What Is A Charity?


Most of us are aware that if we make a donation to a charity, and obtain a receipt with a charitable registration number on it, we are entitled to a tax deduction. If the donation is in the form of publicly traded stock, the tax benefits are even greater.

But what is a charity? And how does it get to issue tax receipts?

There are two steps. The first is relatively easy: if the organization’s activities will be conducted in British Columbia, a founding group of at least five individuals may incorporate themselves as a not-for-profit organization under the Society Act. This is a process much like incorporating a company, with the benefit of limited liability for members. The society thus formed becomes a separate legal entity, governed by its constitution and bylaws, which must conform to certain requirements of the Society Act, and run by a board of directors, generally elected on a regular basis by the society’s members.

In my experience, many who have taken the trouble to organize themselves as a society assume that they can now accept donations and issue tax receipts. Not so: only an organization recognized as a charity by the federal government under the Income Tax Act can issue tax receipts. To be so recognized, the organization must apply for registration as a charity, and wait (and wait and wait) for their charitable registration number to be issued. This is the harder step. One reason it is hard is because the organization’s founders may have decided on their purposes and undertaken their activities without first checking to determine whether their chosen purposes and activities would be considered charitable.

To be registered to issue tax receipts, an organization must have a charitable purpose set out in its constitution and it must carry out charitable activities. It is common for a society to amend its constitution significantly in order to meet the charitable purpose test set out by the Charities Directorate of the Canada Revenue Agency. The process often begins with a letter of rejection of the application for charitable status: “The purpose and activities of your organization do not fall within the legal concept of a charity as recognized by the courts.” With luck, a helpful official at the Charities Directorate will be pro-active and indicate to the organization that if it were to amend the purposes set out in its constitution in such and such a way, and if it were also to limit its activities to such and such, then “it could possibly qualify for registration”. I have one such letter from CRA to the client applicant which goes on to say: “Once you have formally amended the objectives as suggested, and upon receipt of a copy of the respective amendment made to the Constitution and the Special Resolution, stamped by the Registrar, we would be prepared to grant registration. Otherwise, were we to proceed with our determination, the organization would likely fail to qualify for registration.” This is pretty clear and helpful direction, but it is not always available.

So what is a charitable purpose? The courts have identified four general categories: the relief of poverty, the advancement of education, the advancement of religion; or certain other purposes that benefit the community in a way the courts have said are charitable. A charity must also meet a public benefit test. To qualify under this test, an organization must show that its activities and purposes provide a tangible benefit to the public; those eligible for benefits are either the public as a whole, or a significant section of it, in that they are not a restricted group or one where members share a private connection, such as social clubs or professional associations with specific membership. There are certain refinements and exceptions to this public benefit test, so do not be too quickly discouraged.

If your organization has been operating for some time, and then decides to apply for charitable registration, it will not be enough to simply change your constitution to limit it to charitable purposes. You must describe in some detail the activities and programs your organization has been undertaking, and if they include both charitable and non-charitable activities or programs, they will have to be curtailed or at least reorganized and delivered differently. Not every board of directors or founding group will want to make the required changes. There may be substantial investment in, and commitment to, the organization’s existing activities and programs as initially set up. In these cases the governing body must carefully weigh the benefits of registration against the curtailment of its activities. How dependent is the organization on donors who require tax receipts? A non-profit organization recognized by CRA can rely on income producing activities on which they will not be required to pay income tax, and it may find that it is able to provide activities and programs for which tax-deductible donations are not required.

So before embarking on the often difficult path of fitting into the charity box, an organization must consider its reliance on tax deductible donations.

Contact Conor Zokol of DuMoulin Boskovich LLP for your legal needs.