Most organizations that are pursuing charitable status are incorporated. Part of the requirement for achieving such status is that the corporation is organized to pursue charitable purposes. But that by itself is not enough for charitable registration and so prospective charities must apply to the CRA for registration. The question then arises about the tax status of those corporations that are not yet (and may never be) registered charities, and what are their responsibilities?
Just because the corporation is not organized as a for-profit does not necessarily qualify it as a not-for-profit because that definition includes a group that does not qualify as a charity in the opinion of the CRA. Obviously, one cannot definitively know the CRA’s opinion until it is supplied by the CRA (although lawyers can often make an educated guess). If the organization that applies for charitable status does, in fact, qualify then the organization was a charity at the time of its incorporation and theoretically at least, was not as a not-for-profit. If it is not a not-for-profit and not a charity, the organization is, by default, a for-profit organization.
This puts the corporation in a tough spot. If the Minister agrees that it is a charity, then before the time of registration it is actually a for-profit!!! This result is, for lack of a better word, just plain weird, but the consequence is limited.
The most difficult impact relates to the tax consequences to the group. Donations are not taxable but if the corporation engages in business activity the CRA may take the position that these amounts are taxable. Fortunately, most organizations await their charitable status before undertaking such activity. And, truth be told, the CRA rarely looks at the activity of an incorporated charity to determine its tax status during this period. Nevertheless, this activity alone may be a good reason for a future registrant to request that the CRA backdate its official date of registration.
Another consequence to consider is the appropriate tax filing for the corporation. Given that registration as a charity can often take close to a year, it is inevitable that many corporations will have a fiscal year-end prior to registration as a charity. In these circumstances, the organization will have to contemplate the filing of T2 Corporate Tax Returns during that period between incorporation and registration as a charity (or refusal of such). Technically, and assuming that the CRA does not backdate registration, the organization must file a corporate tax return.
This is not, in and of itself, a problem. The difficulty is that the corporate income tax return requires the organization to check off whether it is a for-profit, or not-for-profit, organization. This is true whether or not the corporation has any income to report. And, of course, tax returns must be certified as accurate by an authorized representative of the organization. In these circumstances, the corporation may want to take the position that it is a for-profit corporation (because it hopes to not be a not-for-profit) and file on that basis. If the corporation has no taxable income then there is no tax consequence anyways. Of course, the same would be true if it was a not-for-profit, but if later registered as a charity then it would have retroactively fallen out of the definition of not-for-profit and the filing may (and we emphasize may) be inaccurate.
Organizations would be wise to consider deferring any activities in the corporation until the CRA’s opinion of their charitable status is confirmed. This is usually good practice during the application process but also makes the filing of a nil return, even in a corporate T2, much simpler, less risky, and cheaper. For groups that have no choice but to commence operations before registration as a charity, they would be wise to procure experienced legal advice in order to ensure that there are no liabilities to the incorporated entity and potentially the directors.
Author: Adam Aptowitzer
Adam Aptowitzer is the managing partner at Drache Aptowitzer PC. He practices in the area of Charity Law and Tax Litigation. He can be reached at aaptowitzer@drache.ca.