Running a registered charity or charitable foundation (a “charity”) or non-profit organization (“NPO”) can be a complex task. In addition to concerns about employees, programs and day-to-day operations, there are also legal requirements that can be a stumbling block for the unwary.

These organizations are afforded a number of tax benefits under the Income Tax Act (the “ITA”). Neither pay tax on their income, and charities may also offer tax receipts for donations. The trade-off for these benefits are certain legal requirements. They dictate a number of things, including how these types of organization use their resources and who may benefit from their activities.

The purpose of this note and the next (coming next week) is to review, in brief, some of the legal pitfalls that charities and NPOs might run into, and a crucial way to avoid legal conflict in the future. This week we consider charities.

Use of Resources

The ITA requires that a charity devote all its resources to charitable activities carried on by the organization. This requirement should inform everything done by a charity and it comes into question when a charity wishes to use its funds for something other than its own immediate charitable activities.

For example, a foundation might wish to provide money to other organizations doing charitable work. This is appropriate, so long as the organization is a “qualified donee” under the ITA. However, a foundation cannot provide funds to an NPO, no matter the quality of its activities or how similar its operations are to those of the charity or “charitable” in nature they are. Similarly, a foreign charity, such as a 501(c)(3) in the United States, will not qualify for donations either.

This issue can arise where a charity is affiliated with another organization, say an NPO doing good work in a community or a foreign branch of the charity. The Canada Revenue Agency (the “CRA”) has said, and the courts have affirmed, that a charity cannot be a “conduit” for funds, providing tax receipts to individuals for money that then passes through the charity to other organizations. These activities can put a charity at risk of revocation.

Contract Arrangements

The CRA has said that charities may make use of intermediaries in a number of situations. For example, it can use agents or contractors, or be a participant in a joint venture with another organization.

The key requirement in such circumstances is that the charity maintain direction and control over its resources. The idea is that the charity must make the decisions over the use of its resources and set out the parameters of the activity, its goals, who benefits and when the activity is complete.

The CRA recommends adopting certain measures to ensure that a charity does not go offside these requirements. The most effective tool would be a written agreement setting out, in detail, the duties of the intermediary. In addition, the charity must also monitor the activity, providing instruction on an ongoing basis and arranging for the charity’s funds to be kept separate. The CRA even suggests that a charity make periodic transfers of funds, based on performance, rather than providing a lump sum all at once.

Revenue Generation

The requirement that a charity devote its resources to carrying on charitable activities clearly also limits the activities a charity can undertake to earn money, in particular, carrying on business.

The first question to be answered is whether the activity is a business at all. For example, soliciting donations would not qualify and is thus a fully appropriate activity for charities. Similarly, if the activity by its nature has no capability to earn a net profit, the CRA has said that this would not qualify as a business.

If it is a business, a charity should consider ITA and CRA restrictions. In essence, the business must be a “related business”. There are two types of related business:

1.         one run substantially by volunteers; and

2.         one which is “linked” and “subordinate” to a charity’s purpose.

The first is relatively simple. “Substantial,” according to the CRA, means 90%. In other words, ensure that 90% or more of the individuals running the business are volunteers, and the business will be a related business.

The second has two parts. The first, the question of whether the business is linked to a charity’s purpose, is satisfied in a number of circumstances:

1.         the business is a usual and necessary concomitant of charitable programs;

2.         the business is an offshoot of a charitable program;

3.         the business is simply using excess capacity; or

4.         the business is in the sale of items which promote the charity.

Examples of these could be a church renting out excess capacity to a neighbouring community organization (3) or a hospital renting out its parking spaces (1).

A business being “subordinate” to the charity’s purpose, according to the CRA, means that it is subservient to the dominant purpose of the charity. Here, the important questions are whether:

1.         the business receives too much of the charity’s attention and resources;

2.         the business is integrated into the charity’s operations;

3.         the charity’s charitable goals still dominate the charity’s decision making processes; and

4.         there is any private benefit stemming from the business.

Positive answers to any one or more of these questions could indicate that the activity is not subordinate to the charity’s purpose, thus putting the charity offside.

Information on NPOs Coming Next Week

Check back in here next week for a discussion of some of the legal pitfalls a NPO can run into and how they might be avoided.

If you would like legal or tax advice for your charity or NPO or are considering starting one yourself, please feel free to contact the author at