In many ways, small businesses and nonprofit organizations are similar. Often, both will use the corporate form for their day-to-day operations, and many have similar business activities. From a practical standpoint, there is no real difference between a nonprofit organization operating a concession stand at your local hockey rink and a small restaurant that is run by a private for-profit company. At tax time, however, there are some major differences.
Distinguishing Nonprofit Organizations From Small Businesses
The distinction between a nonprofit organization and a small business does not rest on their activities. In fact, both can engage in commercial activities. The key distinction is the motivation behind these activities. A for-profit small business operates with a view to enriching its owners or shareholders. In contrast, a nonprofit organization is organized and operated solely for social welfare, civic improvement, pleasure, recreation or generally any other purpose except profit. A charity is also a distinct organization under the Income Tax Act. Charities need to be registered as such and can issue tax receipts to donors.
To be considered as not-for-profit, an organization must engage in activities with a view to reaching a specific goal. It can, and strives to, achieve profits, but these are used to further the goal, not enrich the organization’s members. Continuing the example above, if the concession stand is operated by a local minor hockey association and the profits go to providing equipment for players or lowering the cost of registration for parents, then the organization is considered a nonprofit.
Nonprofit Organization Annual Information Return
Nonprofit organizations do not pay income taxes, but that does not mean that they do not have any obligations at tax time. First, many will need to file Form T1044. This form contains information about the organization’s assets and liabilities, its books and records, the amounts it has received during the year, and the remuneration of its key employees. The annual return is the basic document that the Canada Revenue Agency uses to determine if a nonprofit organization is compliant with the Income Tax Act.
An organization must file a return if it received taxable dividends, interest, rentals or royalties totaling more than $10,000 in the year, its assets are more than $200,000, or it had to file a return previously.
Annual Tax Returns for Small Businesses and Corporations
Small businesses also need to file annual returns, but they also need to pay taxes. In the case of a sole proprietorship, the income is included in the owner’s personal income tax return.
Small businesses operating as corporations must prepare and file a separate return, the T2 Corporation Income Tax Return. This is the standard tax return applicable to all corporations. It must contain all of the necessary information for the CRA to assess the company’s tax liability.
Not-for-profit organizations must also file T2 returns if they are incorporated. This does not mean that they will pay taxes, but their income and activities still need to be declared to the CRA.