How Do Charities Operate in Canada?

Registered charities in Canada do more than raise funds — they operate within a detailed legal framework that governs how they carry out their work, how they spend their money, and how they stay compliant with the Canada Revenue Agency (CRA). Understanding how charities function is useful for donors, board members, volunteers, and anyone thinking about starting a charitable organization.

This article explains the legal structure that governs charity operations in Canada, including the two operating models, the rules around grants to non-qualified donees, T3010 filing requirements, and the disbursement quota.

What Is a Registered Charity in Canada?

Not every nonprofit is a registered charity. This section explains the legal distinction and why it matters for how an organization operates.

A registered charity is an organization that has been approved by the CRA to operate exclusively for charitable purposes. Its legal status flows from the Income Tax Act (ITA), specifically paragraph 149(1)(f), which exempts registered charities from paying income tax.

This is different from a nonprofit organization, which is tax-exempt under paragraph 149(1)(l) of the ITA but cannot issue official donation receipts. Registered charities can issue official donation receipts, which give donors access to tax relief under the ITA.

Here is how the tax benefit works for donors:

• Individuals claim a non-refundable tax credit under ITA s. 118.1. This credit directly reduces the amount of tax owed — it does not reduce taxable income.
• Corporations claim a deduction under ITA s. 110.1. This reduces their taxable income.

The distinction matters. A tax credit and a tax deduction are not the same thing, and it is important for charities and donors to understand the difference.

The Two Ways a Registered Charity Can Carry Out Its Work

Canadian charity law recognizes two distinct operating models. Knowing which one applies — or how both can be used — is essential for governance and CRA compliance.

Under the ITA and CRA guidance, a registered charity can carry out its charitable purposes in two ways.

Model 1: Carrying Out the Charity's Own Activities

The first model is direct delivery. The charity carries out its own programs through its staff, volunteers, or contractors. The work is done under the charity's direction, in line with its stated purposes.

A charity can also carry out its own activities through an intermediary — for example, a local partner organization. Under this model, the charity must exercise full direction and control over how its resources are used. This is a strict legal requirement under CRA Guidance CG-002. The charity must make ongoing decisions on significant matters including how the activity will be carried out, who will benefit, what the funds will be spent on, and when the activity will begin and end. Delegating day-to-day operating decisions to an intermediary is permitted, but strategic direction and accountability for outcomes must stay with the charity at all times.

It is important not to confuse this model with the separate grantmaking pathway introduced by the 2022 federal budget. The 2022 amendments to the ITA and CRA Guidance CG-032 created a new option — qualifying disbursements to non-qualified donees — that operates under a different accountability framework. If a charity uses the Own Activities model with an intermediary, direction and control applies in full. If it uses the CG-032 grantmaking pathway instead, the tiered accountability requirements described below apply. These are two distinct models, and choosing one does not reduce the obligations of the other.

Key points for this model:

• The charity remains accountable for the outcomes, not just the process.
• Agreements with intermediaries should document the scope of work and how outcomes will be tracked.
• This model does not require the intermediary to be a registered charity.

Model 2: Making Qualifying Disbursements

The second model is grantmaking. Instead of delivering programs directly, the charity transfers funds to another organization — either a qualified donee or a non-qualified donee. These transfers are called qualifying disbursements under ITA s. 149.1(1).

This model became significantly more accessible after the 2022 federal budget expanded the rules to allow charities to grant to non-qualified donees without needing to treat every grant as a direct activity.

Gifts to Qualified Donees

Transferring funds to a qualified donee is the simpler of the two grantmaking pathways. Here is what qualifies.

A qualified donee is an organization recognized under ITA s. 149.1(1) as eligible to receive charitable gifts. When a registered charity gives to a qualified donee, it does not need to apply the same level of accountability documentation required for non-qualified donee grants.

Organizations that qualify as qualified donees include:

• Other registered charities
• Registered Canadian amateur athletic associations
• Registered national arts service organizations
• Canadian municipalities
• Certain foreign organizations that have received qualifying donee status from the CRA

Gifts to qualified donees count toward a charity's disbursement quota (explained below). They are generally lower-risk from a compliance standpoint because the recipient is already registered with and accountable to the CRA.

Grants to Non-Qualified Donees

Since 2022, registered charities can grant to organizations that are not registered with the CRA — but the process requires meeting specific eligibility conditions and accountability standards set out in CG-032.

A non-qualified donee is any organization that does not appear on the CRA's list of qualified donees. This can include community groups, Indigenous organizations, social enterprises, and foreign nonprofits.

Before 2022, charities had to treat every arrangement with a non-qualified donee as their own activity — requiring tight control over how the funds were used. The 2022 amendments to the ITA and the release of CRA Guidance CG-032 changed this. Charities can now make direct grants to non-qualified donees as qualifying disbursements, provided they follow the CG-032 framework.

The Three Eligibility Conditions

Under CG-032, a charity must satisfy three conditions before making a grant to a non-qualified donee:

1. Charitable purpose — The grant must be used exclusively for activities that advance the charity's own charitable purposes.
2. Accountability — The charity must take reasonable steps to ensure the grantee is accountable for how the funds are used.
3. Not a tax shelter — The grant must not be part of a gifting tax shelter arrangement.

The Three-Tier Accountability Framework

CG-032 sets out a tiered accountability framework, and grant value is the starting point — but it is not the only factor. The CRA applies a holistic Risk Assessment Matrix when evaluating whether a charity's due diligence is adequate. That matrix considers factors such as the grantee's location (including operating in higher-risk jurisdictions), the grantee's governance structure and experience, the nature of the activity being funded, and the charity's own track record with grantmaking. A grant that falls below a dollar threshold may still require more robust documentation if other risk factors are present. Charities should treat the tiers below as a baseline, not a ceiling.

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These thresholds apply per grant, per grantee, per year. Charities making multiple grants to the same grantee should aggregate the amounts to determine which tier applies.

For a complete breakdown of the CG-032 framework and due diligence tools, see B.I.G.'s full article on CRA due diligence for grants to non-qualified donees. 

Annual Compliance: T3010, Disbursement Quota, and Record-Keeping

Staying registered as a charity in Canada means meeting ongoing obligations every year. Here are the three most important ones.

Registered charities do not just apply once and stay registered automatically. They must meet ongoing compliance requirements to maintain their charitable status with the CRA.

Filing the T3010 Registered Charity Information Return

Every registered charity must file a T3010 Registered Charity Information Return with the CRA each year. The deadline is six months after the end of the charity's fiscal year.

Missing this deadline has consequences. The CRA can impose financial penalties and, in serious cases, revoke a charity's registered status under ITA s. 168. Revocation means the charity loses its ability to issue official donation receipts and may face a revocation tax on its remaining assets. For more detail on what can happen, see what happens if a registered charity doesn't meet its obligations. 

What the T3010 covers:

• Revenue, expenses, and assets
• Programs and activities carried out during the year
• Grants made to qualified donees and non-qualified donees
• Disbursement quota calculation (Schedule 6, line 5900)
• Compensation paid to directors and employees

The Disbursement Quota

The disbursement quota (DQ) is a mandatory annual spending requirement. It exists to ensure that registered charities are actively using their assets for charitable work rather than accumulating them.

As of the 2022 federal budget, the tiered DQ rates are:

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These percentages apply to the charity's investment assets — essentially property not used directly in charitable activities. The DQ is calculated on Schedule 6 of the T3010 (line 5900).

Example: A charity with $2,000,000 in investment assets would have a DQ of $35,000 on the first million (3.5%) plus $50,000 on the second million (5%), for a total DQ of $85,000.

A charity that fails to meet its DQ can request additional time from the CRA or face penalties. Charities that consistently fall short risk losing their registered status.

Books and Records

Under the Income Tax Act and CRA guidance on books and records, registered charities must keep accurate books and records for a minimum of six years from the end of the last tax year to which they relate. This includes financial records, donation receipts, grant agreements, and board minutes. This includes financial records, donation receipts, grant agreements, and board minutes.

The CRA can audit a registered charity at any time. Having organized, complete records is the first line of defence.

Can Charities Pay Their Staff and Directors?

This is one of the most common questions B.I.G. receives from charity founders. The short answer is yes — with limits.

Registered charities can pay reasonable salaries to employees, including executive directors and program staff. This is permitted under the ITA as long as the compensation is reasonable for the work performed.

Directors and officers of a charity are a different matter. Under most charitable governance structures — including the Canada Not-for-profit Corporations Act (CNCA) and the Ontario Not-for-Profit Corporations Act (ONCA) — directors cannot be paid for their role as directors unless the charity's governing documents explicitly allow it.

Charities must report all compensation paid to employees and directors on the T3010 each year. The CRA reviews this information as part of its compliance monitoring.

If a charity pays excessive or unreasonable compensation, it risks triggering a CRA audit and potentially losing its registered status.

How Charities Raise Funds

Donations are the most visible source of charity funding — but not the only one. This section explains the main funding sources and the rules that apply.

Registered charities rely on several types of funding to carry out their work:

• Individual donations — Donors receive official donation receipts for tax credit purposes under ITA s. 118.1.
• Corporate gifts — Corporations can deduct charitable gifts under ITA s. 110.1.
• Government grants — Charities frequently receive grants from federal, provincial, and municipal governments. These do not require receipts but must be reported on the T3010.
• Foundation grants — Private and public foundations can make grants to registered charities and, since 2022, to qualifying non-qualified donees.
• Fundraising revenue — Events, lotteries (subject to provincial gaming laws), and campaigns generate additional income.

Charities must keep fundraising costs proportionate to fundraising revenue.  The CRA monitors fundraising ratios and may raise concerns if a charity's costs appear excessive relative to its charitable activities.

Frequently Asked Questions

Common questions about how registered charities operate in Canada.

What is the difference between a registered charity and a nonprofit organization?

A registered charity is approved by the CRA under ITA para. 149(1)(f) and can issue official donation receipts. A nonprofit organization is tax-exempt under para. 149(1)(l) but cannot issue receipts. Not all nonprofits are charities, and not all charities are structured as corporations.

How does a charity carry out its activities?

A charity can carry out its activities directly through its own staff and volunteers, or through intermediaries while maintaining accountability for outcomes. It can also make qualifying disbursements — grants to qualified donees or non-qualified donees — under ITA s. 149.1(1) and CG-032.

What is the disbursement quota?

The disbursement quota is the minimum amount a registered charity must spend each year on charitable activities or qualifying disbursements. The rate is 3.5% on investment assets up to $1,000,000 and 5% on amounts over $1,000,000. It is calculated on Schedule 6 of the T3010.

What is a qualifying disbursement?

A qualifying disbursement is a payment made by a registered charity that counts toward its annual spending requirement. It includes grants to qualified donees, grants to non-qualified donees that meet the CG-032 conditions, and expenditures on the charity's own activities.

Can a charity pay its employees?

Yes. Registered charities can pay reasonable salaries to employees. Directors generally cannot be paid for their director role unless the governing documents permit it. All compensation must be reported annually on the T3010.

When does a charity have to file its T3010?

The T3010 Registered Charity Information Return must be filed within six months of the end of the charity's fiscal year. Late filing can result in penalties and potential revocation of registered status under ITA s. 168.

What happens if a charity loses its registered status?

If the CRA revokes a registered charity's status, it can no longer issue official donation receipts. It may also be subject to a revocation tax on remaining assets. The charity would need to reapply to regain registered status — a process that can take significant time.

Working With a Charity Lawyer

Understanding how charities operate in Canada is just the beginning. Putting that knowledge into practice — structuring compliant grant agreements, meeting disbursement quota obligations, and staying on the right side of CRA requirements — is where experienced legal guidance makes a real difference.

B.I.G. Charity Law Group works exclusively with registered charities and nonprofits across Canada. From applying for charitable status to navigating CG-032 grantmaking rules and T3010 compliance, the firm offers practical, plain-language legal advice grounded in current ITA requirements and CRA policy.

Ready to get your charity on solid legal footing? Book a free consultation with us or reach the team directly at dov.goldberg@charitylawgroup.ca or call 416-488-5888. Visit CharityLawGroup.ca to learn more.

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