Before a group can be registered as a charity, there has to actually be some legal thing to register. This means that every charity faces the choice of which legal structure to use. A charity can be constituted as a trust, an unincorporated association, or a corporation.
People generally think of for-profit businesses when they hear the word ‘corporation’, but corporations also come in a non-share capital flavour that is used for non-profit organizations and registered charities. Becoming a corporation under the federal Canada Not-for-profit Corporations Act or a similar provincial statute can be a benefit to charities of any size. It doesn’t matter whether the group is registered as a charity yet or not; it is often possible to become registered while constituted one way, and then subsequently change to another structure. For example, unincorporated charities can become incorporated without jeopardizing their charitable registration – if done properly, of course.
An unincorporated association is usually one that was formed by a group of people acting together to carry out charitable objectives – usually on a shoestring budget. But a group that is contemplating activities going on long enough to warrant charitable registration should probably also be considering incorporation. A corporation is a much more durable structure; it is its own ‘person’, independent of its members, and therefore will survive any amount of personnel turnover. It is certainly the more likely structure for dealing with a large or dispersed membership.
This corporate trait of independent selfhood also means that a corporation can own property, incur debts, and enter into contracts in its own name. It can also start and defend legal actions. Because a corporation is its own legal person that attracts its own liabilities, incorporation protects the individual members and directors from personal liability for the corporation’s debts. A charity’s directors may be saved a great deal of personal grief and money by pre-emptively taking their personal assets off the table.
For charities, a major source of potential debt is the so-called ‘revocation tax.’ When a charity has its registered status revoked, it becomes liable to pay a tax of effectively 100 percent of the fair market value of its assets. This is typically not a problem for charities that have voluntarily chosen to have their status revoked, because they can plan ahead to properly distribute the charity’s assets and be left with an effective tax of zero. However, when revocation is involuntary, someone will be left holding the bag. If the charity is not incorporated, its directors can become personally liable for the tax.
Another particular source of debt is the fines that Canada Revenue Agency may impose on registered charities for failing to comply with the law. These fines are almost all expressed as percentages, which means they have the potential to represent substantially large sums. For example, the penalty for issuing a receipt that contains false information is 125 percent of the eligible amount on the receipt, up to $25,000. If the charity is unincorporated, all of the directors may become personally liable for the fine due to the actions of one director. This is not only a high-risk, high-liability situation for the directors to put themselves in, but it is also hardly conducive to an atmosphere of trust within the board.
Whether an unincorporated association is already a charity or is looking to become one, it should definitely take the time to familiarize itself with the benefits of incorporation. Although incorporation may not be the appropriate structure for every charity, its potential advantages make it a ‘must’ to consider.
Drache Aptowitzer LLP is experienced in incorporating charities and non-profit organizations and would be pleased to advise you.
Alexandra Tzannidakis
Drache Aptowitzer LLP
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