It’s not easy for a nonprofit organization to obtain a designation as a registered charity under the Income Tax Act. The main advantage of doing so, clearly, is the ability to issue tax receipts for donations received, which greatly helps with fundraising activities. Maintaining the charitable status in good standing is therefore crucial to a charity’s success. Avoid these common mistakes to ensure that your organization maintains its designation as a registered charity.
Issuing Incorrect Receipts
Issuance of improper receipts can lead the Canada Revenue Agency to revoke your charity’s registration. There are several rules that govern the issuance of tax receipts. If a donation is made in cash, then issuing the receipt is straightforward, since it’s easy to determine the amount of the donation. Issues arise when gifts are made in kind, such as artwork or electronic equipment. In such cases, your organization may still issue a receipt, but it must first determine the fair market value of the item. If the gift is worth more than $1,000, the CRA recommends having it professionally appraised. Also, the Income Tax Act clearly states that your organization cannot, under any circumstances, issue tax receipts for gifts of services. If a person donates their time to a charity, they cannot be compensated with a tax receipt.
Using the Charity’s Funds Improperly
To achieve and maintain your organization’s status as a registered charity, its activities must fall within one of the following categories: relief of poverty, advancement of education, advancement of religion, and certain other purposes that benefit the community in a way the courts have said is charitable. The purpose must be indicated in the organization’s official corporate documentation, and the charity’s funds must be, in fact, used to further the purpose on a day-to-day basis. One way to achieve this is to make donations to other qualified registered charities. However, donations to regular nonprofit organizations are not allowed. These donations are considered a non-charitable use of funds and may lead to revocation of your organizatoin’s registration.
Filing the Annual Return
While a registered charity does not pay income taxes or file a tax return, it must file an annual information return. This charity return, Form T3010, is exhaustive and must be filed on time. If your organization fails to file a complete return within six months of the end of your fiscal year, the CRA will start the revocation process. The organization will receive a Notice of Intention to Revoke a Charity’s Registration by registered mail and will have 90 days from the date of the notice to file your return. There are other issues that may lead to revocation, such as loss of proper corporate standing. If your charity has reached the end of its useful life, it is best to file for voluntary revocation to avoid sanctions and penalties.