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How Can a Canadian Federally Registered NPO Church Garner and Disburse Funds?

A federally registered non-profit organization (NPO) church in Canada can garner funds through donations, government grants, and fundraising activities, while its disbursement of funds must align with its registered charitable purposes, either by directly carrying out charitable activities or by making qualifying disbursements to other qualified donees or non-qualified donees. The church must ensure surplus income is reinvested into its mission and is not used for private benefit.

Please note that I am neither a lawyer nor an accountant. I have gathered this information primarily from the Canada Revenue Agency and our accountants. If you wish more detail or, if you are looking into forming your own NPO please do your due diligence and use the appropriate professionals. I am including this information on our website solely in the interest of full disclosure for our readers and supporters.

Please note: individuals and corporations cannot get official tax receipts from a non-profit organization (NPO) because only registered charities and other qualified donees can issue them. NPOs are not registered with the Canada Revenue Agency (CRA) for tax purposes and are therefore unable to issue receipts for tax credits or deductions.

What an NPO can provide: An NPO can still acknowledge a payment with a letter, but it is not an official donation receipt for tax purposes.

What registered charities can provide: Only registered charities and other qualified donees, such as registered Canadian amateur athletic associations, can issue official tax receipts for donations.

Why there is a distinction: Registered charities are registered with the CRA and are exempt from income tax, which allows them to issue official tax receipts. NPOs, on the other hand, are not charities and do not have this status, so they cannot issue these receipts.

Garnering funds

Donations and gifts: Solicit cash and non-cash gifts from individuals and corporations. (If it is a registered charity, it can issue official tax receipts for eligible gifts, NPO’s cannot do this.)

Government grants: Apply for and receive grants from federal, provincial, or municipal governments.

Fundraising activities: Engage in activities like fundraising events and selling goods or services to raise money for its charitable purposes.

Investments: Generate income from investments, as long as the principal and earnings are used to further the church's mission.

Disbursing funds

Direct charitable activities: Use funds to directly carry out its own charitable activities, such as those conducted by its staff and volunteers.

Qualifying disbursements: Disburse funds through gifts to other qualified donees, such as other registered charities.

Grants to non-qualified donees: Make grants to non-qualified donees, provided the church meets specific accountability requirements outlined by the Canada Revenue Agency (CRA).

Reinvesting surplus funds: Ensure any surplus income is used to support the church's mission and is not distributed to members for personal benefit.

Important considerations

Disbursement quota: The church must disburse a minimum amount each year on its charitable activities, calculated based on the value of its property. This is known as the disbursement quota (DQ).

Accountability: All financial activities must be conducted with accountability and transparency, especially when making grants to non-qualified donees.

Permitted activities: The church's activities must align with its stated charitable purposes as registered with the CRA.

Important notes

NPO churches must ensure that fundraising efforts are justified by an identifiable need for the proceeds.

High fundraising expense ratios (e.g., above 70%) may raise concerns with the CRA and require justification.

Proper documentation and record-keeping for all financial activities are essential to comply with regulations and ensure transparency.

It is crucial for NPO church boards to maintain strong financial oversight and seek professional advice to ensure compliance with CRA regulations.

General Classification as an NPO

To qualify as an NPO, an entity must meet three tests. First, it cannot be a charity or an organization that could be registered as a charity. Second, it must be organized and operated exclusively for a purpose other than profit. Third, no part of its income may be paid or made available for the personal benefit of any proprietor, member, or shareholder (with an exception for amateur athletic organizations).

Income Tax Exemption and Tax Treatment of Donations Other Tax and Fiscal Provisions Relevant Legal Forms

The Income Tax Act provides the primary definition of a non-profit organization (NPO), as follows:

"[A] club, society or association that, in the opinion of the Minister, was not a charity within the meaning assigned by subsection 149.1(1) and that was organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, no part of the income of which was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof…" (Income Tax Act, Paragraph 149(1)(l)).

The term "club, society, or association" includes corporations and trusts. The key criterion is that the pursuit of profit cannot be a purpose of the entity. This does not mean that activities which incidentally generate a profit are forbidden, however, so long as the motive for the activity is not the generation of profit. Also, because the Income Tax Act does not require registration of NPOs, they essentially self-assess their status.

Neither NPOs nor registered charities are subject to income tax. Additionally, Canada recognizes a list of foreign universities, domestic municipalities, and certain other preferred organizations which are not technically "charities," but which are treated as such for the purpose of giving tax relief for donations. Together with charities, these listed organizations are collectively known as "qualified donees." NPOs and qualified donees are exempt from most types of income taxation including the taxation of most common sorts of income. They may be subject to property taxes and may have to register for Goods and Services Tax/Harmonized Sales Tax (GST/HST) purposes, however.

All qualified donees are publicly listed by the Canada Revenue Agency (CRA).

Individuals are entitled to a tax credit (as opposed to a deduction) for contributions to qualified donees. Corporations, by contrast, receive a tax deduction for their donations to qualified donees.

Tax deductions reduce your total taxable income, while tax credits directly lower taxes owed to the government. Tax credits can be refundable or non-refundable.

A tax credit directly reduces the tax owed to the government. Tax credits provide a dollar-for-dollar reduction in your tax liability. For example, if you owe $1,000 in taxes and qualify for a $200 tax credit, your tax bill becomes $800.

Canada has a 5 percent federal tax known as the Goods and Services Tax (GST), however the GST does not apply to foreign grants. Moreover, while charities and NPOs are subject to the GST regime, there are many potentially applicable exemptions.

With regard to customs duties, there are no particular exemptions for charities or NPOs. Real property taxes, which are part of provincial and/or municipal jurisdiction, are applied based on provincial law and so vary depending upon the jurisdiction.

Public Benefit Status Proprietary Interest Dissolution Activities

Neither federal nor provincial law sets forth requirements for the organizational form of an NPO or charity. The most common forms are "non-share" corporations, trusts, and unincorporated organizations or associations. The Federal Income Tax Act does, however, distinguish between NPOs and charities—a distinction that may prove useful in making equivalency determinations.

NPOs are not required to serve the public benefit. For example, some organizations are organized purely for the benefit of their members, such as the Canadian Bar Association, sporting and social clubs, labor unions, and political parties (Income Tax Act subsection 188.1(1)). However, some NPOs may be organized for public benefit or social welfare purposes.

In contrast, charities must satisfy the common law test of "charity." There is no federal or provincial statutory definition of this term, and the concept of what constitutes charitable activities draws heavily on traditional English common law dating back several centuries. Over the years, the courts have generally based their interpretation of "charity" on four categories described in English common law:

The relief of poverty;
The advancement of education;
The advancement of religion; and
Certain other purposes for the benefit of the community.

St Brigit's Communit Catholic Church has been established primarily for the advancement of religion and other charitable works.

The CRA also issued guideline CPS-024 in 2006, which explains how the CRA determines whether a charity serves the public benefit. The guideline echoes the four categories of charity listed above, and outlines a general “test for public benefit” that CRA examiners use when registering charities.

Finally, it should be noted that in the case of other organizations that comprise the category of "qualified donees" (apart from registered charities), a public benefit purpose is not a requirement.

In the case of an NPO, members may have a proprietary interest and may, for example, be entitled to a return of contributed capital upon retirement as a member or upon the dissolution of the organization.

The dissolution of a corporation is governed by the applicable federal, provincial, or territorial law under which it was set up.In practical terms, aside from the legal procedures, the key element remains the federal Income Tax Act.

For NPOs, there are statutory rules that deal with the conversion of such an organization into a taxable entity, including the winding up and distribution of assets to members. When this occurs, the law requires that the organization's tax-free status be terminated, deeming a disposition of all the assets for tax purposes, and taxing the recipients of any money or assets.

Economic Activities, Political Activities, Racial Discrimination, Control of Organizations and Tax Treatment of Donations Sales Taxes

As discussed above, an NPO can be set up for any purpose other than to generate profit. In practice, this means that almost any sort of activity can be a legitimate purpose. Indeed, the Income Tax Act does not require registration of these organizations, and they self-assess their own status.

The Income Tax Act also deems certain activities to be charitable, including the transfer of funds to a qualified donee, the carrying on of a "related business" and, within strict limits, "political activity." These issues are discussed below.

NPOs, by definition, cannot be organized or operated for the purpose of making a profit. However, NPOs can engage in a range of activities that generate revenue and, indeed, may generate a profit, if it is clear that this is not the purpose of the organization.

There are no limits on the political activities of NPOs; indeed, political parties are a sub-category of the NPO category of organizations. St. Brigit's Community Catholic Church does not espouse nor endorse any political party and holds no political affiliations.

Canada has produced a great deal of legislation to combat racial discrimination and the promotion of racial hatred, and the courts have not hesitated to apply this legislation to NPOs. In case after case, the courts, bolstered by legislation, have sought to ensure that any form of discrimination in the field of charities and NPOs is barred.

No restriction exists on the control of Canadian not-for-profit organizations by other organizations or persons. With respect to other forms of organizations, it is possible that a Canadian association or foundation may be controlled by a for-profit entity that establishes it, even though it does not own it.

St. Brigit's Community Catholic Church is a 'stand alone' organization and is not owned by any other entity.

For practical purposes, the main distinction between NPOs and charities (and other qualified donees) is that gifts to the former generally cannot qualify for tax relief for donations, while gifts to the latter may qualify.

Canada relies on a system of tax credits (as opposed to deductions) to give tax relief to individuals, while corporate donors receive tax benefits through the conventional deduction system. Thus, for gifts to a charity, an individual donor may receive a tax credit while a corporate donor may receive a deduction.

Both individual and corporate donors may receive a tax deduction for gifts made to a non-profit if the gift was made for the purpose of contributing to the non-profit’s income.

In addition, it should be noted that Canada does not have gift taxes. There are also no death duties, per se, though there may be a deemed disposition of capital property on death.

Charities and NPOs are generally part of the combined federal and provincial sales tax regimes, and though they may have some special rules based on specific activities, there is no general exemption available. That said, the federal Goods and Services Tax does have a special feature: Once an organization has calculated its net tax liability, if any (GST collected net of input tax credits), if it is either a registered charity or an NPO which receives 40 percent of its funding from one or more levels of government, it is entitled to receive a rebate of one-half the net tax paid. Moreover, there is no GST due on foreign grants.

Ontario, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island adopted a “harmonized” sales tax (HST) whereby existing provincial sales taxes will be linked to the federal GST as a single levy. Charities and non-profits in the other provinces will have to comply with both federal GST and provincial sales tax (in applicable provinces).

How Can a Canadian Federally Registered NPO Church Garner and Disburse Funds?

General Classification as an NPO

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