Many organizations are becoming increasingly active in philanthropic activities and engagement. The range of causes looking for support is huge. Sector Source, a project run by Imagine Canada, reports over 170,000 charities and not-for-profits in Canada. Participating in or operating a not-for-profit or charity provides people with the opportunity to make social contributions on many levels. When it comes to managing the financials of that involvement, there are some key differences between not-for-profits and charitable organizations. Here we break down the key points.
What’s the difference?
In Canada, charities are registered with the CRA and can take the form of a charitable organization, public foundation, or private foundation. Their purpose must fall into one of four categories: the relief of poverty, the advancement of education, the advancement of religion, and other purposes that benefit the community.
To register a charity, there is a four-step process with the Government of Canada including a separate application with the CRA which requires the T3010 Registered Charity Information Return. Applications must be approved by the CRA, and once approved they will receive a charitable tax number.
With a charitable tax number, they can issue official donation receipts for income tax purposes. Charities are required to spend a minimum amount of their resources on their charitable activities. Charities are considered tax-exempt, though they must pay GST/HST.
Examples of charities include food banks, colleges, places of worship, animal shelters.
A not-for-profit organization refers to associations, clubs, or societies that are “organized and operated exclusively for social welfare, civic improvement, pleasure, recreation, or any other purpose except profit.”1 They are not allowed to operate exclusively for charitable purposes and do not have to go through a registration process.
Registering a not-for-profit does not mean that it automatically gets charitable status. Not-for-profits can be registered as organizations or corporations. To transition from a not-for-profit to a charity will require a new statement of purpose and in the case of a corporation may require amendments to the articles.
Incorporated not-for-profits are “generally tax-exempt from paying income tax, but may have to pay income tax on property or capital gains”.2 Not-for-profits do not receive a charitable tax number and are not able to issue official donation receipts. They do have to pay GST/HST and may have to file a T2 return, Form T1044, or both within 6 months of their fiscal year-end. They also have no annual minimum spend on their activities.
Examples of not-for-profits include sports clubs, hobby clubs, amateur sports organizations, and membership associations.
Two more things to note
Both types of organizations will have to issue financial statements based on revenue levels and types of revenues.
While both will have to pay GST/HST, there are a few differences.
- There are public service body rebates available for charities but not necessarily not-for-profits
- Most supplies made by charities are exempt, where only a few are exempt with not-for-profits
- Charities’ net tax is calculated using the net tax calculation for charities, while not-for-profits use the normal way
Whether you are considering donating or creating a charitable or not-for-profit organization you will want to ask some questions about the purpose, desired outcome, tax implications, and goals. Both types of organizations can be closely scrutinized and will want to ensure their financial reports are current and accurate through audits, reviews, or compilation engagements. Our team is here to help you navigate your philanthropic goals and tax planning.