The Friction Factor
An American suffragist (Frances E. Willard, 1839-1898) apparently once said: “The world is wide, and I will not waste my life in friction when it could be turned into momentum”. I am not sure exactly what she was referring to but she could easily have meant what some philanthropic clients refer to as bureaucratic friction i.e. that which what sometimes slows them down in their quest to do great things for the world. I thought I would start this year by reviewing some of this friction that clients complain about when told what they can and cannot do; sort of like a ten commandments of the charity and not-for-profit world if you will ..but don’t shoot the messenger as this is just what the regulator (source of the friction) says.
There are many more than ten commandments in the charity and not-for-profit world but for brevity sake I have chosen the ones that always seem to need reinforcement. These mostly apply to registered charities and all of this information has been sourced from and is freely available on the CRA Website.
You shall only engage in allowable activities
Applicants for charitable status need to explain to the CRA Charities Directorate exactly what the organization will be doing inside and outside Canada before the CRA will grant the privilege of letting people get a tax deduction for funding your cause. Then when granted charitable registration, a charity is only allowed to operate by carrying on these charitable activities on its own (or by an agent or contractor on its behalf) and/or by gifting to other qualified donees (other than other registered charities, there is a list of such entities). A registered charity must not engage in prohibited political activities or unrelated business activities. Further details on allowable activities and those that are not take up pages and pages on the CRA Charities Directorate website and in case law.
You shall keep adequate books and records
All profit making business have to keep accounting records. A registered charity must keep similar books and must tell the CRA what Canadian address they are kept at. Furthermore, for fiscal years beginning on or after January 1, 2012 all not-for-profit organizations have to choose to use either accounting standards for not-for-profit organizations in Part III or International Financial Reporting Standards in Part I of the CICA Handbook – Accounting.
Having a complete set of minutes of meeting and list of members’ names and address comes in handy when you need to call a meeting, refer to something in the organizations’ history or when the CRA auditor comes calling.
You shall issue complete and accurate donation receipts
A registered charity may only issue official receipts for donations that legally qualify as gifts. An official receipt must contain specific information. Sample receipts are available on the CRA website. The CRA empathizes the following message on its website about issuing receipts that are not your own. Under no circumstances should a registered charity lend its registration number to another organization for receipting purposes. A registered charity is responsible for all tax receipts issued under its name and number and must account for the corresponding donations on its annual information return. A charity that lends its registration number risks losing its charitable registration.
You shall meet the annual spending requirement
A registered charity must spend the minimum amount calculated for its disbursement quota each year on its own charitable activities, or on gifts to qualified donees. The disbursement quota calculation is based on the value of a charity’s property not used for charitable activities or administration. Due to recent federal budgets, this amounts to 3.5% of the average value of that property, but there are calculations to be made depending on whether the charity is a charitable organization or public or private foundation.
Registered charities whose expenditures on charitable activities or on gifts to qualified donees were less than required in the year due to circumstances beyond their control can apply for a disbursement quota reduction. Furthermore, a registered charity can seek permission to temporarily accumulate funds in order to make a major expenditure, such as buying a building or a costly piece of equipment, which cannot be financed out of its current revenue without the charity incurring a spending shortfall (not meeting its disbursement quota).The amount approved for accumulation, and the income earned on the amount, is then excluded from the charity’s annual spending requirement.
You shall file an annual T3010 information return and file it on time (and this information is public)
A registered charity must file an annual T3010 information return (together with financial statements and required attachments) no later than six months after the end of the charity’s fiscal period. A registered charity must get permission from the CRA before it can change its fiscal period end, since such a change affects the charity’s filing obligations.
As you file information with the CRA you should know that the CRA may also provide to any person, upon request, information such as a copy of the charity’s governing documents, its application for registration as a charity, information about the directors and trustees, any letters or notices, conditions and warnings, suspensions, tax or penalty assessment (other than the amount of a revocation tax) and other relevant applications by the charity.
You shall maintain the charity’s status as a legal entity by keeping your required filings up to date
A registered charity that is constituted federally, provincially, or territorially must meet other specific requirements (in addition to the requirements of CRA) in order to maintain its status as a legal entity. This may include annual filing and/or annual fees. You cannot just stop operating and hope all government issues will go away as there are proper procedures to follow if you want to wind up, or otherwise dispose of your charity.
As an aside, make sure you are legally registered to carry on your charitable activities in each and every jurisdiction where you are operating or fundraising. This includes complying with any special fundraising legislation such at the Charitable Fund-raising Act in Alberta.
You shall inform the Charities Directorate of any changes to the charity’s mode of operation or legal structure
A registered charity should get confirmation from the CRA Charities Directorate before changing its stated objects and/or activities to make sure they qualify as charitable. A registered charity should inform the CRA if it changes its name, telephone number, address, contact person or governing documents (constitution, letters patent, etc.) and must obtain prior approval before changing its fiscal period end. Many of these changes require special forms, extra steps and expertise to guide you through the proper channels. It is best to do it right first rather than find out later that you should not have done something!
You shall operate within the confines of the designation assigned by the CRA
In the CRA’s letter of notification of the charity’s registration each charity was designated as either a charitable organization or public or private foundation. There are many rules about what each of these designated charities can and cannot do and different penalties for each for non-compliance with the rules. You should know the rules that apply to your specific type of charity. A registered charity can request a re-designation if it disagrees with its designation at the time of registration or later feels that the designation should be changed. The success of any such request depends on many factors such as the makeup of the board of directors or trustees and the number of funders.
Registered charities that gift more than half their income to other registered charities are designated as foundations. However if a charitable organization wants to give a substantial amount to another registered charity without being so re-designated , both charities can apply to CRA to be “associated” . There are special rules for this process and the success of any application will depend on the charitable purposes and activities of the charities or the nature of any project they will be undertaking.
You shall not expect quick service from the CRA Charities Directorate as they are overwhelmed with applications and questions
The CRA Charities Directorate published service standards say that: “Our goal is to respond to regular applications for charitable registration within six months, upon receipt of a complete application.” Furthermore, all service requests to and responses from the CRA Charities Directorate are sent through the regular mail. They do not use email at this time. It is not uncommon to receive a letter from the CRA dated weeks before the day it arrives.
You shall not intend to make a profit! (If you are a non-profit and not registered as charity you have to be very careful of these rules.)
This is for those organizations that are not charities (and don’t want to be because of all of the friction from the CRA Charities Directorate). However, not-for-profit organizations must still be aware of the friction that comes from the CRA generally as it enforces the provisions of the Income Tax Act.
Section 149(1) (l) of the Income Tax Act is the section that allows for the existence of non-taxable non-profit organizations operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit.
It is very important that these types of organizations do not have the intention of profiting from carrying on a trade or a business operated in a commercial manner; offering goods and services to the public; operating on a profit-making rather than a cost-recovery basis; or directly competing with taxable entities engaged in the same trade or business. To have these kinds of intention could create all kinds of friction for the organization.
Friction from any of these or many other rules laid down or enforced by the CRA can create unwanted heat for those whose only motive is to create goodness in the world. Professional advisors act as the oil to ease some of this friction. Speaking from experience, it take less effort to do things right the first place rather than try to fix it later. By then when you may really be caught up in the bureaucratic machinery because you did not follow the rules. Then you get to really experience the true meaning of friction as momentum slows down or comes to a grinding halt because you have been robbed of energy and resources.