Many nonprofits have considered whether or not to pursue charitable status. While securing charitable status for your nonprofit certainly has advantages, such as potentially boosting your organization’s credibility, increasing funding opportunities, and thus increasing your impact in the community, it is a significant step. The process can be complex and time-consuming, so it is important to understand what’s involved before diving in. For organizations wondering whether charitable status is right for them, here are some considerations for your nonprofit’s leadership team.
Defining charitable status
Charitable status is a designation given by the Canada Revenue Agency (CRA) to organizations that meet specific criteria. Organizations with charitable status are recognized as charities under the Income Tax Act and are eligible for certain tax benefits. This status allows them to issue official donation receipts, which can be used by donors to claim tax credits.
The CRA generally defines charities under four categories:
- Relief of poverty
- Advancement of education
- Advancement of religion
- Other purposes beneficial to the community (such as health, culture, environment)
Nonprofits and other grassroots organizations often consider charitable status since it comes with several benefits.
More funding opportunities. Since many foundations, corporations, and government grant programs require applicants to be registered charities, charitable status can open doors to new funding sources. While the CRA has made changes to rules which allow non-qualified donees, such as nonprofits, access to more funding sources, some grant funders still have a preference to fund only registered charities.
Tax incentives for donors. Since registered charities have the ability to issue tax receipts, this can incentivize more donations. Many donors, including individuals and corporations, are motivated by the tax benefit of supporting registered charities. This is often the case with big money donors who can make significant contributions of cash or stock options.
Increased credibility and trust. For many potential donors, partners, corporations and even those in the general public, status as a registered charity signals that your organization is legitimate and adheres to regulatory standards. This can enhance your reputation and increase trust and support from the community and potentially help with building donor relationships, which can go a long way in supporting the long term sustainability of your cause.
Lower operational costs. Registered charities are exempt from paying income tax, and many goods and services are often discounted for charities. For example, banquet halls often have a rental rate specific for charities that are often significantly less than the rate offered to for-profit businesses or individuals. These benefits can lead to lower overall operating costs for registered charities.
Given the benefits, your organization may be eager to pursue charitable status. However, before doing so, there are several factors to consider.
1. Understanding the eligibility requirements. The CRA has specific criteria for what constitutes a charity. Your organization must have exclusively charitable purposes and activities that benefit the public or a sufficient segment of the public. It is important to familiarize yourself with these criteria to ensure your organization qualifies.
2. Obtaining incorporation. Before applying for charitable status, your organization must establish itself as a corporation. If your nonprofit is not yet incorporated, it is important to pursue this step first. While incorporation can provide a solid legal foundation and offer protection for board members and staff, it also requires additional work for your team’s leadership, such as establishing bylaws. If your organization is unfamiliar with this step, there is no need to start from scratch. Refer to the bylaw builder to assist your team.
3. Establishing strong governance policies. Registered charities are subject to ongoing regulatory requirements, including annual filings and compliance with the Income Tax Act. Before pursuing charitable status, your organization will need strong governance practices in place to ensure compliance. Developing strong policies will not only help build a strong organizational framework, but will also prepare your team for managing CRA compliance. This includes maintaining accurate financial records, meeting disbursement quotas, and regularly reporting to the CRA.
4. Allocating appropriate resources. Pursuing and maintaining charitable status requires time, effort, and resources. This can easily put a strain on a team of any size if your organization is not properly prepared. So, before moving toward being a registered charity, first ensure your organization has the capacity to handle the additional administrative workload, or pursue strategies to help maximize your nonprofit’s resources to free up time for your team. Your organization will likely need to dedicate staff or volunteers to manage compliance, reporting, and donor relations once you obtain charitable status.
5. Ensuring alignment with your organizational strategy. Consider how charitable status aligns with your organization’s long-term goals and mission. Charitable status can provide significant benefits, but it also comes with responsibilities. So, before deciding whether being a charity is right for your organization, take the time to reflect on whether it aligns with your strategic vision and will help you achieve your objectives of serving your community.
6. Clarifying your cause’s messaging. The CRA requires that a charity’s activities provide a tangible public benefit. It is a good exercise to gather your team and discuss how your programs and services clearly demonstrate this benefit. This will help your team articulate the impact of your work and how it serves the community. This will also allow your team to better communicate your work to the broader public through communication tools like your case for support, newsletters, or social media.
Once your organization has considered all the relevant factors and is ready to apply for charitable status, it may be helpful to consult legal assistance to ensure your organization can ensure compliance with the CRA’s requirement. Obtaining a legal representative who is familiar with charitable law can go a long way in ensuring your organization has sound advice and can also reduce the workload of your team of staff and volunteers.
It is important to remember that even if your organization’s charitable status is approved, your team will need to adhere to ongoing compliance requirements, including annual return filings, and notifying the CRA of any significant changes. If these requirements are not met, organizations can lose their charitable status, which can cause significant issues for your charity’s public image and damage relationships with partners, funders, and the community you serve.
Pursuing charitable status is a significant step for any Canadian nonprofit, so it is crucial to understand the responsibilities and requirements that come with this status. By carefully considering your organization’s capacity and strategic goals, you can make an informed decision about whether charitable status is the right path for your nonprofit.
If you decide to move forward, approach the process with preparation and a commitment to maintaining compliance. With careful planning and dedication, achieving charitable status can be a transformative milestone that helps your organization achieve greater success and maintain long term sustainability serving the communities that need your organization the most.
Roxanne Tackie is the co-founder of Story Point Consulting where she helps people working or volunteering at small nonprofits and charities find the right donors, effectively communicate with supporters, and strengthen relationships with them. In her spare time, she enjoys spending time with her family and friends, baking, and teaching and studying the artform of tap dance.
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