by Sid Kobewka

LawNow August / September 2001

The first steps

Many people want to make a difference in their community by being involved as volunteers in non- profit groups. You may want to improve your local park, start a skateboard park for the children in your community, advance a hobby such as bird watching, promote education and awareness of energy conservation, raise funds to purchase additional equipment for your child's school, or be involved in a local church. How should this be organized? If you have a group of interested people do you have to register your group with a government office? Can you accept funds and issue charitable receipts? If you hire staff or order supplies and run out of funds, do you have to pay from your personal resources? If someone is injured while participating in a activity set up by your group, can you be personally sued? If there is a dispute in your group, what laws govern the resolution of this dispute?

These questions can be asked for any non-profit community organization that you are involved in or planning to start. The terms not-for-profit, non-profit and charitable are often used interchangeably and are not always clearly defined. Non-profit or ot-for-profit organizations are groups organized for some purpose other than making a profit for their members. They are not allowed to distribute profits to their members during their operation nor can they distribute assets on dissolution.

A charitable organization is a non-profit group that has its objectives limited to one or more of the following activities:"relief of poverty, advancing education, advancing religion, and activities beneficial to the community as a whole."

The designation charitable is granted by the Canada Customs and Revenue Agency (CCRA) if it meets the definition referred to above. A non-profit group does not necessarily have to be a charitable organization, but preferential treatment with the CCRA is granted only to charitable organizations.

How do you organize a non-profit group?

Non-profit groups can be unincorporated or incorporated. An unincorporated organization is governed by agreement of the members or by formalized written by-laws. Book clubs, community lobby groups, or hobby clubs are examples of unincorporated organizations which are short term and do not have significant liability. Generally, there is no requirement to register this type of group since it is, simply put, a group of people who have a common interest and who wish to advance that interest. On the other hand, an incorporated non-profit organization is registered with the a provincial registry such as the Alberta Corporate Registry or with the Federal Corporate Registry and this type of organization takes on a formal structure, thus becoming a distinct legal entity. The incorporated organization is no longer just a group of people organized to advance a common cause. Instead, it becomes a person and is governed by the by-laws which are filed when it is incorporated.

Should you incorporate?

An incorporated organization provides its members with the advantage of taking liability for the legal obligations of the organization. If you were interested in building and managing a skateboard park for children in your community, it is clear that this could attract some legal liability. This could greatly benefit the children and community volunteers should be encouraged, but it could be a risky venture.

For example, if your incorporated organization takes on the responsibility of hiring contractors to construct the skateboard park and the organization is unable to pay the contractors, then the organization is liable for the debts, and the members and directors have no liability. If the organization was not incorporated, each of the members along with the individuals from the association who signed the construction contracts could be personally liable for the debt. It would be advisable in this example to incorporate your organization and benefit from limited liability.

If your cause will not require that you raise money or take on legal liability such as hiring employees or entering into contracts, then it is not necessary to incorporate. For example, if you and a group of other like-minded citizens were concerned about the maintenance and safety of a local park, you could call meetings, give yourself a name Friends of the Park, establish objectives (purpose), a constitution (by-laws) and start your concerted effort of lobbying or cleaning your local park. This may be a short term group which may accomplish its purpose in short order. In this circumstance, it should not be necessary to incorporate. However, if this group took on more responsibilities over time such as hiring an executive director, employing summer students to keep the park clean, or raising money to support its cause, then it should incorporate in order to benefit from limited liability. Incorporation of a non-profit group does involve extra work and cost and is not necessary for every group, but it is often advisable to incorporate.

Types of Non-Profit Corporations

The right to form a corporation is granted by either provincial or federal legislation. Each province has its own provincial act; for example, in Manitoba non-profits are incorporated under the Corporations Act; in BC, under the Society Act. You can usually find this out by phoning your provincial government's general information number.

The statutes in Alberta which permit incorporation as a non-profit corporation are the Societies Act, and Part 9 of the Companies Act. These Acts apply to organizations that are carrying out either non-profit or charitable activities. The Societies Act requires five people to be incorporators and the Companies Act allows as few as two people to incorporate. Most organizations in Alberta incorporate under the Societies Act. They differ most importantly in that the Societies Act allows one vote per member while the Companies Act allows one member to control since voting at annual meetings is determined by the number of shares a member holds..

A non-profit organization could also incorporate under the Canadian Business Corporations Act or the Alberta Business Corporations Act, which are normally used by profit corporations, if they wanted more freedom to carry out business-style objects. However, registration with the CCRA as a charitable organization would probably be denied unless the objectives are clearly charitable.

Other legislation permits the formation of incorporated non-profit groups such as the Charitable Foundations Act which is intended for organizations raising funds for a charitable cause. The decision to incorporate under this Act should be made only after receiving advice from a tax specialist since the requirements for formation of a foundation are technical. Other legislation such as the Co-Operative Associations Act and statutes for private charitable organizations with special requirements permit the formation of non-profit companies but these are not as common as incorporation under the Societies Act.

Organizations can incorporate in any province under provincial legislation; however, to "carry on business" in another province they would have to register in that province. The federal government permits incorporations of non-profit groups under the Canadian Corporations Act. You would normally incorporate through this Act if your organization will have a national focus.

How To Incorporate

The Alberta Government provides information about incorporating a Society at the Corporate Registry site: www.gov.ab.ca/gs/services/cpnc/index.cfm. Click on "Societies" and you will be provided with incorporation forms along with sample by-laws. The Societies Act states the following:

"five or more persons may become incorporated under the Act for any benevolent, philanthropic, charitable, provident, scientific, artistic, literary, social, educational, agricultural, sporting or other useful purpose, but not for the purpose of carrying on a trade or business."

You must submit your application to Corporate Registry and they can refuse to register your society if your objectives do not comply with the Act or if your by-laws are deficient. If you would like to review by-laws from another society and you know its name, you can obtain a copy of these from the Corporate Registry, through a registry agent, or a law firm.

The federal government provides information about incorporating a non-profit organization on its site: www.strategis.ic.gc.ca/ sc_mrksv/corpdir/engdoc/6f.html.

How To Obtain Charitable Status

If your organization becomes registered with the CCRA as a "charitable organization" it will be permitted to issue charitable tax receipts and will not pay tax on income. The CCRA will not allow all non-profit groups to gain charitable status since this privilege is granted only to organizations that pursue the defined charitable causes of " relief of poverty, advancing education, advancing religion, and activities beneficial to the community as a whole."

The CCRA will deny this privilege to organizations which have as their main purpose the promotion of a particular viewpoint, or if they do not benefit the community as a whole but only benefit a select group of people. If an organization obtains charitable status, it can lose this if it fails to continue meeting the CCRA's requirements for charitable status. For example, if the organization begins earning profits and spending less than 80% of this on advancing the objectives of the organization or if the organization becomes too political and begins primarily advancing a particular viewpoint, its charitable status will be revoked. The CCRA requires that the organizations file a detailed questionnaire on a yearly basis in order to determine if the organization continues to qualify as a charitable organization. The CCRA provides information about registration of a charity at its web site: www.ccra-adrc.gc.ca/tax/charities/ menu-e.html

Other Laws Non-Profit Groups Must Follow

Non-profit groups must comply with all provincial and federal laws and your organization should have an awareness of what laws may apply in your particular circumstances. If your group is hiring staff, then you must comply with the employment standards legislation of your province regarding payments of holiday pay or pay on dismissal. In addition, your organization is liable for damages for wrongful dismissal of employees. If you are building, you must contact the responsible municipality and obtain a building permit. Non-profit groups do not receive special treatment regarding compliance with governing law and you should be aware of the laws which could apply to your organization.

One Act which is of specific relevance to non-profit groups in Alberta is the Charitable Fund-Raising Act. If your organization has raised funds of more than $25,000 per year or hires a private fund-raising firm then you must register with the Alberta government. The Alberta Government Services web site has detailed information about this Act and its applicability. You can start at www.gov.ab.ca/ home/consumers_and_licensing and click on "How to register a Charitable Organization".

Disputes In Your Organization

What if your organization has a difference of opinion regarding the handling of the affairs of the organization? For example, what if some members of the group want to hire an executive director and others want to continue using volunteers? How is this dispute resolved in each type of organization?

Incorporation through any of the provincial or federal acts provides a defined method for resolving internal conflict. The ruling document is the by-laws of the society and the by-laws are required to state the procedure for calling members' meetings and directors' meetings.

The members of a society must meet at least once per year and elect directors. The directors manage the affairs of the society for the year unless their powers are restricted by the members. The members then hold the power to control the affairs of the society, but they can only exercise their power as permitted by the by-laws. The by-laws can be amended by the members at a membership meeting by special resolution (75% vote). If any interested party is of the opinion that the society has not run its affairs as required by law and that this has unfairly prejudiced the rights of a member, then they can apply to a judge of the Alberta Queen's Bench for an Order granting them a remedy. As you can see, the society cannot be controlled by one individual, but the members through their power as members or through the courts can ensure that the society is run in order to promote its objectives as stated in the by-laws.

An unincorporated non-profit group is more difficult to regulate. If the group has prepared by-laws which govern their affairs then those by-laws will regulate the affairs between the members. The by-laws operate in the same fashion as a contract between the parties. The problem is that most unincorporated groups do not have extensive by-laws and often the affairs of the organization are not clearly spelled out by the by-laws. The members could resort to the courts to resolve the dispute, but without a defined agreement between the members of the organization the court will be reluctant to become involved other than assisting in developing a procedure for the membership to vote on the issue. Resorting to court action can be very costly. If there is a deadlock in the organization with no clear method of resolving the dispute, this will likely result in the end of the group or a fractious split which will more than likely harm the cause being advanced. If your organization will be in existence on more than a temporary basis it is wise to prepare by-laws which will clearly identify a procedure for resolving a difference of opinion in the organization.

Conclusion

The complexities of the matters you should consider when deciding about the legal structure of your organization will increase with the size and complexity of its undertaking. You can keep it simple if it is a simple non-profit endeavor, but if it is not simple, then you should seek advice from professionals. Do get involved, do contribute, and do rely on the many competent helpful people and resources provided for non-profit organizations. For more information Law Now provides further articles and links to various nonprofit and charity web-sites: www.extension.ualberta.ca/ lawnow/nfp/links.htm.

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