The Non-profit, Not-For-Profit,
Voluntary, Charitable Sector
Non-profits, not-for-profits, charities and the voluntary sector
describe community organizations that are different from businesses
making money. Often descriptions are used like "I'm raising
money for a non-profit charity." But what does this mean?
Is there a legal difference for example, between a non-profit
and a not-for-profit or between a non-profit and a charity?
Some General Comments
The law of non-profit organizations and charities is confusing.
In many respects, it still relies on ideas that are hundreds
of years old. The result is we are without clear, comprehensive,
and common definitions of charitable or non-profit organizations
or activity.
In general, a non-profit organization is one that can neither
pay dividends to its members nor distribute its assets to its
members while it is operating or winding up. A charity has the
additional requirement of being limited to doing particular types
of activities. Because of these restrictions, the financial and
other resources of the organization must be used to carry out
its objects. These limitations are in stark contrast to what
is permitted to the business corporation which has all the powers
of a natural person.
These limitations that determine what is non-profit or charitable
come from the legal requirements of three different areas of
the law: the historical law of trusts, the law of corporations,
and tax law.
The Historical Law of Trusts
Trusts have a very long legal history. They are concerned with
certain kinds of promises that the courts will enforce. To be
a charitable trust, the promise has to be one of four kinds:
for the relief of poverty, for the advancement of religion, for
the advancement of education, and for other purposes beneficial
to the community which are not one of the first three kinds.
This means that money collected for the charitable purpose of
relieving poverty can only be used for that purpose. It is enough
to remember that the legal meaning of charity is determined by
a very confusing and old set of standards.
The Corporate Part
There are several different ways by which people in Alberta can
organize themselves and be legally recognized. For example, under
the Societies Act "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." In other words,
a society cannot have making money as a purpose. A society's
documents must show that its purposes are clearly other than
to carry on a trade or business.
The main way a society proves its intention not to operate as
a business is to restrict itself to what it will do with any
money it receives or makes, and with the property it owns. This
is often stated as a prohibition on paying dividends to its members
and a prohibition on distributing assets to its members, either
while it is operating or on a winding-up.
The Tax Part
Once registered, most groups seek to avoid paying the variety
of taxes imposed by governments: income tax, goods and services
tax, and property tax are the three most common. In this regard
the Income Tax Act provides that an organization is tax-exempt
for any tax year where it is a club, society, or association
that, in the opinion of the Minister, was not a charity within
the meaning assigned by (another section of the Income Tax
Act) and that was organized and operated exclusively for
social welfare, civic improvement, pleasure or recreation, or
for any other purpose except profit. No part of the income of
the organization was payable to, or was otherwise available for
the personal benefit of any proprietor, member or shareholder.
Here we see that to be to be considered non-profit, the general
limitations against trade or business purposes must again be
present, together with the restrictions on the distribution of
income. Also, the organization cannot be a charity. The reasoning
is that to qualify as a charity for income tax requirements there
are additional restrictions (and benefits). In addition, we see
the requirement that the organization must be both organized
and operated exclusively for its non-business purposes. In other
words, it can't do business with a view to making money.
Observations
What can we conclude from this brief summary of legal principles?
The simple answer is that there is no single meaning to the words
not-for-profit or charity. Not-for-profit and non-profit are
used interchangeably. A volunteer is generally considered to
be an individual who acts without payment. The precise, legal
meaning of the non-profit or charity will depend on the context
in which it is being used. The lesson to take away is that where
an organization is required to be non-profit or a charity or
somehow involve volunteers, the legal details of those requirements
should be carefully explored. Being a non-profit, volunteer charity
might just not be what it seems.
Laird Hunter is a lawyer with the firm Worton & Hunter in Edmonton, Alberta
