A non-profit is an organization that uses surplus revenues to achieve its goals, rather than distributing them as profit or dividends.
They can be non-incorporated like an artist collective. Or they can be incorporated through the Ministry of Government and Consumer Services. Incorporated non-profits must have a Board of Directors, with articles and bylaws to govern themselves. When they are incorporated, we call non-profits 'societies'. Non-profits may also choose to obtain Charitable Status which is granted by the Canada Revenue Agency (CRA) upon application by a non-profit.
To Incorporate or Not To Incorporate
There are many factors that should be taken into account when considering a move to incorporate your organization. It should be noted that there are two possible steps in incorporation: becoming a regular non-profit, and becoming a charitable organization. The application and reporting requirements are different for each type of incorporation. Below are lists of the pros and cons of being non-incorporated versus incorporated, and having charitable status.
Non-incorporated organization:
- You remain the ultimate authority within your organization
- It is easier to be flexible with the type of work you do
- No government reporting requirements
- Funds may have to be managed under a personal bank account so make sure you understand the personal tax implications of accepting and distributing grants or other funds on behalf of the organization
Incorporated non-profit
- Some venues may require you to be a non-profit to rent their space
- Once incorporated, the organization becomes a separate entity for tax purposes and you no longer need to worry about the personal tax implications of managing money for the organization
- Any changes to the Board of Directors must be reported in paperwork to the government
- End-of-year reporting requirements and filing of tax paperwork (T2 forms, T4A forms), and potential penalties for late filing
Charitable organization
- The above “incorporated non-profit” items continue to apply
- Increased reporting requirements
- Increased scrutiny of the organization’s activities and financial information
- Potential access to apply for funding from private foundations and corporations
- Ability to issue tax receipts (19-35% of donation depending on your province).
- Eligible to receive rebates for GST/HST paid during the year.
Charities also must spend a certain percentage of their assets (including cash, investments, and fixed assets) and file annual reports in order to maintain their charitable status.
The Canada Revenue Agency (CRA) assesses eligibility for registration as a charity under the Income Tax Act using a two‑part test to determine whether an organization:
- is constituted for purposes that are exclusively charitable and define the scope of activities that can be engaged in by the organization; and
- subject to limited exceptions, devotes its resources to charitable activities that further those purposes.
To be eligible, a purpose should generally identify three elements either expressly or implicitly through its context:
- the charitable purpose category:
- relief of poverty,
- advancement of education,
- advancement of religion,
- or certain other purposes beneficial to the community in a way the law regards as charitable;
- the means of providing the charitable benefit; and
- the eligible beneficiary group.
Steps to Incorporating
Articles and Bylaws
All non-profits require articles that state the purpose or mandate of the organization. The CRA publishes a list of potential purposes which are also considered charitable. Purposes can be put in whatever wording you choose. Bylaws are different than workplace policy and procedure because they require adherence to governing law outside of the company, whereas workplace policies are for internal operations only.
Board of Directors
To incorporate you need a minimum of three Board Members.
Resources for Incorporation
Society Requirements
Each society is required to have:
- Members: Societies must have a minimum of three Members. These Members vote on who their Board of Directors are. However, each society may determine on its own who those Members are and what conditions there are to membership. Members may also be required to pay dues.
- Register of Members and Directors: This is a list of all the names and addresses of the Board of Directors and Members of the society.
- Annual Meeting: Each society is required to have one annual meeting of the Members.
- Minutes: This is written documentation of any meetings held by the society.
- Accounting Records: Every society must keep a record of the money received and spent. Many also produce financial statements.
- Letters of patent, bylaws, special resolutions: A copy of the letters of patent, issued when the application to becoming a society is approved. As well as a copy of the original bylaws and any subsequent special resolutions that changed those bylaws.
Filing Requirements
Societies
Annually a society must submit the following:
- CRA T2
- With CIAAR (s546)
Charities
The Information Return includes:
- Registered Charity Information Return, Form T3010A
- Registered Charity Basic Information Sheet, Form TF725
- List of directors/trustees or like officials, Form T1235
- List of qualified donees, Form T2136
- Copy of the registered charity’s own financial statements
- Issuing T4’s or T4A’s to anyone who worked for the organization
- GST/HST rebates:
- Form GST66
- Form RC7066 SCH
Non-charitable not-for-profits
The Information Return includes:
- T2SCH546 information return
- Issuing T4’s or T4A’s to anyone who worked for the organization
- GST/HST rebates
NOTE: Collecting GST/HST is only required for a society offering goods and services over $30,000 annually. However, all societies may apply to have their GST/HST rebate.
Things to consider
Some things to consider when thinking about incorporation or pursuing charitable status:
- Often for smaller organizations, the ability to issue a tax receipt for donations might not impact the amount or the decision to give for most of your individual donors. Most individual donors are choosing to give because of a personal connection and a 20% return on their donation might not be a deciding factor. There is also an increase in administrative paperwork in order to issue paperwork and report on the tax receipts at the end of the year.
- A charitable number can be thought of as a tool for fundraising rather than a solve-all solution. Donations and private support still relies on relationships that must be cultivated and maintained before a charitable number can have an impact.
- Even though the government doesn’t require audited financial statements until you reach a certain level of revenue, many private foundations, or corporate foundations will ask to see audited financial statements before they consider giving you money. Financial audits cost a few thousand dollars each year and extensive preparation time.
- If you are becoming a regular incorporated non-profit before becoming a charity, make sure you apply with Objects and Purposes that are applicable to a charitable organization so you don’t have to change them when applying for charitable status.
Resources
Ontario Non-Profit Network Resource Centre is a compilation of tools, resources, research, and discussions for non-profits working for the public benefit of Ontario.
Law Help Interactive (American) - this site allows you to prepare legal documents, find and prepare forms, and more all in one place! Can also be helpful to look at when thinking about incorporating and understanding what you need.
Online Courses for Running Non-Profits offered by Canadian Charity Law.