legal regime in place to specifically govern the activities of charities takes place under the auspices of the Income Tax Act and generally deals with the ways in which charities raise and spend money. This article aims to explore some of the areas charity managers, directors and volunteers need to be aware of when running a charity.

The disbursement quota rules are some of the most complex and difficult rules that charities must face. Adding to the complexity are different rules that apply if a charity is a private or public foundation. Essentially, t he purpose of the disbursement quota is "to ensure that most of a charity's funds are used to further its charitable purposes and activities; to discourage charities from accumulating excessive funds; and to keep other expenses at a reasonable level." [1] The rules mandate a certain level of spending as calculated in a particular manner. Consequently, the rules are quite complex and I encourage charities to contact me for a review of their particular situation. However, a s a rule of thumb charities must spend at least 80% of:

1) Donations for which they gave official donation receipts in the year following they are received

3) Gifts from other arm's length charities (with a five year duration proviso)

5) Amounts received from other registered charities in the immediately preceding taxation year.

Charities must also spend 3.5% of the average value of their assets over the previous 24 month period which were not used directly in their charitable operations (if greater than $25,000).

It bears mentioning that the charity can apply for an exception to the spending requirements of the disbursement quota rules in cases where they are saving funds for a major capital-intensive project such as a building.

Even where a charity is operating in good faith, a charity may inadvertently provide donors with a receipt that is deficient in some way. In such an instance, the charity is liable to a penalty to the charity of 5% on the eligible amount stated on the receipt for a first offence and 10% for a second offence. However, the greater penalty is perhaps to the charity's reputation when the CRA disallows a donor's official tax receipt. Therefore, it is important that the charity not make any errors on the receipts that it issues and that it only issue receipts for properly made donations.

According to the Income Tax Act , charitable receipts must contain the following information:

The name and Canadian address of the organization;

The organization's Canada Revenue Agency registration number;

The receipt's serial number;

The place where the receipt was issued;

If the donation is a cash donation, the day or year during which the donation was received;

If the donation is a gift other than cash:
1. The day on which the donation was received,
2. A brief description of the property, and
3. The name and address of the property appraiser if an appraisal was done;

The day on which the receipt was issued (if different from the day on which the donation was received);

The name and address of the donor (for an individual include his or her first name and initial);

The value of the donation on the date it was made; and

The signature of an individual authorized by the organization to acknowledge donations, (where a charity generates its official receipts automatically, the receipts may bear a facsimile signature).
The name of the Canada Revenue Agency; and

The Agency's website, http://www.cra.gc.ca/charities.html .

By law, charities are limited in the types of operations they can carry out to raise funds. One of these limitations restricts charities from operating a business unrelated to their charitable objects. An activity becomes a "business" when it is a business-like transaction operated regularly or continuously. The CRA takes the position that related businesses are permitted only where they are linked and subordinate to a charity's purpose. Accordingly, the two kinds of related businesses are as follows:

1) businesses that are linked to a charity's purpose and subordinate to that purpose and

2) businesses that are run substantially by volunteers, which is a deemed related business under the ITA.

So for example, a hospital is permitted to run a parking lot or gift shop business for the use of patients, visitors and staff as it is linked and subordinate to their principal object of improving the health of their patients (particularly if it is run entirely by volunteers) . Conversely, it is impermissible for a hospital to run a parking lot business wh ere the only contribution to the charity's objects is in the form of producing revenue. On the other hand if at least 90% of the people involved in operating the business are unpaid volunteers, (for example a bakery run by unpaid seniors), the business activity will be deemed a related business. This type of related business does not have to be linked to the charity's charitable purposes.

Many charities conduct operations overseas (examples include church missions, abroad, emergency assistance, or friends of overseas charities). Where a charity wants to undertake such activities they must ensure that they retain ultimate control over the use of funds raised here (or the property bought with such funds). For example, where money is raised to purchase an ambulance for a needy overseas community, the charity must ensure that the ambulance is used strictly for medical purposes and not, for example, to transport arms and weapons.

Finally, while charities are not required to submit yearly income tax returns, they are required to submit annual forms which summarize their finances for the year. The form is referred to as the T3010 and is available from the CRA website. The form is due within 6 months of the charity's fiscal year end and the penalty for filing late is $500 each time. A charity that does not file its return can lose its registered status. After losing its registered status, a charity can no longer issue tax receipts for donations. Also, the charity will have to pay a tax equal to the full value of any remaining assets.

[1] See Information Circular RC 4108, Registered Charities and the Income Tax Act, updated May 7, 2002.