The words “nonprofit” 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.
Both charities and nonprofits have an eye on helping people and supporting communities. However, charities focus on helping the poverty-stricken, advancing education or religion, or benefiting communities in other ways. Examples of charities include food banks, research institutions, missionary organizations, libraries and animal shelters. Nonprofits, in contrast, don’t necessarily have a charitable focus. Instead, they work to improve social welfare through pleasure, sport, recreation or other nonprofit endeavors. For example, curling clubs, festival organizations, amateur soccer leagues and other groups are often nonprofits.
Charities must register with the Canada Revenue Agency. Nonprofits do not have to register. However, if you want your organization to be a nonprofit 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. In contrast, nonprofits can accept donations, but they can’t issue receipts to their donors. Donors to nonprofit organizations can’t claim tax deductions for their donations.
Neither charities or nonprofits earn profit, so they don’t have to pay income taxes on an organizational level. However, individual employees have to report income earned from nonprofits, 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 nonprofit, the organization must submit Form T1044 (Non-Profit Organization Information Return). Nonprofit 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.
Both nonprofit 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 nonprofits 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. Nonprofit corporations and organizations don’t have to deal with this disbursement quota.