Charities and non-profit organizations (NPOs), both operate on a non-profit basis, meaning the organization's primary purpose is not to make a profit. There are, however, significant distinctions between the two types of organizations pursuant to the Income Tax Act (Canada) and Canada Revenue Agency (“CRA”) guidelines.
What is a registered charity?
There are three categories of registered charities in Canada; charitable organizations, public foundations, and private foundations. To be registered as a charity for the purposes of the Income Tax Act, an organization's application must be approved by the CRA. The CRA ensures that the organization’s purpose is exclusively charitable at law. As discussed in one of our previous posts, “What Purposes Qualify as “Charitable” in Canada?”, there are four accepted categories that charities must fall into. These categories are: relief of poverty, advancement of education, advancement of religion, or other purposes beneficial to the community. Aside from the purpose needing to be exclusively charitable, an organization’s activities must align with its purpose, while also being charitable. Registered charities are exempt from paying income tax and can issue donation receipts for income tax purposes.
What is a non-profit organization?
Non-profit organizations are associations, clubs, or societies, where the purpose can be anything other than making revenue. Some examples of purposes for NPOs would be social welfare, civic improvement, pleasure, or recreation. NPOs operate by providing services to the public and supporting social causes through its funding. The purpose of an NPO is often to improve a community or an individual’s quality of life, without requiring, or accepting profit. Some may rely on donations from the public to further their purpose, while others may rely on government grants. NPOs are generally exempt from paying income taxes as long as they do not undertake activities with a view of making profit. However, NPOs are not permitted to issue donation receipts for income tax purposes.
Some differences between charities and non-profit organizations
In addition to the above distinction between charities and non-profit organizations, the process of obtaining registered charity status is more onerous than becoming an NPO. To become a charity, an organization must apply to the CRA and be approved to obtain charitable status, while NPOs are not required to go through the same registration process. Charities will be issued a charitable registration number once approved by the CRA, and they will also receive a designation from the CRA as a charitable organization, public foundation, or private foundation. NPOs are not issued a charitable registration number or given a designation.
Another distinction is that registered charities have a spending requirement whereas NPOs do not. Any registered charity must spend a minimum amount on its own charitable activities each year, or on gifts for qualified donees. NPOs do not have any kind of spending requirement.
In addition to the differences noted above with respect to income tax exemptions and donations receipting, there are differences between charities and NPOs with respect to GST/HST payments, and annual returns. With respect to GST/HST, most of the requirements are the same, however, charities are prescribed a specific way to calculate net tax owing. Finally, with respect to annual returns, charities must complete an annual information return (Form T3010), while NPOs do not.
Conclusion
Registered charities and NPOs share some similarities, such as being generally exempt from income taxes. However, there are many differences between the two. The most significant differences that we have outlined above are that charities may only be registered if their purposes are exclusively charitable at law, and that registered charities are permitted to issue donation receipts to donors. In summary, the requirements for qualifying for and maintaining charity registration are higher than those for an NPO. However, registered charities enjoy a major benefit that NPOs do not: the ability to entice donors with donation receipts. Outsiders Law has extensive knowledge when it comes to charities and NPOs. If you have more questions about the distinction between a charity and nonprofit, or are looking to start the registration process, contact one of our lawyers! We look forward to making the process far less daunting for you.
Disclaimer
The information provided in this article is for educational purposes only. Nothing contained herein should be considered as legal, professional, or tax advice. Please contact us directly if you require legal assistance.
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