Nonprofit practitioners need to be aware of the additional layer of complexity of legal issues constricting their operations, beyond those faced by the average citizen and corporation.

The necessity for this extra layer of complexity is clear when one considers that the federal government subsidizes every dollar a Canadian taxpayer donates to a registered charity (within certain limitations). Moreover, the nature of charitable giving in Canada puts private citizens in control of funds to be spent on behalf of people who are generally unable to ensure proper use of such funds.

Much of the legal regime in place to govern specifically the activities of charities takes place under the auspices of the Income Tax Act and generally deals with the ways in which charities raise and spend money. This article aims to explore some of the requirements charity managers, directors and volunteers need to be aware of when running a charity.

The disbursement quota rules are among the most complex and difficult that charities must face, and they differ for private and public foundations. Essentially, the purpose of the disbursement quota is “to ensure that most of a charity’s funds are used to further its charitable purposes and activities; to discourage charities from accumulating excessive funds; and to keep other expenses at a reasonable level.” The rules touch every aspect of a charity’s possible revenue and holdings and mandate a certain level of spending of each calculated in a particular manner.

However, as a rule of thumb charities must spend at least 80% of:

1) Donations for which they gave official donation receipts in the year following that in which they are received

2) Bequests or inheritances

3) Gifts from other arm’s length charities (with a five year duration proviso)

4) Ten-year gifts and

5) Amounts received from other registered charities in the immediately preceding taxation year.

Charities must also spend 3.5% of the average value of their assets over the previous 24-month period which were not used directly in their charitable operations (if greater than $25,000).

The charity can apply for an exception to the spending requirements of the disbursement quota rules in cases where it is saving funds for a major capital-intensive project such as a building.

Even where a charity is operating in good faith, it may inadvertently provide donors with a receipt that is deficient in some way. In such an instance, the charity is liable to a penalty of 5% of the eligible amount stated on the receipt for a first offence and 10% for a second offence.

However, the greater penalty is perhaps to the charity’s reputation when Canada Revenue Agency disallows a donor’s official tax receipt. Therefore, it is important that the charity not make any errors on the receipts that it issues and that it only issue receipts for properly-made donations.

According to the Income Tax Act, charitable receipts must contain the following information:

• the name and Canadian address of the organization;
• the organization’s Canada Revenue Agency registration number;
• the receipt’s serial number;
• the place where the receipt was issued;
• if the donation is a cash donation, the day or year during which it was received;
• if the donation is a gift other than cash, the day on which the donation was received, a brief description of the property, and the name and address of the property appraiser if an appraisal was done;
• the day on which the receipt was issued (if different from the day on which the donation was received);
• the name and address of the donor (for an individual include his or her first name and initial);
• the value of the donation on the date it was made;
• the signature of an individual authorized by the organization to acknowledge donations (where a charity generates its official receipts automatically, the receipts may bear a facsimile signature);
• the name of the Canada Revenue Agency; and
• the agency’s website, http://www.cra.gc.ca/charities.html.

By law, charities are limited in the types of operations they can carry out to raise funds. One of these limitations restricts charities from operating a business unrelated to their charitable objects.

An activity becomes a “business” when it is a business-like transaction operated regularly or continuously. The CRA takes the position that related businesses are permitted only where they are linked with and subordinate to a charity’s purpose and are run substantially by volunteers.

Thus, for example, a hospital is permitted to run a parking lot or gift shop business for the use of patients, visitors and staff as it is linked and subordinate to the hospital’s principal object of improving the health of its patients. Conversely, it is impermissible for a hospital to run a parking lot business whose only contribution to the charity’s objects is in the form of producing revenue.

On the other hand, if at least 90% of the people involved in operating the business are unpaid volunteers (for example a bakery run by unpaid seniors), the business activity will be deemed a related business. This type of related business does not have to be linked to the charity’s charitable purposes.

Many charities conduct operations overseas (examples include church missions abroad, international child sponsorship agencies, emergency assistance, or friends of overseas charities). Where a charity wants to undertake such activities, it must ensure that it retains ultimate control over the use of funds raised here (or the property bought with such funds).

For example, where money is raised to purchase an ambulance for a needy overseas community, the charity must ensure that the ambulance is used strictly for medical purposes and not, for example, to transport arms and weapons, as appears to have happened in one recent situation.

Finally, while charities are not required to submit yearly income tax returns, they are required to submit an annual form, the T3010, that summarizes their finances for the year. Available from the CRA web site, it is due within six months of the charity’s fiscal year end, and the penalty for filing late is $500 each time. A charity that does not file its return after repeated requests from CRA to do so can lose its registered status. After losing its registered status, a charity can no longer issue tax receipts for donations, and will have to pay a tax equal to the full value of any remaining assets.