As part of our educational series for Non-Profit Organizations (NFPs), we at GBA LLP are happy to share insights on an often-debated topic: How does a Non-Profit Organization become a Charity in Canada?
While NFPs and charities may seem alike, it’s crucial to understand that all charities are non-profits, but not all non-profits are charities. The key difference lies in their legal and tax implications. Becoming a registered charity can provide an NFP with significant benefits, including the ability to issue official tax receipts to donors, access to certain tax exemptions, and enhanced credibility with the public.
So, how does an NFP take the leap to become a registered charity? Here’s the pathway broken down into five manageable steps.
Before anything else, it’s essential to comprehend that only organizations established for a purpose recognized in law as charitable can become charities. The four categories of charitable purposes recognized by Canadian law are relief of poverty, advancement of education, advancement of religion, and other purposes beneficial to the community in a way the law regards as charitable.
The second step involves ensuring that your organization is structured appropriately to become a charity. The Canada Revenue Agency (CRA) requires that registered charities be constituted and operated exclusively for charitable purposes. Therefore, the organization’s governing documents (like its constitution, bylaws, or articles of incorporation) must clearly indicate its charitable intent.
Once you’ve clarified your charitable purpose and reviewed your structure, the next step is to complete and submit Form T2050, “Application to Register a Charity under the Income Tax Act,” to the CRA. The application requires you to provide detailed information about the organization’s activities, governance, finances, and fundraising practices. It’s vital to be thorough and precise when preparing this application, as the CRA will use this information to determine whether the organization qualifies as a charity.
After submitting your application, the CRA will review it to ensure that the organization qualifies under the Income Tax Act. This process may take several months, and the CRA may contact you for further information or clarification. Patience is key in this step, as your goal is to ensure the CRA understands and agrees with your charitable purpose and operations.
Congratulations, you are a registered charity! However, the journey does not end here. Charities must comply with ongoing obligations under the Income Tax Act, such as filing an annual information return, keeping appropriate books and records, and spending a minimum amount on charitable activities each year. Neglecting these requirements may lead to penalties or revocation of charitable status.
While the process to become a registered charity can be challenging, the benefits can be significant. If your non-profit is considering making this transition, be sure to consult with a legal or accounting professional to guide you through the process. Remember, the path to charitable status is not a sprint; it’s a marathon. With careful planning, patience, and professional advice, your organization can successfully make the transition and unlock new opportunities for impact.
Stay tuned to our GBA-LLP.ca educational series for more insights and guidance tailored for the non-profit sector in Canada. Remember, we’re here to help you navigate the complexities of your non-profit journey.
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This blog is not meant to provide specific advice or opinions regarding the topic(s) discussed above. Should you have a question about your specific situation, please discuss it with your GBA advisor.
GBA LLP is a full-service accounting firm in the Greater Toronto Area, but we primarily service all of Ontario as well as the rest of Canada virtually, except Quebec. Our team of over 30, provides Audits and Reviews of financial statements, and Compilations of financial information, as well as corporate tax returns. We provide specialized corporate tax and succession planning for small and medium businesses, in addition to general advisory services.
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