The words “non-profit” and “charity” are often used interchangeably, but there are key differences between these two types of organizations. If you want to start a not-for-profit organization, it’s important to understand the differences between these two classifications so that you know where your efforts fall.
Canada designates your business as a for-profit, non-profit, or charity based on your purpose.
Charities exist to benefit their communities, and these include churches, synagogues, mosques, and secular organizations. Some charities help the poor, while others have educational purposes.
Canada classifies non-profits as organizations that exist for improving welfare, recreation, and pleasure, including everything from women’s shelters and playgroups for low-income kid to food banks and sports collectives.
For-profit and non-profit organizations have one major difference — for-profit organizations intend to turn a profit, while non-profits and charities don’t.
Charities must register with the Canada Revenue Agency. Non-profits do not have to register. However, if you want your organization to be a non-profit corporation, you need to apply to incorporate.
Registered charities can give receipts to donors, and donors can use these receipts to claim a deduction on their income tax returns.
The Canada Revenue Agency (CRA) offers a searchable online database that lets potential donors confirm your charity’s registration status. This helps donors feel comfortable in making donations as they receive official donation receipts they can use to for non-refundable income tax credits at tax time.
The ability to issue official receipts gives registered charities a big advantage over non-profit organizations and improves marketing strategies for qualified charities.
The government also offers a charitable donation tax credit calculator online, making it easy for prospective donors to figure out how much of a tax benefit they might receive.
In contrast, non-profits can accept donations, but they can’t issue receipts to their donors. Donors to non-profit organizations can’t claim tax deductions for their donations.
Neither charities or non-profits earn profit, so they don’t have to pay income taxes on an organizational level. However, individual employees have to report income earned from non-profits, and they have to pay income tax as with any other type of income.
If you run a registered charity, you must file Form T3010 (Registered Charity Information Return). If you run a non-profit, the organization must submit Form T1044 (Non-Profit Organization Information Return).
Non-profit corporations may need to file a T2 (Corporation Income Tax Return). These forms simply provide information to the CRA about your organization’s revenue and expenses for the year. All three of these forms must be submitted within six months of the end of your fiscal year.
Charities May Qualify for HST Rebates
If you register your organization as a charity and it pays harmonized sales tax (HST) on items you purchase, you may qualify for an HST rebate on what you pay. Your charity’s qualification depends on its location and where you do business. Keep in mind, only five provinces — New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, and Ontario — participate in the HST program.
If you have responsibility for your organization’s bookkeeping, you may have responsibility for filing the HST rebate paperwork so your organization recovers its funds. Whether you keep the books for charities or nonprofits, it’s important to understand and apply the appropriate tax laws for your organization. This ensures you use your available resources in the most effective way.
Both non-profit organizations and registered charities are barred from using money to personally benefit their members, founders or employees. Salaries are not covered by this rule; salaries are not considered to be personally profiting off an organization.
However, managers of non-profits and registered charities face a unique challenge with salaries: They have to find a balance between salaries that are competitive with for-profit organizations without putting undue strain on the financials of their own organizations.
In addition, registered charities are required to spend a certain amount of money every year on charity. The money can fund the organization’s own charitable work, or it may be donated to another registered charity. Charitable expenditures include monies that go directly to charity. They do not include overhead expenses, such as management, administration, fundraising costs or advertising expenses.
Non-profit corporations and organizations don’t have to deal with this disbursement quota.