2017-03-15 00:00:00TaxesEnglishHelp nonprofit or charitable organizations understand how Canadian tax laws affect their operation and relationship with donors.https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/06/Art-gallery-employees-at-nonprofit-business-discuss-tax-implications-while-posing-for-photo.jpghttps://quickbooks.intuit.com/ca/resources/taxes/charity-or-nonprofit-learn-the-implications/Is Your Organization a Charity or a Nonprofit: Learn The Tax Implications

Is Your Organization a Charity or a Nonprofit: Learn The Tax Implications

5 min read

If you plan on starting a Canadian nonprofit organization (NPO) you should understand the difference between a charity and a nonprofit. Although charities and nonprofits both typically operate in a nonprofit fashion, key differences exist between the two things. For example, if you keep records for a charity, you must register your charity and use the government-issued registration number when issuing receipts to your donors. Also, these differences have significant tax implications for both types of entities.

The Purpose Behind Your Organization

Canada designates your business as a for-profit, nonprofit, 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 nonprofits 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 nonprofit organizations have one major difference — for-profit organizations intend to turn a profit, while nonprofits and charities don’t.

Differences Between Nonprofit and Charity Scope

if you start a youth soccer league, you can opt to make it for-profit or nonprofit. Likewise, if you open a tutoring centre for illiterate adults, you can choose between a for-profit or a nonprofit organization. But in the case of the tutoring centre, you can take the additional step of registering your nonprofit organization as a charity. Even if you plan to start an organization that serves the community, you can’t claim it as a nonprofit if you intended to make a profit on your products or services.

Charity Organizations Must Register

If the government classifies your organization as a charity, you must register the organization. The government then issues your organization a registration number. Once you register your organization as charity, you can issue receipts when individuals make donations. Donors can then use these receipts to lower their tax burdens. Unlike charity organizations, nonprofit organizations can’t and don’t issue receipts for donations.

Increasing Your Donations

Many charities depend on donations to continue their mission, and they often depend on face-to-face contact with donors when soliciting funds. Today, your charity has more fundraising options. Setting up an online site for your donations can allow your charity to receive additional funding from sources you might never meet in person. Accessing these additional sources of income makes a great way to increase your operating budget and gives your organization the financial means for supporting the communities you serve.

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 nonprofit 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.

Nonprofits, Charities, and For-Profits at Tax Time

Generally, nonprofits and charities have exemption from income taxes and don’t pay them. But if your nonprofit organization earns capital gains by selling property, the CRA may collect taxes on those returns. If you operate a registered charity, your organization doesn’t pay taxes, even if it profits from capital gains. Because of this tax status, your registered charity organization gets to put all that money back into its mission when it earns extra funding through capital gains. The CRA taxes all the earnings of for-profit corporations and businesses.

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 responsiblity 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.

Earning Potential of NPOs and Charities

When you start a for-profit organization, no legal limit exists on the amount of profits you can earn. But with a nonprofit, your organization doesn’t operate to earn profits, although you can pay yourself and your employees salaries. Your salary should be in line with your skills and comparable to the market rate for that type of work. No laws limit how much charity or nonprofit executives can earn, and managers of many of the country’s top charities make well into the six figures. The income you pay yourself from your charity remains subject to personal income tax. If you just wish to earn a salary, a nonprofit structure may make sense, but if you want unlimited earning potential, a for-profit business proves the better option.

Independence or Shared Control

You can run a for-profit organization as a sole proprietor and make all the decisions yourself. If you crave ultimate control over your vision, you may prefer this structure. Generally with a nonprofit or registered charity, you need to share control of the organization. A board of directors or an advisory council helps guide the organization and lends legitimacy to your efforts.

Whether you establish a Canadian nonprofit or registered charity or opt for a for-profit business, your efforts can make the world a better place. Each option has advantages and disadvantages. It’s up to you to look at the particulars, including the tax impacts, and decide what works best for your situation and your vision. Whichever type of entity you choose, QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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