Although nonprofit organizations and charities aren’t run for personal profit, they still deal with a lot of financial details. Just like a business, these organizations have to account for revenue, expenses, payroll, and other financial details. If you’ve been hired by a nonprofit to do bookkeeping or tax prep, you need to understand the Canada Revenue Agency’s rules and expectations.
Difference Between Charities and Nonprofit Organizations
The CRA lays out the difference between charities and nonprofit organizations: A nonprofit is devoted to social welfare or civic improvement, but a charity must be run exclusively for charitable purposes. Additionally, charities have to register with the CRA, while nonprofits don’t.
Both charities and nonprofits are exempt from income tax, but nonprofits may have to pay taxes on capital gains. If you represent a nonprofit that may qualify as a charity, you may want to help the organization register with the CRA. In addition to avoiding capital gains tax, registering as a charity also means that the organization can give out receipts for charitable donations, and donors can claim deductions on their tax returns. Those tax deductions can make it easier to attract potential donors.
Filing Tax Returns for Nonprofits
Your nonprofit clients may have to submit Form T1044 (Non-Profit Organization Information Return). The CRA only requires nonprofits to file this return if they have over $10,000 in dividends, interest, rental income, or royalties in the tax year, or if they have more than $200,000 worth of assets. On top of that, if you file one year, you have to file the next year. Help your clients understand whether they need to file, so they can prepare.
Additionally, if your nonprofit clients have to file the T1044, they may also have to file a T2 (Corporation Income Tax Return). An organization may be able to submit the short version of this return if it only has a presence in one province or territory. If an organization owns a dining, recreational, or sporting facility, it may also need to file a T3 (Trust Income Tax and Information Return).
Filing Tax Returns for Registered Charities
Registered charities have to file Form T3010 (Registered Charity Information Return). You must include detailed financial statements with this return as well as a description of the charitable activities and information about the charity’s trustees and directors. If a charity’s revenue exceeds a certain threshold, you may have to submit additional documentation.
Recordkeeping Tips for Nonprofits
Whether your clients are registered charities or nonprofit organizations, they need to keep clear, consistent records. If a nonprofit fails to track its revenue, it may exceed the $10,000 threshold without realizing it and forget to file a return. Similarly, if a charity doesn’t track all of its financial activities, it may lose its registered status with the CRA. Help your clients find and implement tools that make this process easier, and help them understand the importance of quality bookkeeping.
If you represent nonprofit clients, you need to understand the tax rules and regulations so you can give these clients timely advice. As you gain more knowledge in this area, you may want to specialize in helping nonprofits and charities. Serving a niche clientele can be a great way to grow your accounting business.