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 main legal responsibilities of registered charities.
Do registered charities have to follow any rules?
Yes. You must follow:
- rules made for registered charities,
- other rules that affect your activities, even if they’re not made specifically for registered charities.
This article covers the first category of rules. The Canada Revenue Agency (CRA) (a federal government body) is responsible for making sure registered charities follow these rules.
To learn more about the rules in the second category, jump to the section “Are there other rules registered charities must follow?” at the end of this article.
Why must registered charities follow rules?
Registered charities must follow rules on how they conduct their activities. For example, there are many rules that apply to issuing tax receipts for donations. People and businesses that make donation get tax receipts. They can use these receipts to reduce the amount of income tax they owe to the government.
This means that every year, governments accept to forfeit vast sums of money they would otherwise have collected in taxes. This is why governments have made rules to ensure registered charities are collecting donations, issuing receipts and carrying out activities for purely charitable purposes.
Where can I find a list of these rules?
The CRA has several checklists to remind registered charities of their obligations, as well as a web page titled Advantages and obligations of becoming a Registered Charity.
Rule 1 – Stay true to your charitable mission
Registered charities must dedicate their resources to the charitable purposes and activities identified in their application for registration.
Sometimes, registered charities unintentionally stray 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.
Obviously, any new purposes and activities must also be recognized as charitable under the law. You should therefore contact the Canada Revenue Agency before making any changes, to check that the new purposes and activities will not cause you problems on this front.
Also, when you make changes, you must notify the Canada Revenue Agency and provide documents explaining these 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”
As a registered charity, you’re authorized to fulfill your mission in three ways :
- by conducting your own activities,
- by giving resources to “qualified donees,”
- by making grants to non-qualified donees under certain conditions.
1. Conduct your own activities
You can conduct your own activities using your own staff and volunteers or work with outside individuals and groups. For example, you could ship supplies to a foreign country for disaster relief and hire someone in that country to distribute the supplies.
When you’re working with outside individuals and groups, you must maintain direction and control over the use of your resources and be able to demonstrate that you are in charge.
To ensure that you maintain direction and control over your resources and can demonstrate it, it’s a good idea to have a written agreement. The Canada Revenue Agency has a comprehensive guide on what to include in this kind of agreement.
2. Give to “qualified donees”
You can also fulfill your mission by making gifts to “qualified donees.” These gifts can include money and property but not services.
Qualified donees include:
- other registered charities,
- Canadian municipalities,
- registered Canadian amateur athletic associations,
- registered national arts service organizations,
- certain housing corporations providing low-cost housing to the elderly,
- certain universities outside Canada that have students from Canada,
- certain foreign charities.
For a complete list of qualified donees, see the CRA website.
3. Make grants to “non-qualified donees”
You can make grants to non-qualified donees under certain conditions.
Non-qualified donees are donees that don’t meet the legal definition of qualified donee. These include:
- non-profit organizations,
- clubs,
- circles,
- associations.
“Grants” include all resources you transfer to a donee or make available to them. For example, you could grant them money or goods.
If you make a grant to a non-qualified donee, you must satisfy many conditions. The grant must serve to advance your charitable purposes. You must also make sure that the donee uses the grant only for those purposes.
In addition, you must document the purpose of the grant and the fact that the donee is using the grant for that purpose. The Canada Revenue Agency has guidelines to help organizations ensure they satisfy the conditions for making grants to non-qualified donees.
Rule 3 – Avoid partisan political activities
This is an area that is often confusing for registered charities or groups thinking about registering. Here are the basic rules:
- You can’t have a political purpose, but you can conduct political activities. “Purposes” are the reasons for which a charity is created. “Activities” are the programs and projects a charity develops to achieve its purposes.
- All “partisan” political activities are prohibited. Partisan means activities that involve support for, or opposition to, a political party or candidate for public office.
For example, you cannot:
- publish an article on social media supporting the re-election of a candidate who has taken the same position as your charity on an issue that concerns you,
- invite only one candidate to speak at your annual meeting.
Non-partisan political activities that advance your registered charity’s purpose are allowed. These activities are basically aimed at influencing lawmakers and public opinion on issues related to your charity’s purposes.
For example, you can adopt a position regarding laws that concern your mission. It’s acceptable for a registered charity to hold a position like that of a political party provided it doesn’t link its position to political parties.
Rule 4 – Avoid prohibited business activities
If your registered charity qualifies as either a charitable organization or public foundation, you can carry on certain business activities to advance your purposes (mission).
However, if your charity is a private foundation, you aren’t allowed to carry on any business activities.
Consult our article Introduction to Registered Charities to learn more about these 3 categories.
“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.
You should keep in mind that only “related” business activities are allowed. What is a related business activity?
- A business run 90% or more by volunteers, or
- A business activity linked to your charity’s purposes and subordinate to those purposes. (“Subordinate” means the business activity remains a minor activity in relation to your charity’s other activities and it’s carried on to support your charity’s main mission.)
Here are some examples of “linked and subordinate” business activities:
- A hospital operates a paid parking lot, cafeteria or gift shop.
- A university runs a student bookstore and dining halls.
- A church rents out space in its parking lot on weekdays when it isn’t hosting activities.
- An animal shelter sells pens with the shelter’s logo on them.
In addition to related business activities, some activities aren’t considered to be “business activities” at all. For example, you may:
- ask for donations,
- sell donated goods,
- charge fees for programs and services (for example, museum admissions), if the fees are to cover the true cost of the activity, not to make a profit,
- organize fundraising activities, on the condition that they don’t turn into the organization’s main activity. If the event is held often, for example, a weekly raffle, it might be a business activity,
- receive income from safe investments.
For more examples of business activities that are allowed or prohibited, consult the CRA’s explanation sheet on this subject.
Rule 5 – Keep proper books and records
You must keep adequate books and records, in English or French, at the address in Canada listed with the CRA. It’s a good idea to keep a back-up copy offsite.
Even if you have an outside person, such as an accountant or bookkeeper, to keep your books and records, the charity is still responsible for meeting all the requirements regarding book- and recordkeeping.
These documents must make it possible for the CRA to audit:
- your revenues,
- the resources you used for your charitable activities,
- your purposes and activities.
What are “books and records”?
They’re documents that demonstrate an organization’s activities. They include financial statements, bank statements, copies of official donation receipts, governing documents, minutes of meetings, annual reports, annual information forms, accounting ledgers, fundraising materials and written agreements.
Books and records also include the supporting documents that prove that 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.
Must books and records be in paper format?
You can keep your books and records in paper format or in an electronic format that is readable.
How long must we keep books and records?
Generally, copies of donation receipts must be kept for 2 years from the end of the calendar year in which the donation was made. Other records must be kept longer. To learn more, consult the section on books and records on the CRA’s website.
Rule 6: File an Annual Information Return (Form)
Each year, you must fill out and file an information return and financial statements, along with other forms, with the CRA. A return is a kind of form.
You must file the return within 6 months of the end of your fiscal period. A fiscal period is the 12 months (for incorporated charities, this can be up to 53 weeks) covered by your financial statements. For example, if your fiscal period runs from April 1 to March 31, you must file an information return by September 30.
Filing your return isn’t just an obligation. It’s also a way of making public certain information regarding your charity, such as the financial statements. The Canada Revenue Agency publishes the information it receives in the List of charitable organizations and certain other qualified donees.
If you need to correct information on a return after it’s filed, fill out Form T1240 and submit it to the Canada Revenue Agency.
Rule 7 – Notify the CRA of changes and get permission when required
You must get permission from the CRA:
- to change your fiscal period end,
- to change your designation (charitable organization, public foundation, private foundation). To learn more about these designations, consult our article Introduction to Registered Charities,
- to reduce your disbursement quota. To learn more about the disbursement quota, see the next section in this article,
- to associate with another charity carrying on similar activities. To learn more about Associated Status, consult the CRA’s website.
You must notify the CRA of changes to your:
- name, address, phone number, fax number, contact person, and address where records are kept,
- governing documents (constitution, incorporating documents, etc.),
- legal status: for example, if you incorporate or cease to be incorporated, become a division of a larger organization or cease to be a division, merge with another organization, etc.,
- purposes and activities,
- by-laws.
You must submit notifications of changes or requests for permission separately from your annual information return. Consult the Making Changes section of CRA’s website to learn more.
Rule 8 – Meet your disbursement quota (annual spending requirement)
Your disbursement quota (DQ) refers to the minimum amount you must spend each year on your charitable activities, gifts to “qualified donees,” or grants to non-qualified donees.
The DQ rule was created to:
- make sure you spend the money you receive on your charitable activities,
- discourage you from building up large reserves.
Each year, you must spend a certain percentage of the value of assets you own that are not used directly in your charitable activities or administration of the charity.
These assets include, among other things, reserve funds, endowments, investments and buildings.
The requirement to spend a minimum percentage of the value of your assets does not apply if the total of your assets is worth $100,000 or less.
For private and public charitable foundations, the requirement only applies if their asset value exceeds $25,000.
For a more detailed explanation of the DQ and how it’s calculated, consult the Disbursement Quota Calculation section on the Canada Revenue Agency website.
Rule 9 – Follow the rules on fundraising
The main rule to remember is that fundraising is not, in-and-of-itself, charitable and can’t become your principal activity.
Moreover, each type of fundraising has its own rules and administrative formalities that you must follow. For example, there are many rules for issuing official receipts for donations to registered charities.
Other rules you must follow
In addition to CRA rules, you must respect other rules created by various levels of government (provincial, territorial and municipal). Most of them apply to the general population and not just to registered charities. It’s impossible to list all these rules, but here are some important ones:
- If you’re incorporated, you must follow the specific rules that apply to corporations. For more information on this topic, consult our article Introduction to Registered Charities.
- If you have employees, you must follow the rules on payroll deductions, working conditions, etc.
- If you have activities in Quebec or issue tax receipts to Quebec residents, you must file an information form with Revenu Québec every year. To learn more, consult Revenu Québec’s website.
- If your charity is incorporated under Quebec law, or is incorporated under the laws of another place and has its head office or activities in Quebec, you 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 CRA’s GST guide and the Revenu Québec website.
- Some charities may also have to pay other kinds of taxes, such as taxes on the sale of land called “capital gains taxes.”
Charities operating in certain sectors (for example, daycares) must follow rules specific to those sectors. These rules deal with safety and hygiene standards, permits, background checks for employees, etc. - Before selling a building that was financed with public funds, registered charities that are incorporated and whose activities include providing housing must get permission from the Ministère des affaires municipales et de l’habitation (Quebec department of municipal affairs and housing).
What happens if you don’t follow the rules?
Penalties for not following these rules can include fines, suspension of the right to issue tax receipts for donations, and even cancellation of your registration.