I’ve written for and about nonprofits and charities for more than a quarter century but earlier this year, I realized—true confession time — I tended to use the two terms somewhat interchangeably, not being entirely clear on the differences.
When I went to talk with experts, it turned out that I was far from alone. Not only are the differences between such terms confusing to the general public, but also for many people who work and volunteer within the sector.
“Some of the 2.5 million Canadians working in the sector and 800,000 members of boards of directors understand the distinctions and some don’t,” says lawyer Mark Blumberg. “In fairness to those in the sector, there is some new terminology being promoted so it can be confusing.”
Given that uncertainty around language is widespread (what’s a social enterprise? a social purpose? a registered vs unregistered charity?) we decided to make sure we’re all on the same page, and thus able to do more good across Canada.
Why does language matter?
There are times when being precise in language is important for the nonprofit and charitable and social purpose sectors.
First of all, as Paul Nazareth, VP, Education & Development, Canadian Association of Gift Planners, says, “You’ve got to know the legal boundaries simply so that you stay on the right side of the Canada Revenue Agency, both for your organization and for your donors.”
Cathy Barr, Vice-President, Policy, Research & Standards, Imagine Canada, agrees. “Many lawyers and executives of larger charities grasp the distinctions, but it’s very important for all executive directors and board members to understand their organization’s legal status, be aware of rules and regulations around that status, and know that their organization is meeting its legal obligations.”
But it’s also important for all staff and volunteers of nonprofits and charities to have a good basic understanding of the landscape. Nazareth says, “As someone who flies a lot, I don’t need to know everything about how planes work, but I do need one key piece of information: where that plane is going.”
This understanding helps staff and volunteers within organizations represent their organizations well and give proper counsel to funders and other stakeholders. This can mean that fundraisers, communications and finance staff are able to clearly communicate how their organization operates and is regulated and accountable. It’s helpful even for those team members who work in the programming side to understand.
Language also shapes action as new players enter the space, whether those are new donors or those wanting to start a new initiative. Nazareth says, “People want to do good and assume the way to do this is to start a charity, but they don’t know that they are recreating the wheel every single time. They don’t know that partnering with an existing organization would save them thousands of dollars and years of paperwork. They also often don’t recognize how different a charity is from a private enterprise when it comes to the extent of accountability and oversight.”
So, what’s what?
There are actually very clear-cut legal definitions around charities and nonprofits in Canada.
First of all, a charity is (almost always) a kind of a nonprofit organization, but a nonprofit organization is not a type of charity. However, in Canada, according to the Canada Revenue Agency: “If you are operating as a charity, you cannot be considered a non-profit organization, even if you are not registered or cannot be registered as a charity. You can only meet one definition, not both.”
The term nonprofit organization (or not-for-profit organization) is used to describe any type of organization whose purpose is other than that of making profit. It may go without saying that a for-profit business doesn’t always turn a profit, but its intention is to do so. Since the 1917 Income Tax Act was first brought in, nonprofits have been generally exempt from paying income tax (this is determined by the CRA tax services office) but cannot issue charitable tax receipts to donors. The income of a nonprofit must not benefit a member, but rather the organization is organized and operated for a specific purpose such as recreation, civic improvement, social welfare, etc.
Like a for-profit organization, a nonprofit organization can legally incorporate itself as an entity, either provincially or federally (depending on the geographic scope of its purpose). This is particularly important for liability purposes. Barr says, “Many groups loosely call themselves charities or nonprofits that are actually simply groups of people getting together for a shared purpose and are not legally constituted as a nonprofit or charity.” As an example of this, Barr recalls being on the executive of a community group years ago, and says, “Our group was not incorporated as a nonprofit organization. I later learned that if someone had gotten hurt at an event, for instance, and had sued our group, there was no legal entity to sue. Instead the people running the organization would be liable.” Incorporation creates a legal person, which allows a nonprofit organization to take out insurance, cover liability, etc.
While we use the term charity in general understanding to mean the giving of help to others in need, under the Income Tax Act, registered charities must be constituted and operated exclusively for charitable purposes. Barr says, “When it comes to the legal definition of a registered charity, there are very specific criteria for what constitutes charitable activity. If an organization’s work doesn’t meet those criteria, it doesn’t matter whether it’s doing something good and valuable.” Registered charities do not pay income tax and are required to use their funds for charitable activities or as gifts to qualified donees.
Largely because registered charities are authorized to issue tax receipts to donors, they are tightly regulated by the CRA, with organizations required to offer significant transparency about their finances. Imagine Canada’s Standards Program requires all charities to provide a link to their Registered Charity Information Returns (T3010).
What’s new and shiny… and confusing?
For many, however, the distinctions between charity and nonprofit are clearer than other new terms in this space. Blumberg says, “Every year or two, people come up with new terms they try to get the world to use.” Blumberg believes that some of this emerging terminology is a question of marketing something old as new.
That something is what is perhaps most commonly referred to as social enterprise. In a white paper for innovation hub MaRS, lawyers Susan Manwaring and Andrew Valentine of Miller Thomson explain: “Social enterprise offers a range of possibilities for combining for-profit and non-profit goals, as well as the possibility of pursuing philanthropic ends without relying on the traditional means of financing charitable ventures: government grants and private donations.”
What’s challenging is that social enterprises can be operated by for-profit companies, nonprofit organizations or charities, depending on their purpose and structure. Manwaring and Valentine say, “More commonly, however, the term refers to the use of revenue-generating business-like activities to accomplish, at least in part, a socially beneficial end.”
Charities are limited in the types of business activities in which they may engage and the types of investments they are allowed to make, but they are permitted to develop social businesses such as a vocational training program for their clients, as these are considered charitable activities. Fewer restrictions are placed on the types of business activities in which nonprofit organizations may engage, other than limiting themselves to nonprofit purposes.
One common way of describing for-profit social enterprises is to call them benefit corporations or B corps, a designation given to organizations with a “triple bottom line” of profits, people and environment. Nonprofit B Lab offers B Corps certification in Canada. First certified in 2009, there are now more than 230 certified B Corps in Canada.
The challenge in this complex and overlapping area is that some people can use the lack of clarity to their advantage, says Nazareth. He cites crowdfunding companies as an example. “They are corporate platforms but they use the word ‘donate’ on their buttons.” At the same time, Nazareth says, there is a space in the field of doing good for such entities. “The charitable sector has accountability and transparency, but we can’t legally give money to a particular individual. That’s where crowdfunding fits in.”
Blumberg also says, “Sometimes the term social enterprise is used as an implied criticism of other businesses or charities when in reality charities can engage in certain business activities, while businesses might be better off doing good things like paying living wages to their workers or making decisions that are sensitive to the environment rather than focusing on giving themselves an innovative name.” He adds that some organizations — particularly charities — that want to do innovative work might be better served by setting up another entity altogether.
In the end, what do we call this sector? Nazareth refers to it as the “social good sector” because he believes there’s room in the tent for all who want to help, while Barr says Imagine Canada refers to it as CNPO – charities and nonprofit organizations—and when including entities beyond registered charities and nonprofits, uses terms like social purpose organizations.
“People don’t realize the extent to which we get caught up with words and terms with limited meaning at best,” says Blumberg.
Nazareth agrees. “It’s important to understand the sector and its legal definitions and the implications for our work, but we spend too much time arguing about what we are. In the end, we need to spend more time moving forward together and calling it whatever works. There’s room for all who want to do good — we’re all just trying to do good, together.”
Susan Fish is a writer/editor at Storywell, a company that helps individuals and organizations tell their story well. She has written for the nonprofit sector for more than two decades and loves a good story.
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