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Pros & Cons of Charitable Status

“To be a charity or not?” is a dilemma that many organisations face. Unfortunately, they often do not think through the answer sufficiently. Many just apply for charitable status without understanding what might be involved and, particularly, what the downside might be. The reality is that being a charity means, among other issues:

  • Much stricter and more limited purposes for the organisation to adhere to.
  • Money-making activities (which are allowed) have to be incidental to the primary purposes and all profits made are devoted to fulfilling those primary charitable purposes (which, as noted, have to meet specific criteria).
  • Significantly greater administrative burden in terms of financial reporting, donation receipting and the like.
  • Higher performance standard required of directors (as, effectively, trustees of charitable funds).
  • Much greater public visibility of finances and, by extension, operations and operational performance.
  • Membership challenges – a charity cannot benefit its members so, for example, no member could take a subsidised course if the organisation was an educational charity or be a resident if the organisation was a housing charity.

The two most obvious (and valid) reasons for taking on the burden of being a charity are:

  1. to present a particular image as a “charity”; and 2. to assist with fundraising through the ability to issue donation tax receipts.

Taking the first point: being seen as a “charity” may help in a number of ways. It may help, for example, in recruiting volunteers, in more favourable treatment from suppliers and with some forms of fundraising, where being a “charity”, as opposed to a “not-for-profit”, is thought to be more appealing to potential donors. As to the second point: the crucial issue is where the organisation sees its funds coming from. If they are coming from the government – e.g. housing subsidies or training programs – there is no value in being a charity as governments do not take tax receipts. If much of the funds come from corporate sponsorships, again there is little incentive to become a charity. Most commercial companies do not want a tax receipt (cost to process vs. “benefit” they might obtain). Rather they want the social marketing or halo effect of having their corporate logo displayed and being seen as community supporters. If the organisation is, however, dependent now and in the future on private donations or foundation grants for the substantial majority of its income then the ability to issue a tax receipt, as a charity, becomes of real and very practical significance.

Recognize, however, that being a “charity” can have somewhat negative connotations in some quarters. “Charity” can often imply a “little-better-than-poorly-run-amateur” organisation, as opposed to a professionally managed business that, as a not-for-profit, has socially-minded/ humanitarian/ethical/ … goals. Promoted as a professionally run not-for-profit, it might be easier to obtain commercial sponsorship deals from companies who see advantage in having their products incidentally promoted/used.

Questions to be asking of organisations faced with this dilemma are:

  • How much of your funding do you see coming from fees, private donations, grants from foundations, grants from government sources and from commercial sources (perhaps as in-kind donations e.g. products from suppliers)?
  • How is that likely to change going forward?
  • Will grants be sustaining or simply one-off?
  • Equally, what is going to happen to your cost base going forward? Are you going to have to employ (more) people to handle service growth, bookkeeping, and internal infrastructure? Are you going to have to take on office/work space?
  • How large do you see this becoming? Is it going to remain a side-line or a source of full time employment for the originators?

These are serious matters, so often not thought through by enthusiastic founders or Board members (often equally enthusiastic friends of the founder as opposed to experienced organisational managers).

Just what are the purposes of Organisation X that are currently on file (assuming it is properly incorporated, provincially or federally)? Would they meet the CRA’s criteria for charitable status as currently described? Does Organisation X actually do what its purposes claim? Are the present Board prepared to take on the more stringent legal (and financial) responsibilities as directors of a charity?

The challenge for organisations is that there is often a “carrot”, such as a specific funding opportunity, being dangled in front of them – but which is dependent on charitable status – and it is very easy to succumb to the temptation of chasing the same. But what would such a grant do? If it allows expansion of offerings, will it pay for their up-keep and maintenance going forward? It is like buying a house – it is all very well getting help with the cost of purchase but how are the property taxes, the repairs, the hydro bills etc. going to get paid?

To help organisations faced with this dilemma, refer them – and in particular the founders and the Board – to the following CRA website link, which will provide them with some sense of the work that will be involved as a charity, particularly when it comes to books and records and receipting: https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/checklists-charities.html

The cost of becoming a registered charity is relatively negligible, being little more than filing fees, though having a charity lawyer (note “charity” lawyer i.e. an actual specialist) look over things may well be worth the price of review. But filing paperwork is not the problem – the work lies in grappling with the fundamental issues, weighing the pros and cons and making those strategic determinations. If the organisation is managing satisfactorily at present and paying its way, they may want to stay with current not-for-profit status, not apply for charitable status and ignore both the allure of potential grants and donations and the reality of the burdens charitable status imposes.

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