Can a Charity Pay Employees? Legal & CRA Guidelines

Many people assume that charities in Canada operate entirely on volunteer work, but this is a common misconception.

Yes, Canadian charities can pay employees. Most registered charities employ staff to carry out their charitable activities and operations.

The Canada Revenue Agency permits and expects charities to compensate employees fairly for their work, as long as the compensation is reasonable and properly documented.

The rules around charity employment differ from paying board members or directors.

Employees who perform day-to-day operations, program delivery, fundraising, or administrative tasks can receive salaries like workers in any other sector.

These payments must follow standard employment laws, including payroll deductions for income tax, Canada Pension Plan contributions, and Employment Insurance premiums.

Understanding how charities can legally compensate their staff is important for both charity leaders and potential employees.

This article covers the legal requirements set by the CRA, who qualifies as an employee versus a director, how to determine reasonable compensation, payroll obligations, and best practices for creating clear employment agreements.

Knowing these rules helps organizations stay compliant while attracting qualified staff.

Overview of Paying Employees in Canadian Charities

Canadian charities can legally pay employees for their work.

Registered charities in Canada pay approximately $199 billion per year in employee compensation, which represents more than half of the sector's total expenditures.

Key Differences Between Charities and Non-Profit Organizations

Charities and non-profit organizations operate under different rules in Canada.

Both types of organizations can pay salaries to employees, but registered charities must meet specific requirements set by the Canada Revenue Agency (CRA).

Registered charities receive special tax benefits. They can issue tax receipts for donations and are exempt from income tax.

NPOs do not have these same privileges.

Charities face stricter oversight from the CRA regarding how they spend funds.

NPOs have more flexibility but must still follow provincial laws.

Both charities and NPOs must ensure that employee compensation is reasonable.

The funds paid to staff must align with the organization's charitable or non-profit purposes.

Basic Compensation Rules for Registered Charities

The CRA requires that all compensation paid by registered charities must be reasonable.

This means salaries should match the skills, experience, and responsibilities required for each position.

Charities must maintain transparency in their financial reporting.

Organizations need to document how much they pay employees and ensure these amounts align with market standards.

Key compensation requirements include:

• Salaries must support the charity's mission
• Pay rates should be comparable to similar roles in the sector
• Compensation cannot provide undue personal benefit
• All payments must be properly documented

The average full-time salary in Canada's charity sector is $63,582.

Entry-level positions average $40,786 per year, while mid-level roles average $51,427 annually. Executive positions average $69,919 per year.

Charities must report employee compensation on their annual returns to the CRA.

This reporting helps ensure accountability and proper use of charitable funds.

Employment vs. Volunteer Roles

Charities can have both paid employees and volunteers working within their organizations.

The distinction between these two types of workers is important for legal and tax purposes.

Employees receive regular compensation for their work. They have employment contracts, receive pay stubs, and are subject to standard employment laws.

Charities must deduct income tax and CPP contributions from employee wages.

Volunteers donate their time without receiving payment. They cannot be compensated with regular wages for their volunteer work.

Charities may reimburse volunteers for legitimate expenses they incur while volunteering.

Some individuals may serve in both capacities at the same organization.

A person could volunteer on the board of directors while also working as a paid employee in a different role. Clear separation between these roles must be maintained.

Legal and CRA Requirements for Employee Compensation

Canadian charities must follow specific legal rules when paying employees.

The Canada Revenue Agency sets strict guidelines about compensation to protect charitable status and ensure donations are used properly.

Canada Revenue Agency Regulations

The CRA requires registered charities to report all employee compensation on Schedule 3 of their annual Registered Charity Information Return.

This includes salaries, wages, commissions, bonuses, fees, honoraria, and both taxable and non-taxable benefits.

Charities must issue T4 slips to employees and make proper payroll deductions.

The organization needs to remit income tax, Canada Pension Plan contributions, and Employment Insurance premiums to the CRA.

Failing to follow payroll regulations can result in penalties and audits.

The CRA does not require pre-approval for employee salaries.

However, the agency reviews compensation during audits and through annual filings to ensure amounts are reasonable and properly documented.

Charitable Status and Private Benefit Restrictions

A registered charity cannot provide private benefit to individuals beyond what is necessary to achieve its charitable purposes.

Paying employees reasonable compensation for actual work performed is acceptable.

Excessive salaries or payments that primarily benefit individuals rather than the charity's mission can jeopardize charitable status.

The CRA can revoke a charity's registration if compensation violates private benefit rules.

This means losing the ability to issue tax receipts, which often devastates fundraising.

The agency may also impose financial penalties or require repayment of improper compensation.

Directors who approve inappropriate compensation can face personal liability for breaching their fiduciary duties.

Board members must act in the charity's best interests when setting employee pay.

Determining Reasonable Compensation

The CRA assesses whether salaries are reasonable based on several factors.

Compensation should be comparable to what similar organizations pay for similar roles. The amount must be proportionate to the charity's budget and size.

Key factors the CRA considers:

• Annual revenue and organizational size
• Geographic location and cost of living
• Job responsibilities and time commitment
• Industry standards and sector norms
• Complexity of the position

Charities should benchmark salaries using resources like CharityVillage salary surveys or Imagine Canada reports.

A small charity with a budget under $500,000 typically pays an Executive Director between $55,000 and $75,000 annually. Mid-sized organizations with budgets of $1 to $5 million usually pay $75,000 to $120,000.

Board approval and documentation are essential.

All compensation decisions should be recorded in board minutes with supporting market research.

Who Can Be Paid by a Charity in Canada

Canadian registered charities can legally pay people who work for them, but the rules differ based on the person's role.

Employees receive salaries through standard employment contracts, while directors face strict limits on compensation.

Employees and Executives

Registered charities can hire employees and pay them salaries like any other organization.

These employees work under employment contracts and perform various duties that help the charity fulfill its charitable purposes.

Executive directors, program coordinators, fundraisers, and administrative staff all qualify for compensation.

The charity must pay reasonable amounts based on the work being done.

The Canada Revenue Agency requires charities to report all compensation on their annual returns.

Executive compensation receives more scrutiny than other positions.

Charities need to justify what they pay their top executives. The amount should match what similar organizations pay for comparable work.

Paying executives too much can lead to problems with the CRA.

All compensation must serve the charity's mission.

The charity cannot use its funds mainly to benefit individuals rather than advancing its charitable purposes. This applies to both regular employees and executives.

Founders and Board Members

Founders of a charity do not automatically receive payment for starting the organization.

If a founder becomes an employee or contractor, they can receive reasonable compensation for actual work performed. Their role as founder alone does not justify payment.

Board members typically serve as volunteers.

Most charities do not pay their board members for attending meetings or making governance decisions.

This volunteer model helps charities use more funds for their charitable purposes.

Rules for Directors' Compensation

Provincial law determines whether directors can receive compensation at all.

A registered charity generally cannot pay directors simply for holding their positions on the board.

Some provinces allow governing documents to include provisions for reasonable compensation when directors provide specific services.

For example, a director might also work as an employee of the charity. In this case, the director receives payment for the employee work, not for being a director.

The Income Tax Act imposes serious penalties for giving directors undue benefits.

A charity that provides an inappropriate benefit faces a penalty of 105% of the benefit amount.

A second violation within five years increases the penalty to 110% and suspends the charity's ability to issue tax receipts.

These penalties make it critical for charities to follow all compensation rules carefully.

Wondering how charities can generate income while staying compliant? Read our detailed guide on whether charities are allowed to make money and how CRA rules apply.

Payroll, CPP, EI, and Tax Considerations

Charities that employ staff must follow the same payroll rules as other Canadian employers.

They need to deduct Canada Pension Plan contributions, Employment Insurance premiums, and income tax from employee wages, then remit these amounts to the CRA on schedule.

Payroll Deduction Requirements

Charities must start making payroll deductions as soon as they pay an employee.

The organization needs to withhold three types of deductions from each paycheque: CPP contributions, EI premiums, and income tax.

The CRA requires charities to calculate these deductions based on the employee's gross pay.

Employers should use the Payroll Deductions Calculator or the official payroll tables to determine the correct amounts.

Getting these calculations wrong can result in penalties and interest charges.

Each charity needs a payroll programme account with the CRA.

This account tracks all deductions and remittances.

The remittance schedule depends on the charity's average monthly withholding amount, which determines whether it remits monthly, quarterly, or more frequently.

CPP and EI Contributions

Charities must deduct CPP at a rate of 5.95% on employee earnings between $3,500 and $68,500 for 2024.

A second additional CPP contribution (CPP2) applies at 4% on earnings between $68,500 and $73,200.

The employer also contributes a matching amount for regular CPP.

For EI, charities deduct premiums from employee wages and pay 1.4 times the employee's contribution.

The charity cannot classify regular employees as contractors to avoid these obligations.

The distinction between employee and contractor matters significantly.

If the CRA determines that a worker is actually an employee, the charity becomes liable for all unpaid CPP and EI premiums retroactively.

Issuing Tax Receipts for Compensation

Charities cannot issue charitable tax receipts for employee compensation.

Wages, salaries, and benefits are taxable employment income, not donations.

This rule applies even if an employee works for below-market rates.

An employee can make a separate donation to their employer charity outside of their employment relationship.

The charity can issue a receipt for this donation only if it meets CRA requirements for charitable gifts.

The donation must be voluntary with no expectation of benefit or compensation.

Best Practices for Setting and Documenting Compensation

Canadian charities need clear systems to set fair pay and keep proper records.

Following compensation policies, using salary surveys for market comparisons, and getting board approval protects organizations from CRA scrutiny while ensuring employees receive appropriate pay.

Compensation Policies and Procedures

Every charity should have a written compensation policy that explains how pay decisions get made.

The policy needs to outline who approves salaries, how often the organization reviews compensation, and what factors determine pay levels.

A strong policy includes conflict-of-interest rules.

Staff members cannot vote on their own salaries. Board members who receive compensation must step away from approval discussions.

The policy should explain how the charity defines reasonable compensation.

This means listing factors like job responsibilities, required skills, time commitment, and geographic location.

Organizations need to document these factors for each position.

Charities must update their compensation policies regularly.

The board should review and approve any changes.

All staff and board members need access to the current policy.

This transparency helps prevent misunderstandings and shows donors the organization manages funds responsibly.

Market Comparisons and Salary Surveys

Charities must compare their salaries to similar organizations.

Resources like CharityVillage and Imagine Canada publish salary surveys that show what comparable positions pay across Canada.

When benchmarking salaries, organizations should compare positions with similar budget sizes, geographic areas, and sectors.

A small rural charity cannot justify paying executive salaries that match large national organizations.

The CRA expects charities to document their market research.

Organizations should keep records of which salary surveys they used and how they applied the data.

This documentation proves compensation stays within reasonable ranges.

Charities need to consider multiple factors beyond base salary.

Benefits, vacation time, and retirement contributions all count as compensation.

The total package must align with what similar organizations offer.

Board Approval and Documentation

The board must formally approve all compensation decisions through recorded votes. Meeting minutes need to show who attended, who voted, and whether anyone declared conflicts of interest.

Documentation requirements include written job descriptions and employment contracts. Performance reviews should also be kept on file.

The charity should maintain records of the salary research used to justify compensation levels. These documents prove to the CRA that the organization followed proper procedures.

Organizations must file accurate reports about compensation. Registered charities report executive salaries on their T3010 returns.

All employees receive T4 slips showing their annual income and deductions. The board should review compensation annually.

This review checks whether salaries still match market rates and the organization's budget. Any adjustments need the same approval process and documentation as initial salary decisions.

Employment Contracts, Termination, and Severance

Charities in Canada must follow specific rules when hiring employees and ending employment relationships. Written employment agreements help protect both the organization and workers.

Proper termination procedures prevent costly legal disputes and regulatory penalties.

Employment Agreements and Contractor Distinctions

Charities benefit from creating written employment contracts with all workers, regardless of their position. These agreements clarify the rights and obligations of both parties from the start.

A written contract should include the job position, compensation details, vacation time, probationary periods, and termination provisions. The contract must meet the minimum standards set by provincial employment laws.

In Ontario, the Employment Standards Act of 2000 establishes minimum requirements for wages, overtime, vacation, statutory holidays, and termination notice. Contract terms cannot reduce these minimum standards.

Charities must also distinguish between employees and independent contractors. This distinction affects tax obligations, benefits, and termination requirements.

Without proper written agreements, ending a working relationship may lead to legal challenges. The Canada Revenue Agency reviews these classifications to ensure proper tax treatment.

Termination and Severance Obligations

Charities must provide adequate notice or pay when terminating employees without cause. Courts determine what counts as reasonable notice based on factors like length of service, age, and position.

These court-determined periods often exceed the minimum standards in employment legislation. Non-unionized charitable sector employees in Canada can receive up to 24 months of severance pay when terminated or laid off.

The Canada Labour Code governs termination rights for federally regulated workers. Provincial standards apply to most other charitable organizations.

A written termination clause in the employment contract establishes fixed costs for ending employment. This prevents uncertainty and expense from wrongful dismissal lawsuits.

The clause must comply with the Employment Standards Act and other relevant regulations to be enforceable.

Avoiding CRA Penalties for Non-Compliance

The Canada Revenue Agency monitors charitable organizations to ensure proper employment practices. Charities that misclassify workers as independent contractors when they should be employees face penalties and must pay back taxes, CPP contributions, and EI premiums.

Proper documentation protects charities from CRA scrutiny. Written employment contracts that clearly define the relationship help demonstrate compliance.

Organizations should maintain accurate payroll records and remit required deductions on time. Charities that fail to meet employment standards may lose their charitable status or face financial penalties.

The CRA reviews compensation arrangements to ensure they serve charitable purposes and don't provide undue private benefit. Regular reviews of employment practices help charities maintain compliance with tax and labour regulations.

Conclusion

Canadian charities can legally pay employees, including executives and staff members who perform operational work. All compensation must be reasonable, properly documented, and aligned with what similar organizations pay for comparable roles.

Directors typically serve as volunteers, though they may receive expense reimbursements for costs incurred while fulfilling their duties. Organizations need to follow specific rules set by the Canada Revenue Agency and provincial legislation.

This includes maintaining proper approval processes, benchmarking salaries against sector standards, and keeping detailed records of all compensation decisions. Charities that fail to comply risk losing their registered status, facing financial penalties, or damaging their reputation with donors and the public.

B.I.G. Charity Law Group helps Canadian charities navigate compensation rules and maintain compliance with federal and provincial regulations. Our firm provides guidance on developing salary policies, reviewing employment agreements, and ensuring all payments meet legal requirements.

Organizations can schedule a FREE consultation or contact our team at 416-488-5888. For more information about charity compensation and governance, visit CharityLawGroup.ca or email dov.goldberg@charitylawgroup.ca to discuss specific questions about paying employees in a Canadian charity.

Frequently Asked Questions

Charities in Canada can legally pay employees for their work, but specific rules govern board compensation, salary levels, and payment practices. The following questions address common concerns about charity employment and compensation in Canada.

Can a charity pay workers?

Yes, charities in Canada can pay workers for their services. Canadian registered charities employ millions of people and spend billions of dollars annually on employment compensation.

Workers provide essential services that help charities fulfill their missions. Charities must ensure they pay employees fairly while using donations appropriately.

The Canada Revenue Agency allows charities to pay reasonable compensation for work performed.

Can charity board members be paid in Canada?

Board members typically serve on a voluntary basis without compensation. The CRA expects board members to donate their time and expertise to support the charity's mission.

However, some exceptions exist in specific circumstances. A charity may reimburse board members for reasonable expenses incurred while performing their duties.

These expenses might include travel costs, meals, or accommodation related to board activities. The charity must keep proper records of all reimbursements.

In rare cases, board members may receive compensation if they provide services beyond their regular board duties. The charity must clearly document these separate roles and ensure the compensation is reasonable.

The CRA scrutinizes payments to board members closely.

What is considered a reasonable salary for charity staff?

A reasonable salary reflects the fair market value for similar positions in comparable organizations. The CRA evaluates whether compensation aligns with the work performed and the employee's qualifications.

Charities should base salaries on objective criteria rather than arbitrary amounts. Several factors influence what counts as reasonable compensation.

These include the employee's experience, education, and responsibilities. Geographic location, organizational size, and sector norms also affect salary determinations.

Charities should document how they determined compensation levels. This documentation helps demonstrate that salaries are reasonable if the CRA questions them.

Many charities conduct salary surveys or consult compensation studies to support their decisions.

Are there limits on how much a charity employee can earn?

No specific dollar limit exists for charity employee salaries in Canada. The CRA requires that compensation be reasonable but does not set maximum amounts.

Charities must justify that salaries reflect fair market value for the work performed. High salaries can raise concerns among donors and the public.

Charities should be prepared to explain and defend their compensation decisions. Transparency about salary practices helps maintain public trust and donor confidence.

The reasonableness standard applies to all forms of compensation. This includes base salary, bonuses, benefits, and other payments.

Charities must evaluate total compensation packages rather than just base salaries.

Can directors of a registered charity get paid?

The term "director" can refer to either board directors or executive directors. Board directors generally cannot receive payment for their board service.

Executive directors and other management staff can receive salaries for their work. An executive director serves as a paid employee who manages daily operations.

This position differs from a board director who provides governance oversight. Many charities employ executive directors or other senior staff with director titles.

Board directors who also serve in paid staff roles must maintain clear boundaries. The charity should document the separation between governance and employment duties.

This separation helps prevent conflicts of interest and ensures proper oversight.

What happens if a charity pays too much or too little?

Paying unreasonably high salaries can jeopardize a charity's registered status. The CRA may decide that excessive compensation does not further charitable purposes.

This could result in penalties, sanctions, or revocation of charitable registration.

Unreasonably low wages can also create problems for charities. Underpaying staff may violate employment standards legislation.

It can lead to high turnover and make it hard to attract qualified employees.

Charities must comply with all employment laws, including minimum wage requirements. They should also consider the cost of living and competition in their sector.

Balancing fair pay with fiscal responsibility helps charities keep effective operations and public trust.