The terms “nonprofit organization” and “charity” are often used interchangeably in day-to-day conversation. However, the two are very different legally and from a tax standpoint. While it is true that all charities are not for profit, the reverse is not true; many nonprofit organizations are not charities.
A nonprofit organization can take on many forms. It can be a club, a society, or an association, whether it’s incorporated or not. Its constituting documents and its daily operations may have any purpose except profit. For example, it can be created to enhance social welfare, civic improvement, pleasure, or recreation. The key element to be considered a nonprofit organization is that none of the activities of the organization can be for the financial benefit of its members. Common examples of nonprofit organizations include local sports leagues, art appreciation societies, and festivals. While many pursue activities that are charitable in the common sense of the term, they are not registered as charities and cannot issue tax receipts for donations that they receive. Being a nonprofit organization does not mean that the group cannot pursue commercial activities; indeed, many do. As long as the profits are used to further the goals of the organization, as opposed to enriching members, the organization is exempt from income tax. Nonprofit organizations must pay GST/HST on their purchases like anyone else. If they have sufficient commercial activities, they must register for the GST/HST and charge it to their clients.
A charity can also take on many legal forms, but it must be registered with the Canada Revenue Agency to be able to emit tax receipts for the donations it receives. To be registered, the charity must be established and operated solely for charitable purposes. The Income Tax Act stipulates that the acceptable charitable purposes are the relief of poverty, the advancement of education, the advancement of religion, and other purposes beneficial to the community. Common examples include food banks, animal shelters and places of worship. Registered charities are more strictly regulated than regular nonprofit organizations. For example, they must annually spend a minimum amount, called a disbursement quota, of the funds they raise on charitable activities. Also, they must file an exhaustive annual return with the CRA showing that they meet the various legal criteria on an ongoing basis. Even though they must file this return, charities are exempt from income tax. In general, charities must pay GST/HST on their purchases. However, they have a special regime whereby they may claim a partial rebate of GST/HST paid on eligible purchases. Under the GST/HST, most supplies made by charities are deemed to be exempt supplies, so they often do not need to charge the tax to their clients. If they are registered for the GST/HST and they make both taxable and exempt supplies, there is a special simplified calculation that determines the net tax to be remitted. Nonprofit organizations and charities both solicit the public for donations. When making a donation, it’s important to understand the difference between the two, since the tax consequences are very different.