There is a common misconception that all not-for-profit corporations are charities, or at the very least, exempt from paying income tax.
In reality, however, not all charities are not-for-profit corporations, and not all not-for-profit corporations are charities. If you have incorporated a not-for-profit, or are thinking of doing so, it is important that you are aware of your status for income tax purposes.
In Division H of the Income Tax Act, R.S.C., 1985, Cap. 1 (5th Supp.), under section 149(1)(f), it states that registered charities, among many others, are taxpayers exempt from paying tax on their taxable income.
To become a registered charity under the Income Tax Act, supra, an organization must apply to the Charities Directorate at the Canada Revenue Agency (CRA). There are three different types of charitable statuses that an organization can apply for:
- Charitable Organization;
- Public Foundation; and
- Private Foundation.
A charitable organization carries on its own charitable activities and receives donations from arm’s length donors. The advantages of having the status of charitable organization are several, and include the ability to issue donation receipts; to receive gifts from other types of charities (i.e. public foundation); and toenjoy a variety of HST exemptions. A public foundation is an organization that generally gives over 50% of its income to qualified donees (other charities) and receives funds from arm’s length donors. Private foundations carry on their own charitable activities and might give some of its funds to qualified donees, but it is directed by, and receives funds from, non-arm’s length parties. Public and private foundations are unable to issue donation receipts nor do they enjoy any HST exemptions.
Depending on the nature, objects and intentions of your charitable not-for-profit it is important to consider under what status you register your organization. If you are thinking of having your organization apply for charitable status with the CRA, please contact one of our experienced business lawyers at Key Murray Law.
Legal information appearing in this article and elsewhere on Key Murray Law’s website is intended for informational purposes only and is not intended to substitute for or replace any legal or other professional advice. If you have specific concerns or a situation in which you require legal advice, you should consult directly with one of our lawyers.