Administrative Deregistration – Just the Beginning of Your Problems
Adam Aptowitzer, September 11, 2007
The rampant confusion between not-for-profits and charities in Canada has been taking on a new dimension since the Canada Revenue Agency has become more active in deregistering charities for administrative non-compliance. As charity professionals know, there is a distinct difference between charities, not-for-profits, and for profit entities, however newly deregistered charities have simply been assuming that as they are no longer charities they are automatically not-for-profits and therefore not taxable.
Under the Income Tax Act a charity is, amongst other things, organized for exclusively charitable purposes and is in the opinion of the CRA a charity. It is not necessary to be registered as a charity to be considered one. A not-for-profit on the other hand is a group organized for reasons other than profit and is in the opinion of the Minister (i.e. the CRA) not a charity. The difference between them can be small and often relates to whether the objects of the organization are purely charitable. Other things being equal, where the objects are not purely charitable the organization will qualify as a not-for-profit.
However, in circumstances where the charity has been deregistered for administrative reasons the organization is presumably still a charity (albeit not registered as such) in the opinion of the Minister and therefore it cannot be a not-for-profit. Furthermore, as the organization is no longer a registered charity it loses its non-taxable status under paragraph 149(1)(f) of the Income Tax Act. Thus, unless it can avail itself of some other exemption, the organization is now taxable!!
For a newly deregistered charity this can be a difficult blow as not only must it divest itself of all of its assets because of the imposition of the revocation tax, it can not issue tax receipts for donations and any income it earns is now taxable. It is difficult to see how an organization could recover from this other than to pursue a retroactive re-registration. The lesson to learn here is that meticulous care should be given to ensuring that all CRA documents are filed on time.
If you have any questions about this subject feel free to contact the author at firstname.lastname@example.org