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Info-Guide – Not-for-Profit Organisation (NPO)
Last Verified:
2007-08-01
This document will guide you through the steps to starting a not-for-profit organisation (NPO) and inform you about the major resources available in
In addition, we suggest you consult the other Info-Guides listed at the end of this document.
This Info-Guide was developed by Info entrepreneurs in collaboration with the Canada Business Network.
Note: The documents given as references in the text and in the “Other Resources” sections can be consulted on our Web site or be requested from our information agents.
TABLE OF CONTENTS
- Definition
- Choosing a legal structure
- Charitable status
- Associations
- Taxation
- Organisation and logistics
- Financing
- Resources
1. Definition
Not-for-profit organisations are created to benefit the community. Activities of a not-for-profit organisation may be of a patriotic, national, charitable, philanthropic, religious, professional, or athletic nature without monetary gain.
For fiscal purposes, an NPO is an entity created and operated solely for non-profit purposes. Its income must not be distributed to proprietors, shareholders or members, or made available to them for personal gain.
In certain circumstances a not-for-profit organisation may engage in revenue producing activities and earn a profit, however these activities are to be conducted solely to further the principal objectives of the organisation.
Not-for-profit organisations are also known as non-profit, not-for-profit, voluntary and volunteer organisations.
Here are some examples: Sports associations, theatre, dance and music groups, activity clubs, religious fellowships, educational and literary societies, and community services associations.
2. Choosing a legal structure
There are a number of legal issues involved in selecting a legal structure for a not-for-profit organisation. You may do this yourself, but it would be wise to consult a lawyer. Given the legal implications of the creation of a corporate entity, a lawyer’s counsel may be useful to you in writing the objectives of the corporate entity, choosing a name, and deciding upon its internal organisation.
Not-for-profit groups can organise in a variety of methods. The three main methods of creating a not-for-profit organisation are:
- Provincial incorporation
- Federal incorporation
- Establishing a co-operative (for more information, consult our document Info-Guide – Cooperatives)
It is possible for a not-for-profit organisation to operate without any form of registration. Such an organisation may, however, have difficulty entering a number of common business transactions including banking services, signing leases and entering into other types of contracts. Questions regarding this type of not-for-profit structure, and any legal documentation that may be required when creating this type of organisation, should be addressed to legal counsel.
Advantages of incorporation
- A not-for-profit corporation has a legal status separate and distinct from its members. Members may come and go, but the corporation continues until it is dissolved or wound up.
- The not-for-profit corporation can enter into contracts, buy and sell property, etc.
- Individual members of a corporation are generally shielded from liability.
- The formal corporate structure facilitates ongoing operations and decision-making.
- There may be increased credibility with the government, funders and the public.
- The not-for-profit corporation has an enhanced ability, through its governing documents, to address membership status issues (e.g., removal for unpaid dues or death and expulsion for disciplinary reasons).
Disadvantages
- The most commonly encountered is the paperwork and regulation entailed.
- Most jurisdictions require an annual corporate filing related to the location of the head office as well as director information.
- Some not-for-profit entities (excluding registered charities and smaller not-profit organisations) must file an annual information return with the Canada Customs and Revenue Agency.
- Incorporated not-for-profits (except registered charities) must file an annual corporate income tax return.
- Federal corporations incorporated under the Canada Corporations Act must get ministerial approval to change certain bylaws.
- There are some constraints placed on the type of activity that the group or entity may engage in.
- There is a need to devote time and resources to maintaining corporate structure that would otherwise go to carrying out the desired purposes or activities of the organisation.
Provincial not-for-profit incorporation
Most incorporations in Québec are done in accordance with Part III of the Companies Act. They are incorporated by letters patent, sometimes called a “charter.” The application must be accompanied by the previously obtained Name Research Report of the names used and declared to the Registraire des entreprises, as well as confirmation of the Name Reservation, if applicable.
The Registraire des entreprises will issue the letters patent and file a copy with the Québec register of enterprises.
A copy of the letters patent will be sent to the legal person, along with an Initial Declaration, which must be completed and returned within 60 consecutive days of the registration date. Registering the non-profit legal person serves to make public all of the critical information required by citizens and businesses that must deal with them.
Application for Constitution as a Non-profit Legal Person (PDF document)
http://www.registreentreprises.gouv.qc.ca/documents/formulaires/loi_compagnies/le-50.0.11.07-t(2007-04).pdf
Federal not-for-profit incorporation
Federal incorporation affords corporations heightened name protection, second only to trademark protection. This means they can carry out their activities across Canada under their name. Not-for-profit organisations are incorporated at the federal level under theCanada Corporations Act- Part II. This includes both charitable corporations and membership corporations, such as social, professional or fraternal organisations. For more information, consult our document
Federal Not-For-Profit Incorporation - Canada Corporations Act / Part II, call 1-866-333-5556, or visit http://strategis.gc.ca/epic/internet/incd-dgc.nsf/en/h_cs02145e.html
Other resources:
Federal Information Kits for Not-for-Profit Organisation and annex http://corporationscanada.ic.gc.ca/epic/internet/
incd-dgc.nsf/en/home
Creating a Non-profit Corporation or Organisation – Registraire des entreprises http://www.registreentreprises.gouv.qc.ca/en/de
marrer/constituer_pmsbl/default.aspx
3. Charitable status
Canadians may receive tax relief for contributing to organisations that have charitable status. Generally, organisations with the primary purpose of benefiting the community as a whole (for example, the relief of poverty, advancement of religious instruction for the public good, advancement of education, animal welfare, etc.) may apply for charitable status.
Designations
There are three designations of registered charities: charitable organisations, public foundations and private foundations. The designation of a charity depends on factors such as its mode of operation, e.g. whether it primarily gives money to other registered charities or carries out its own charitable activities, and whether the directing officers are closely related, or if it is funded primarily from a single private source.
Activities
The Income Tax Act requirements vary depending on the charity's designation. Generally speaking, charities must devote their resources to either their own charitable activities or make gifts to other registered charities or qualifying organisations. Charitable organisations and public foundations may operate businesses related to their mandate or managed by volunteers. Charities may engage in limited, non-partisan political activities that are subordinate to their charitable purposes and activities.
To qualify for registration, an organisation must be established and operated for charitable purposes, and it must devote its resources to charitable activities. The charity must be resident in Canada and cannot use its income to benefit its members. A charity may be incorporated or governed by a trust or constitution.
Charitable registration provides advantages under the Income Tax Act:
- it can issue official donation receipts for gifts received. This reduces the individual donor's income tax payable and reduces the taxable income of a corporate donor;
- it is exempt from paying income tax.
Registration may also provide the charity with advantages under the Excise Tax Act, e.g., it may qualify for a GST rebate. For more information on GST rebates, please contact the nearest Tax Services Office.
Charities Directorate – Canada Revenue Agency (CRA)
The Charities Directorate of the Canada Revenue Agency (CRA) is responsible for charities under the Income Tax Act. It reviews applications for charitable registration, provides technical advice to registered charities and monitors charities to ensure ongoing compliance with the law. For more information, consult our document
Information on Charities, call
Enregistrement des organismes de bienfaisance auprès de Revenu Québec http://www.formulaire.gouv.qc.ca/cgi/affiche_doc.cgi?
dossier=2505&table=0& (In French only)
4. Associations
When forming a contractual association, you may choose its legal form. It may be an unincorporated association, and this may be best if the organisation is simple, there are few members, and their contributions are small or limited.
An incorporated association or non-profit corporation is suitable if it is expected to have many members, large monetary contributions are required, many activities are planned, a building or premises will be required for this purpose, you also plan to operate a business, and you expect to hire staff. This association is a legal entity separate from its members. It has a name, an autonomous existence independent of that of its members, a head office, rights and obligations, a distinct activity, and property.
Votre association, personne morale sans but lucratif
A source of information for association members and administrators, it aims to briefly outline the legal provisions governing associations in Québec. Available in our documentation centre. http://www.pubgouv.com/justice_com/personne_morale.htm (In French only)
5. Taxation
Non-profit Organisation – NPO – Information Return
As required by subsection 149(12) of the Income Tax Act, a not-for-profit organisation may have to file an Information Return. Once an organisation has filed this information return, it has to keep filing, for as long as it remains an NPO, regardless of the dollar value of its revenues or the book value of its assets. For more information, consult our document
Non-profit Organization - NPO - Information Return, call 1-800-959-7775, or visit http://www.cra-arc.gc.ca/E/pbg/tf/t1044/
GST/HST Rebates for Public Service Bodies
Many goods and services provided by public service bodies are exempt from GST. These bodies can get back some of the GST they paid on items they used either to make the goods or to provide the services. For more information, call 1-800-959-7775, or visit http://www.cra-arc.gc.ca/E/pub/gp/rc4034/
General information – Non-profit organisations – Revenu Québec
http://www.revenu.gouv.qc.ca/eng/entreprise/impot/osbl/info.asp
6. Organisation and logistics
The not-for-profit board of directors
The not-for-profit corporation is governed by a board of directors. The size of the board is defined in the bylaws of the corporation (within parameters established by each jurisdiction). While the board, as a whole, has a great deal of authority and power, the individual director, when acting alone, has almost no power.
Within this structure, the board is typically responsible to appoint (whether directly or indirectly) board committees, officers, employees and agents of the corporation to carry out day-to-day activities. In some cases, it may fall to the corporation's membership to elect particular officers, such as the president. A director will be entitled to exercise any authority associated with an office or position to which he or she is elected or appointed.
Knowing the mandate
To be effective in their role, directors and prospective directors must know and understand why the organisation exists and whom it serves. It is equally important for the board of directors to periodically re-visit this mandate to determine its ongoing relevance and the organisation's commitment to it.
Accountability
All not-for profit directors are potentially accountable to someone or some entity, often to multiple parties. This accountability can take many forms: annual general meetings where members can vote to replace directors they have lost confidence in or make changes to governance documents that affect the board; administrative or judicial penalties imposed owing to regulatory non-compliance; reporting requirements to funders; and court actions mounted by dissatisfied stakeholders.
The role of directors
The board of directors of a not-for-profit corporation is responsible for the management of the corporation. In general terms, this means that the board is responsible for supervising senior staff, providing strategic planning to the corporation and developing and implementing corporate policy. Board members must be (or at least must become) knowledgeable about the business and financial affairs of the corporation. Where the corporation is a charity, the board has a heightened duty of care with respect to the protection of its charitable property.
Liability of directors
As a general rule, directors are not personally liable for the contracts of, or the actions or omissions of, the corporation that they serve because a corporation is considered to be a separate legal person at law. The liability protection afforded to directors as a result of incorporation is often referred to as the "corporate veil". However, there are exceptions to this general rule and there are many instances of directors' liability at common law, under federal and provincial statutes, and under the Civil Code of Québec. Directors of not-for-profit corporations should be aware of these exceptions.
Committees
Committees are an essential tool for the effective and efficient functioning of a not-for-profit corporation's board of directors. An appropriate committee structure allows a board to focus expertise where it can best be used and manage the flow of information so directors are not burdened with unnecessary material that can hinder rather than facilitate good decision making. Solid committee work – i.e., thoughtful assessment of information that results in well-focussed recommendations or options – is a lynchpin of prudent and informed board decisions.
Annual summary
Once incorporated, a not-for-profit corporation must file an Annual Summary with the Corporations Canada, on or before June 1st of each year, containing information relating to the year ending March 31st. http://strategis.ic.gc.ca/epic/internet/incd-dgc.nsf/
en/cs02167e.html#filing
Primer for Directors of Not-for-Profit Corporations
This book is designed to provide directors of not-for-profit corporations with information on their basic legal rights and obligations in that role and to provide a good understanding of their potential responsibility should they agree to serve on the governing body of a not-for-profit corporation. http://strategis.gc.ca/epic/internet/incilp-pdci.nsf/en/cl00700e.html
7. Financing
Internal financing
Dues
Dues are the major source of funding. The Companies Act enables companies incorporated in accordance with this legislation to require members to pay annual dues. The requirement to pay annual dues is usually laid out in the company’s by-laws, which stipulate the members and categories of member to which they apply. The by-laws also stipulate their amount and when they must be paid.
Admission fee
The by-laws may also specify that, when joining, members must pay an admission fee. The amount of the admission fee may vary depending on the organisation being joined and may be based on various factors, such as the cost of opening a file or the method of approving members.
External financing
Loans and security
The company may take out loans secured against its property, such as a mortgage. The Companies Act stipulates that administrators may take out loans when authorised to do so by a by-law approved by at least two-thirds of the votes of members attending a meeting.
Donations
The company may be financed through donations as long as it was formed as a non-profit organisation and does not operate a business. Donations must not exceed the amount of real property that the company may acquire or possess, as indicated in its incorporating document.
On the other hand, if the association is a voluntary organisation or charitable organisation whose purpose is to collect funds through public contributions or any other method with a view to redistributing them in accordance with its objectives, this must be indicated in its incorporating document.
Financial assistance
To find available financing programs, consult our document
Social Economy – Financing and Technical Resources.
8. Resources
La gestion des organismes sans but lucratif – Trousse autodiagnostic
Developed by the Corporation de développement économique et communautaire (CDEC) Centre Sud/Plateau Mont Royal, this kit concerns management practices that may be implemented in a community group. For more information, call 514 845-2332 or visit http://www.cdec-cspmr.org/ES-osbl.html#Conseil. This document is also available in our documentation centre. (In French only)
Organisme sans but lucratif – Répertoire 2006-2007
A consultation and reference tool listing non-profit organisations, excluding associations. Available in our documentation centre. (In French only)
Guide des programmes d'aides – Organismes à but non lucratif – Canada-Québec – Publications CCH
This document provides a list of grant programs offered by both the provincial and federal levels. You can consult this document at our documentation centre. For more information, contact Publication CCH at
In conclusion
We hope the information provided in this Info-Guide has been helpful to you. Many other interesting documents, tools and links may be found on our Web site.
If you need more information about business-related subjects, our agents are available to provide you with free information about federal, provincial, and municipal government programs, services, and regulations as well as some programs and services offered by the private sector.
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DISCLAIMER
Information contained in this document is of a general nature only and is not intended to constitute advice for any specific fact situation. Users concerned about the reliability of the information should consult directly with the source, or seek legal counsel.
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