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An internal division is a branch, section, parish, congregation or other division of a Canadian registered charity (the head body) that is permitted to receive and receipt donations on its own behalf. Although it has its own charitable registration number, an internal division operates as an extension of its head body, acting under authority of its head body, pursuant to the governing documents of its head body, and furthering the charitable purposes of its head body.
Historically, the charitable registration number of an internal division was comprised of the same nine-digit business number as its head body and contained a few additional digits at the end to identify it as an internal division. As previously reported, the Canada Revenue Agency (“CRA”) announced that it would be changing its numbering system for internal divisions to provide each internal division with its own nine-digit business number distinct from its head body. CRA has begun issuing the new numbers, a process that will continue into fall 2018. In a new webpage, CRA has provided information on how this change will affect internal divisions going forward. The changes are minimal. Specifically, CRA states:
- Internal divisions are not required to take steps to receive their new business numbers – CRA will send a letter listing the business summary of all of their updated accounts, including the new number;
- The change in business number will not affect the registration requirements for internal divisions (registration requirements are discussed below);
- Internal divisions will not need to make any changes to their governing documents;
- Internal divisions must begin using their new business numbers as soon as they are issued (note: this means that internal divisions must update their charitable donation receipts to reflect the new number. Where donation receipts are pre-printed, the internal division may simply cross out the old number and insert the new number manually);
- CRA will accept as valid donation receipts bearing the old business number, provided that the receipt was issued before the date of the new business number; and
- T3010 returns will need to be filed using the new business number, and there is no requirement to file a T3010 for the period before the internal division received its new business number.
The change to the business numbers is welcomed in the sector as it forms part of the IT modernization initiative of the Charities Directorate and will assist internal divisions in accessing CRA’s new online services, which are being developed currently.
In addition to its new webpage, CRA has recently released Guidance CG-028 – Head bodies and their internal divisions (the “Guidance”), which clarifies CRA’s requirements for the charitable registration of both head bodies and their internal divisions. With respect to head bodies, the Guidance states that in order to be considered a head body, an organization must demonstrate its authority over its internal division(s), through governing documents that permit it to:
- create and close internal divisions;
- own the property of the internal division;
- appoint and control the board of the internal division;
- approve the budget of the internal division; and
- exercise a measure of control over the activities of the internal division.
To register as an internal division, an organization must submit to CRA the following:
- Letter of Good Standing from the head body (i.e. on letterhead of the head body) that includes the following information,
- the date of the letter
- the name of the internal division
- the legal name of the head body as it appears on its governing document
- the operating name of the head body if it is different from the legal name
- confirmation that the applicant is an internal division of the head body
- the date the internal division was established
- the name, position and signature of a director, trustee, or like official who is permitted to sign for the head body
- Governing documents of the head body, including constating documents (i.e., Letters Patent, Articles of Incorporation, etc.), charter documents (i.e., by-laws) and any policies that outline how the head body will govern its internal division(s).
Once registered, internal divisions are subject to certain rules and reporting requirements. Specifically, internal divisions must:
- file their own T3010, Registered Charity Information Return; and
- maintain a fiscal year-end that is the same as its head body.
Importantly, the head body must maintain charitable status in order for its internal division(s) to retain registered status.
The Guidance includes a helpful chart setting out the similarities and differences between a traditional registered charity, a head body, and an internal division as well as a list of scenarios to help organizations determine whether they are internal divisions.
The establishment of internal divisions has many benefits. Registering divisions as internal divisions of a head body is a particularly efficient way to manage and retain control over those divisions. A corporate structure that provides for a head body and internal divisions ensures that the various divisions will not (and, in fact, cannot) experience mission drift or engage in activities that are not aligned with the mandate of the head body. Further, while each internal division is required to file its own T3010 tax return, they would not be required to attend to the annual corporate return filings prescribed by various corporate statutes. They would not be required to hold annual meetings, prepare individual audited financial statements or make annual appointments. The head body, however, will be required to apply for extra-provincial registration in every province where it has an internal division outside of its incorporating jurisdiction. Although this requirement may seem burdensome for the head body, keeping administration within one entity helps to ensure that filings are done uniformly and on time. Additionally, separate charitable registration numbers for each internal division can provide comfort to donors that their donations will be used to fund the activities of the particular internal division to which they donate and that the funds will be used in activities within the geographic region of that division.
Miller Thomson’s Social Impact Group has expertise in providing advice on and obtaining registration for internal divisions. If your organization is considering the establishment of internal divisions, we would be pleased to assist.