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Not-for-profits should be doing some strategic thinking

Typically, because charities are subject to so much regulation and not-for-profits comparatively little, most focus from the sector tends to fall on the former. However, there are changes both recent and expected that not-for-profits should be planning for.

The first and most obvious change is the new suite of corporate laws that have been passed both federally and in Ontario at the provincial level. It is expected that these redrafts of the corporate laws will be rolled out to other provinces in the future, although there may be minor differences among them. The changes in the law affect not only the way the corporations have to be organized (a subject which we have discussed many times in the past), but also introduce brand new disclosure obligations. For registered charities, the disclosure of financial information is nothing new, but for not-for-profits this represents a marked departure from the previous regime.

These obligations apply to soliciting corporations regardless of whether or not they are registered charities. By way of reminder, a soliciting corporation is one where the corporation receives income during a single financial year in excess of $10,000 in the form of:

1. donations or gifts or, in Quebec, gifts or legacies of money or other property requested from any person who is not:

(i) a member, director, officer or employee of the corporation at the time of the request

(ii) the spouse of a person referred to in subparagraph (i) or an individual who is cohabiting with that person in a conjugal relationship, having so cohabited for a period of at least one year, or

(iii) a child, parent, brother, sister, grandparent, uncle, aunt, nephew or niece of a person referred to in subparagraph (i) or of the spouse or individual referred to in subparagraph (ii);

2. grants or similar financial assistance received from the federal government or a provincial or municipal government, or an agency of such a government; or

3. donations or gifts or, in Quebec, gifts or legacies of money or other property from a corporation or other entity that has, during the most recent financial year, received income in excess of $10,000 in the form of donations, gifts or legacies referred to in paragraph (a) or grants or similar financial assistance referred to in paragraph (b).

For example, a grassroots organization with more than $10,000 in such income will now have to file their financial returns online. Many political organizations are set up as corporations without share capital, so the disclosure of such information to the public may be seen as a political tool by an organization’s opponents.

There are also some changes expected to arise as a result of the CRA’s findings in its three year test audit program for the not-for-profit sector. We wrote earlier this year that now is the time for the sector to be delivering its recommendations as to what the regime should look like. No doubt the CRA’s audits will be used by the Department of Finance in drafting a new set of rules, which will be presented as a fait accompli in some future government budget. If the new proposals do not meet with the approval of the sector, it will be difficult to get Finance to back down at that point.

Regardless of what this regime is going to look like, it is likely that it will increase the accountability of not-for-profit organizations. It is important to keep in mind that a not-for-profit organization is a tax designation and not simply a corporation without share capital. One way such organizations may wish to reorganize would be to consider becoming a typical private corporation. Technically, it may be possible, to create a share capital corporation that qualifies as a not-for profit organization.

This arrangement would seem to make even more sense where the not-for-profit has a sister charity run as a parallel organization. Such arrangements are common in situations where charities and not-for-profits work together toward related goals (only some of which might qualify as a charitable). In these circumstances, one could imagine the for-profit organization making donations to its sister charity and in this way reducing the taxable income left in the organization.

These types of arrangements are exceedingly complex and do require an experienced tax and charity lawyer to successfully execute them. Lawyers at Drache Aptowitzer LLP will be happy to help in this regard.

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Drache Aptowitzer LLP

Tax and Charity Lawyers at Drache Aptowitzer LLP
Drache Aptowitzer LLP is one of Canada’s foremost experts in the law related to charities and non-profit organizations. Their team of bloggers is led by Adam Aptowitzer LLB. He is a lawyer practicing in the areas of charity and tax law. He is a member of both the bars of Alberta and Ontario. He has been speaking and writing on the topic of charity law for several years and been published in numerous publications including the Canadian Taxpayer, the Canadian Fundraiser and the Not-for-Profit News and has been cited as an expert in many publications including the National Post.Read more here
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