In this article I discuss various options for non-Canadian non-profits and charities interested in fundraising or operating in Canada.
January 15, 2008
Foreign Charities and Non-Profit Organizations Operating in and from Canada
Many foreign charities (ie. non-Canadian charities) or non-profits are interested in operating in Canada for numerous reasons including the ability to fundraise and obtain grants, to make use of Canadian expertise, or to carry on charitable activities in Canada. In this article I will focus on European and American charities interested in having a presence in Canada. Some U.S. or European charities want to undertake charitable activities in Canada. Others want to use Canada as an extension of their fundraising activities while others want to fundraise and work with the Canadian charity to have the Canadian charity conduct similar operations in other countries, for example, international development, religious activities or education.
We are frequently asked by foreign charities what structure should they use in Canada and we will discuss the following ideas:
In addition we will provide a brief overview of regulatory requirements for Canadian registered charities.
In this article we will not discuss unincorporated associations or trusts as a vehicle for setting up a charity in Canada because although they may save a small amount of money initially with an unincorporated association there is no limited liability and with a trust there is significant potential personal liability of the trustees. Therefore both these vehicles are rarely used for operating charities with international affiliations.
1) No Presence by Foreign Charity in Canada
If an organization is not involved in Canada, has no activities in Canada and is not interested in fundraising or grants from Canadians, or Canadian corporations or foundation then it makes perfect sense to not have a presence in Canada.
2) Work with Canadian charity that has similar objects.
If the foreign charity has a donor who wishes to make a one time or small donation it may not be cost effective to set up a structure for that one time or small donation. It may be possible for another Canadian registered charity that is involved with similar work to receive the one-time donation and to use it to fund its own activities outside of Canada or a joint project with the foreign charity. The problem with working with another charity that has similar objectives is that it may not be a permanent solution and you are beholden to the Canadian charity. However this may not be appropriate when large amounts of money are involved or when you are trying to create a long term presence in Canada either from an organizational or fundraising perspective.
3) Special status for certain listed Foreign Universities
Certain foreign Universities that have student bodies which ordinarily include students from Canada may receive a special status on application and acceptance whereby that foreign university can issue Canadian tax receipts. These universities are known as ”Schedule VIII Universities”. This exception only applies to universities who consistently have Canadian students studying at them. For more information on this option see my article
4) Special Status for Foreign Charities that have recently received Gifts from the Canadian Government
Another category which only affect as a few listed foreign charities are foreign charitable organization outside of Canada to which Her Majesty in right of Canada (federal government or its agents) has made a gift in the corporation’s taxation year or the preceding 12 months. (see CRA Circular 84-3R5 Gifts to Certain Charitable Organizations Outside Canada). Recent examples of Her Majesty in right of Canada gifts include: Aga Khan Foundation, Aga Khan University Foundation, Buddhist Compassion Relief Tzu Chi Foundation R.O.C., Canadian International School of Hong Kong Limited, Cayman Islands National Recovery Fund, Center for Strategic and International Studies (United States), Council for Canadian American Relations, Inc., International Peace Garden Inc., Stedelijk Museum (Holland), The Centre for our Common Future, The Foundation for Canadian Studies in the United Kingdom, The State Hermitage Museum Russia, Woodrow Wilson International Centre for Scholars United States, Village Focus International, The American Assembly United States. This option is relevant to only a small number of foreign non-profits.
5) US-Canada Tax Treaty Exemptions
The United States has a tax treaty with Canada. Article XXI of the United States-Canada Income Tax Treaty deals with exempt organizations. See Article XXI of the Canada-U.S. Tax Treaty. For a Canadian charity to be recognized by the IRS they must follow Notice 99-47. For a list of US charities that are ‘exempt organizations’ in Canada see the Canada Revenue Agency (“CRA”) document T4016 Exempt U.S. Organizations under Article XXI of the Canada-United States Tax Convention . Here is a copy of the full text n99-47 IRS Guidance Relating to Article XXI of the United States-Canada Income Tax Convention. For a full discussion see “Exemption of Canadian Charities under the United States-Canada Income Tax Treaty” by Michael Seto and Mary Jo Salins at http://www.irs.gov/pub/irs-utl/topicc01.pdf. The biggest limitation on using the provisions of the Canada-US income tax treaty is that the Canadian donor may only use this deduction against U.S. source income and only up to a certain percentage. The vast majority of Canadians will not have U.S. source income and therefore using the United States-Canada income tax treaty is only of marginal utility.
6) Representative Office
The Representative Office is not a separate legal entity of the foreign charity. Under provincial legislation if a foreign charity is operating in Canada (carrying on business) then the foreign charity may have to register in the provinces that it is carrying on its activities. As a foreign charity would not be resident in Canada, one of the requirements for registration as a Canadian registered charity, therefore the foreign charity cannot obtain registered charity status or issue tax receipts that could be used by Canadian donors unless some of the narrow exceptions discussed above apply. Furthermore, as the Representative Office is not a distinct legal entity there is no seperate limited liability from the foreign charity and the foreign charity is liable for all debts, expenses or liabilities of their office. The Representative Office may be appropriate to maintain a presence in Canada and obtain funds from organizations that do not require tax receipts such as the Canadian government or CIDA, or some Canadian businesses.
7) Non-profit without Charitable Status
A Canadian non-profit is covered under paragraph 149(1)(l) of the Income Tax Act (Canada) and is a club, society or association, that is not a charity as defined in the Income Tax Act (Canada) and it is organized and operated solely for:
A foreign charity can be involved with the setting up and operation of an independent non-profit entity either under Canadian Federal legislation or legislation for each of the provinces. Incorporations under the Canada Corporations Act are most common for charities that will be operating in more than one province or internationally. Such a non-profit cannot be a subsidiary of the foreign charity but the foreign charity can have some control over the Canadian non-profit by other means such as the requirement for membership in the By-law of the Canadian non-profit.
If a non-profit corporate entity is set up in Canada the advantages include limited liability status, a permanent presence in Canada, and once the non-profit organization is registered, it is exempt from paying income tax (under Part I of the Income Tax Act). Similar to the Representative Office a non-profit establishes a presence in Canada and obtain funds from organizations that do not require tax receipts such as the Canadian government or CIDA, or some Canadian businesses. The advantage of being a non-profit without charitable status is you don’t have to apply for charitable status with attendant costs and there is not the extra level of scrutiny, legislation, regulations, imposed by the Income Tax Act and the CRA on registered charities.
For information of what requirements a Canadian federal non-profit does have you can see our article Requirements for Canadian Federal Non-profit Corporations that do NOT have CRA registered charity status.
One of the issues that arises when setting up a non-profit corporation is whether there are Canadian supporters who can be involved with the ongoing maintenance of the organization or whether employees will be hired to do that. With a Canadian federal non-profit corporation there is no requirement that the directors or officers be resident Canadians, however, rarely will a Canadian federal non-profit be set up without at least some Canadians involved on the board.
If an established U.S. or European charity sets up a Canadian non-profit or charity then consideration should be given to having an agreement between the foreign charity and the Canadian organization. Such an association agreement would cover issues such as the purpose of the two organizations, representation of the foreign charity on the Canadian organization’s board of directors, ownership of intellectual property such as trade marks and copyright, a license to use intellectual property and clauses dealing with dispute resolution or termination of the relationship.
An example of when a non-profit without charitable status may be useful is an organization that will be receiving all of its funds for operations from either a incorporated business or a Canadian government department such as the Canada International Development Agency (CIDA). The sponsor or contributor will presumably have other requirements of their own.
8) Establishing a Canadian registered charity (Non-profit with Registered Canadian Charitable Status)
For most foreign charities interested in having a real and substantial presence in Canada after reviewing the various options this is the preferred route. It has the same benefits as a non-profit without charitable status namely limited liability, permanent presence, and being exempt from paying income tax. It also provides the most flexibility in terms of fundraising and obtaining grants because the organization will have the status of being a Canadian registered charity and can issue donation receipts. The ability to issue tax receipts is the most important difference. A foreign charity can be involved with the setting up and operation of an independent non-profit which has charitable status in Canada. Although such charity cannot be a subsidiary of the foreign charity it can be associated in various ways with the non-Canadian charity. The foreign charity can have some control over the Canadian non-profit by various means including by agreement, or requirement for membership in the By-laws of the Canadian charity.
The importance of being able to issue donation receipts is illustrated below. Canadian charities can issue tax receipts which give a donor a credit that can be worth depending on the taxpayer, the province and the type of donation between 30-60 cents on the dollar of value of the gift. Canadian rarely will donate funds to a foreign charity when, for example, the $10,000 donation costs them $10,000 instead of a donation to a registered Canadian charity costing them only $5,400.00 in the case of Ontario after the tax credit is factored in. This reduction in a donor’s income tax is important for many donors. For small donations it may not make much of a difference but for larger donations it is more tax effective and efficient to donate to a registered Canadian charity. In Canada we use the term “qualified donee” which refers to largely registered Canadian charities, amateur athletic associations, the UN and its agencies, some foreign universities and a small number of other organizations that the Canadian government has recently donated to. With recent changes in the Federal budget which allows preferential treatment of the donation of certain marketable or public securities the tax savings are even greater.
There are other advantages of being a registered Canadian charity including partial or full rebate on property tax. As well many institutions in Canada will not fund organizations unless they are registered Canadian charities (“qualified donees”) either because they are required by law to only fund registered charities or they have just decided for administrative simplicity to use the status of registered Canadian charity as a way of limiting those who can apply for grants.
One final advantage outside of the tax realm of using a Canadian entity is that many Canadians prefer to donate to Canadian charities, rather than foreign charities or even Canadian non-profits that are not registered charities, whether because of nationalistic reasons or concerns over accountability.
OVERVIEW OF REGULATORY REQUIREMENTS FOR CANADIAN REGISTERED CHARITIES
Foreign charities that wish to establish a Canadian registered charity need to be aware that they will have to comply with legal requirements of Canadian charity if there activities are within Canada and to the extent that the activities of the Canadian Registered charity is outside of Canada there are additional requirements.
Certain Canadian Requirements for Canadian Charities Operating in Canada
There are a number of requirement in order for the CRA to confer registered charity status including:
1) the organization must be established and operated for charitable purposes. In Canada courts and the CRA have identified four general categories of charitable purposes namely:
All the purposes of the organization must be charitable, not some or most.
2) the organization must devote its resources to charitable activities.
3) The charity must be resident in Canada. A Canadian federal non-profit corporation set up under the Canada Corporations Act is resident in Canada even if some or all of its directors are non-resident.
4) The charity cannot use its income to benefit its members.
As outlined in T4063 from CRA:
“A charity also has to meet a public benefit test. To qualify under this test, an organization must show that:
- its activities and purposes provide a tangible benefit to the public;
- those people who are eligible for benefits are either the public as a whole, or a significant section of it, in that they are not a restricted group or one where members share a private connection, such as social clubs or professional associations with specific embership; and
- the charity’s activities must be legal and must not be contrary to public policy.”
There are many factors which could preclude an organization from obtaining or maintaining registered status including:
Additional Requirements for Canadian charities
Distinctions between Charitable Organization, Public Foundation and Private Foundation
The Income Tax Act and CRA divide charities into three categories namely charitable organization, public foundation or private foundation. The difference between these three entities largely relates to whether a majority of the directors are at arms length and the source of receiptable income. In brief a foreign charity will almost always want to be considered a charitable organization in Canada, unless it is planning on donating most funds that it receives to other Canadian registered charities.
Canadian charities are encouraged by the disbursement quota rules to spend as much as possible on charitable activities and as little as possible on administrative and fundraising expenses. The rules set out what amounts are required to be spent on charitable activities in each year. In its simplest form a charity must disburse each year eighty (80%) percent of the charity’s last years receipted income, subject to exceptions. Therefore if a new charity this year receives $100,000 cash gift with no restrictions on it, the charity will have to spend $80,000 next year on charitable activities and no more that $20,000 on administrative and fundraising expenses.
Filing the T3010A
Within 6 months of the end of a charity’s fiscal year, the Canadian registered charity must file the T3010A form, the Registered Charity Information Return. Failure to file this form will probably result in fines and the loss of registered charity status. The form is typically prepared by the accountant of the charity. It is important that charities diarize the date
Maintaining adequate books and records
Canadian charities must keep adequate books and records, in Canada, whether electronic or paper based, to confirm that they still qualify for charitable status, to allow for verification of donation receipts as well as the charity’s revenue and expenditures. A Canadian charity must also keep source documents. The CRA has a guide entitled “Keeping Records – RC4409” which provides further details as well as Information Circular 78-10R entitled Books and Records Retention/Destruction.
Provincial regulation of fundraising
Some provinces have legislation that affects charities, fundraising or issuance of receipts for those provinces.
Provincial Requirements for Extra Provincial Licences
If a charity is going to carry on its operation in a province then it may be required to file forms and register in that province. For example, a federal non-profit corporation with an office in Toronto will need to register with the Ontario government. If that same federal non-profit were to decide to operate an office in another province it may have to register in that province. It depends on the extent of the presence in the particular province. As well the complexity and expense varies widely depending on the province. If the charity will operate under a name which is different from its official name then there may be a requirement for a business name registration for that business name.
Tax receipt issues
There are restrictions in terms of what can result in the issuance of a tax receipt and also what amounts can the receipt be issued for. As well there are strict requirements as to the form of tax receipt. For example, a donation of services is not receiptable. These rules must be complied with.
When one is running a charity, like a business, there are a plethora of other legal issues that should be considered including corporate governance, employment contracts, leases for office space or equipment, risk management and insurance.
Canadian Requirements for Canadian Charities Operating Outside Canada.
Above we have discussed various options for a foreign charity operating in Canada and the basic legal requirements for a Canadian charity. If the foreign charity proceeds with creating a non-profit corporation and obtaining registered charitable status and if that Canadian charity wishes to operate outside of Canada, for example to do international development, educational or religious work then you may wish to review my paper on Canadian Charities Operating Outside Canada
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.