|JAMES D. L. KERR
|TO: Business Clients||FROM: James D.L. Kerr ● Lawyer
Tel 416 485-4254
Fax 416 485-8836
Certified Specialist Civil Litigation
|DATE: October 6, 2004|
|RE: INCORPORATION OF NON-PROFIT CORPORATIONS|
non-profit corporation is usually incorporated under the
Irecommend that the application for incorporation be drafted in co-operation with a lawyer and auditor, and that the draft application be then submitted to each of the Ministry of Government Services (formerly the Ministry of Consumer and Commercial Relations), the Public Trustee and the Canada Revenue Agency (“CRA” – formerly “CRA”) for comment before formal filing with the Ministry of Government Services. The requirements of the three government agencies are not always consistent, each with the others, which is all-the-more reason to obtain pre-approval.
The federal and provincial governments, while involved themselves in some goods works, for the most part leave charitable and philanthropic work to private individuals. However, through income tax deductibility of some donations, the governments contribute to, and even encourage, such works. In exchange for this assistance and co-operation, the governments also impose reporting requirements and reserve the right to review the activities of charitable groups.
Registration as a charity entitled to provide donees
with receipts for income tax purposes involves a careful assessment of the
applicability of the various statutory provisions and regulations under the Income
Tax Act (
Incorporation of a provincial non-profit corporation is accomplished by way of establishment of a corporation without share capital under the Corporations Act. This process involves the following:
(a) Under the Income Tax Act, "registered charity" includes both "charitable organizations" and "charitable foundations".
(b) Charitable organizations must meet the following criteria:
i. All resources must be devoted to charitable activities;
ii. At least 50% of the directors, officers, etc., must deal at "arms length" (i.e. be, essentially, unrelated);
iii. May not have received more than 50% of its capital from any one person or related group;
iv. May carry on related businesses or make donations, within limits, to qualified "donees" (this essentially means up to 50% of a charitable organization's resources may be donated to other registered charities);
v. A charitable organization is exempt from income tax and is entitled to issue receipts for donations.
vi. Charitable foundations are divided into two types: "public" and "private" foundations.
vii. More than 50% of the directors, officers, etc. of public foundations must deal at arm's length and it may not have received more than 50% of its capital from any one person or related group.
viii. Private foundations are any charitable foundations other than "public" foundations. Private foundations may not carry on a related business and may not incur debts. Private foundations are also exempt from tax and are also entitled to issue tax receipts.
ix. Charitable foundations must expend a certain amount on their objects each year and this is referred to, in the legislation, as the "disbursement quota". The disbursement quotas for private and public foundations are different. The disbursement quota for a private foundation for a taxation year is the aggregate of:
A. 80% percent of the aggregate amount of gifts received by the foundation in the immediately preceding taxation year for which receipts were issued other than gifts of capital received by way of bequests or inheritance, gifts received subject to trusts or directions that they be held for at least ten years, or gifts received from registered charities;
B. 100% of the aggregate amount of gifts received in the immediately preceding taxation year from registered charities other than specified gifts;
C. 4.5% (or proportionately reduced percentages if a particular taxation year of the foundation is fewer than 365 days) of the amount, if any, by which the aggregate value of the investment assets (other than prescribed property) of the foundation at the beginning of the year, determined in prescribed manner, which were not directly used in charitable activities or administration, proportionately reduced if such investment assets were not owned for the entire immediately preceding taxation year, exceeds the aggregate of the total amounts to which the percentage in paragraphs (a) and (b) above apply;
D. As a transitional provision, if the foundation claimed an income reserve (repealed with respect to taxation years commencing after 1983) for its last taxation years commencing before 1984, the amount by which 90% of such reserve which would otherwise have been included in the disbursement quota of the foundation under the rules in respect to the taxation year commencing in 1983 less the total amount of such percentages in paragraphs (a) and (b) above apply exceeds the disbursement quota for the foundation otherwise determined, is to be added to the disbursement quota of the foundation at a rate of at least 10% of such additional amount in the ten taxation years of the foundation commencing after 1983.
Registered Charities are required to file annual returns with the tax department as well as with provincial authorities under applicable provincial statutes. From this, and from the foregoing, the need for the on-going participation of a competent auditor/tax advisor should be self-evident. If you have yet to consult an auditor and do not have someone in mind, I will be pleased to provide my recommendation, at your request.
Cost of Incorporation
Establishing a non-profit/charitable corporation involves out-of-pocket expenses incurred on account of the incorporation of approximately $550.00. With respect to fees, it is more problematic. While I am able to charge a fixed fee with respect to the incorporation and organization of a business corporation (which in many respects are “stock” items), I am not able to offer the same service with respect to the incorporation of a corporation without share capital. This is owing both to lack of standardization – each charity’s objects are designed to meet its specific requirements – and due to the limited demand. Accordingly, my services are billed on an hourly basis – see Fee Schedule posted on my web site at www3.sympatico.ca/jastrax. In some instances I may offer a fee reduction to a specific charity as my own charitable contribution.
Total cost will be dictated by the level of complexity and will be further influenced by factors beyond my control, such as time incurred in responding to, satisfying and reconciling the requirements of the Public Trustee and CRA. On average, you may expect to spend between $1,500.00 and $2,500.00, exclusive of out-of-pocket expenses (such as the incorporating fees and other disbursements). I wish to emphasize, however, that I am not guaranteeing that total cost will not exceed this level.
In addition, fees and some disbursements bear GST, unless the client which I bill is GST exempt – which I must know in advance for billing purposes. Government filing fees do not bear GST if paid by the client (i.e., if you send me the money in trust in advance and I pay from trust), but otherwise I must add GST to the non-taxable amount when I invoice the client.
DISCLAIMER: The foregoing is not intended to be a comprehensive guide to the applicable law. General Client Memoranda and mailings from James D.L. Kerr ● Lawyer are intended to inform clients and acquaintances with respect to current issues that may be of interest to them. Memos are current to the date shown on the Memo. The law is constantly changing, however, and for that reason a Memo may not be completely accurate after it's stated date. Where circumstances warrant, the advice of a lawyer or other qualified professional should be obtained.
© 2005 James D.L. Kerr