In Ontario, a not-for-profit organization (also known as a “non-profit organization”) may operate under the legal vehicle of a trust, an unincorporated association, a provincial or federal cooperative, or a provincial or federal corporation.
After reading our article about the differences between an provincial incorporation in Ontario & a federal incorporation, this article will detail why you should incorporate your non-profit organization and how to obtain a charitable status.
But first, what is a not-for-profit organization in Ontario ?
A not-for-profit organization is an entity that can be created under a federal or a provincial law. What is fundamental to understand is that a not-for-profit organization does not aim to acquire a gain or generate a profit to be distributed to its members. Unlike a corporation, a not-for-profit organization does not have a share capital. Therefore, it cannot issue shares, which represent a fractional unit of its capital, and pay dividends to its members.
There are 2 general misconceptions about not-for-profit organizations that must be clarified.
NOT-FOR-PROFIT ORGANIZATIONS CANNOT EARN A PROFIT
On the contrary, in Ontario, a not-for-profit organization can and should earn a profit to accomplish its purposes and ensure its sustainability. In fact, a not-for-profit organization may conduct the same commercial activities as a corporation. Thus, it can earn a profit or register an operating surplus. However, the profit or surplus has to be incidental to its primary purposes and reinvested into the organization.
INCORPORATING A NOT-FOR-PTOFIT ORGANIZATION GRANTS THE CHARITY STATUS
That is incorrect. An incorporated not-for-profit organization (also known as a “not-for-profit corporation”) is not automatically considered a registered charity under the Income Tax Act.To obtain the status of a charitable corporation, that is to say a not-for-profit corporation for charitable purposes, specific requirements prescribed by the Charities Directorate of the Canada Revenue Agency must be respected.
But, before looking into charitable corporations, let’s take a glimpse at not-for-profit corporations.
What is a not-for-profit corporation in Ontario ?
Remember, a not-for-profit corporation is a not-for-profit organization that operates under the structure of a corporation; that is incorporated.
There are 3 reasons why you should incorporate.
A DISTINCT LEGAL ENTITY
An Ontario not-for-profit corporation has a distinct legal status that allows it to acquire and own property, and to enter into contracts. This legal existence is independent from the ones of its members’.
Therefore, a member cannot be held personally liable for the not-for-profit corporation’s debts. Also, the not-for-profit corporation can enforce its rights by bringing a legal action in its own name, and conversely, a legal action can be brought against it in its own name.
A PERPETUAL EXISTENCE
Having a legal entity, in Ontario, means that a change in the membership of the not-for-profit corporation does not affect its existence. Thus, unless the members of a not-for-profit corporation or the government undertake precise steps to dissolve the not-for-profit corporation, it exists indeterminately.
MORE GOVERNMENTAL GRANTS
From a practical standpoint, a not-for-profit corporation represents a structured organization with mechanisms in place that ensure good governance practices. This structure increases the chances of receiving federal and Ontario governments grants that favour transparent and organized not-for-profit entities.
In Ontario, a not-for-profit corporation can be governed by the federal or provincial Act; the former is the Canada Not-for-profit Corporations Act (hereinafter “NFPA”), and the latter is the Corporations Act of Ontario (hereinafter “CAO”).
- To incorporate under the NFPA, your not-for-profit corporation has to serve and support people across Canada.
- Important changes to the CAO are to come into force; what are those changes and how may they impact your not-for-profit corporation? The next section answers both questions.
Changes to the Ontario law on not-for-profit corporations
In 2010, the Ontario government enacted the Not-for-Profit Corporations Act (hereinafter “ONCA”) to simplify the rules and process of incorporating not-for-profit organizations under part 3 of the CAO.
Although there is no fixed date for its entry into force, the ONCA will apply to all existing not-for-profit corporations governed by the COA. There are some cases where the ONCA will not apply such as for insurance corporations, corporations governed by the Cooperative Corporations Act, or when the statute expressly provides otherwise.
The ONCA introduces certain novelties for not-for-profit corporations such as:
- A distinction between public benefit corporations and other not-for-profit corporations,
- A new process for reviewing the financial records, and
- Improved rights of voting and non-voting members of not-for-profit corporations.
For existing not-for-profit corporations in Ontario, the coming into force of the ONCA raises certain transition considerations. You can obtain more information about these considerations by clicking here.
A status of a not-for-profit corporation in Ontario
As a rule of thumb, establishing a not-for-profit corporation should take into account its intended tax status. In other words, an Ontario not-for-profit corporation should draft its purposes to meet the conditions required by the tax registration status before incorporating.
A not-for-profit corporation has 2 choices with respect to its tax status; it may be registered as a not-for-profit organization or a charity. A not-for-profit corporation cannot be considered as a not-for-profit organization and a charity simultaneously.
- If a not-for-profit corporation wants to be registered as a charity, it has to meet all the conditions set out under the Income Tax Act and common law, and by the Charities Directorate of the Canada Revenue Agency.
- If a not-for-profit corporation wants to be registered as a not-for-profit organization, then its purpose(s) must fall exclusively within 1 one of the following categories;
- social welfare,
- civic improvement,
- pleasure or recreation, or
- for any other purpose except profit.
For example, a condominium association generally qualifies as a not-for-profit organization because it operates for the benefit of its members and without the purpose of generating a profit.
Charitable corporations in Ontario
There are 2 reasons to apply for a charity status for a not-for-profit corporation: charities are tax exempt and can issue receipts. Thus, if one donates money, a charitable not-for-profit corporation (also known as a “charitable corporation”) can issue a receipt to reduce the donor’s tax liability. The ability to issue receipts generates funds because it upholds an incentive for donors. Furthermore, a charitable corporation does not pay any taxes on profit or operating surplus.
A not-for-profit corporation can be a charity in Ontario provided:
- Its purposes and activities fall within the legal concept of a charity as recognized by common law, and
- It meets any other requirements under the Income Tax Act
Thee concept of "charity"
The common law notion of “charity” requires 3 conditions to be met:
- An exclusive dedication of property,
- For a charitable purpose, and
- For a public benefit.
AN EXCLUSIVE DEDICATION OF PROPERTY
A not-for-profit corporation in Ontario has to dedicate all its property to a charitable purpose.
Generally, common law rules that an entity created for both a charitable and a non-charitable purpose will be void. If such a case arises, a court of law may analyze the nature of the purposes, sever the charitable purpose from the non-charitable purpose or consider whether the non-charitable purpose is ancillary to the charitable purpose.
In addition to dedicating all its property to a charitable purpose, a not-for-profit corporation has to fit within 1 of the 4 categories of charitable purposes (also known as the “4 heads of charity”). This has a technical definition that differs from its popular meaning.
There are 4 heads of charity:
(A) Relief of poverty;
Common law interprets “poverty” as meaning more than providing for the basic necessities of life which may encompass situations where the relief of poverty avoids people from falling into poverty.
The relief of poverty does not necessarily require the beneficiaries to be poor. Consequently, it may assist people who have fallen on a hard time and apply to a small group of persons. For example, Ontario organizations that provide soup kitchens or supply low-cost rental housing provide relief of poverty.
(B) Advancement of education;
The advancement of education includes both private and public schools, and applies to libraries, choral societies, museums, Shakespeare societies, learned societies, scholarships, bursaries, amongst others.
To determine whether or not a not-for-profit corporation in Ontario falls within this head of charity, the nature of education is taken into account. Note that the mere provision of information or dissemination of opinions have been considered insufficient to fall within this category.
(C) Advancement of religion
Advancement of religion includes the publishing, teaching and propagation of a religion, and for building and maintaining worshiping and burial grounds. In general, no distinction is made between religions. Note that the advancement of religion does not need to promulgate the religion, but to allow people to celebrate it.
Under this head of charity, 2 conditions have to be met:
- The religion requires a God, precisely a belief in God, and to promote the worship of that God.
For example, a charity working to promote ethical principles does not meet this condition.
- For the public benefit.
Common law generally presumes that the advancement of religion provides for a public benefit.
(D) Other purposes beneficial to the community
This category includes purposes beneficial to the community that may account for a charity purpose, but do not fall within the 3 first heads of charity.
Here are a few examples of purposes that have been recognized as such:
- Social welfare purposes such as orphanages, hospitals, disaster relief organizations,
- Community purposes such as parks or cemeteries, or
- Social groups preventing cruelty to animals or preserving the environment.
FOR A PUBLIC BENEFIT
If the purposes fall within 1 of the 4 heads of charity to which all its property is dedicated, the not-for-profit corporation has to provide for a public benefit.
The notion of public benefit has 2 aspects:
- There must be a benefit to the public.
In other words, there must be a tangible and practical, direct or indirect, benefit that is assessed on a case-by-case basis. Generally, in Ontario, the benefit to the public is presumed for the first 3 heads of charity.
- The public must be the beneficiary.
In other words, the benefit must accrue to a section of the community, which means that the beneficiaries must not be numerically negligible, and that the quality that distinguishes the beneficiaries from non-beneficiaries cannot depend on their relationship with the not-for-profit corporation.
To sum it up, a not-for-profit corporation has to:
- Fit within 1 of the 4 heads of charity,
- Dedicate all its property to that charity,
- All of which have to provide for a public benefit.
Provided all the conditions are met, the Charities Directorate of Revenue Canada Agency will grant the charitable status to any not-for-profit corporation incorporated and residing in Canada.
Note that common law provides that a charity cannot engage in politics. However, under the Income Tax Act, a charity may engage in political activities, provided those activities are ancillary and incidental to its charitable activities and that those activities do not include the direct or indirect support or opposition to any political party or candidate for public office. In certain cases, it may devote up to 20% of its resources to these activities.
As you can see, registering your Ontario non-profit corporation as a charity is not an easy task. On the contrary, it requires a thorough understanding and application of various legal nuances. For any questions about non-for-profit or charitable corporations, contact us. here.
To conclude, remember that:
- Incorporating your not-for-profit organization and registering it as charity is good for business, but subject to technical legal rules that have to be respected.
- You are not alone; Lex Start is here to help you incorporate and register your charitable corporation without compromising your budget by offering affordable and customized legal services.
We hope that this article helped you understand what an Ontario not-for-profit corporation is and how it can become a charitable corporation. For more information in regard to your jurisdiction of incorporation or about the incorporation process, Lex Start can help you.