Non-Profit vs Charity: What's the Difference and why does it Matter?
Updated: 6 days ago
Key Differences Between Registered Charities and Non-Profit Organizations
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.
How Do I Know if The Canada Revenue Agency Accepts My Charitable Organization?
To become a registered charity in Canada, your organization must apply to the Canada Revenue Agency (CRA) and meet strict criteria to obtain charitable status. The CRA carefully reviews applications to ensure that the organization operates exclusively for charitable purposes as defined by law. This means your organization must focus solely on activities such as relief of poverty, advancement of education or religion, or other purposes beneficial to the community.
The application process can take approximately six months or longer, depending on the completeness and clarity of your submission. It is important that your organization's governing documents clearly state its exclusively charitable purposes and that its activities align with these purposes. The CRA will also assess whether your organization meets the requirements to issue official donation receipts, which provide donors with tax benefits such as tax credits.
Once approved, your organization will receive a charitable registration number and must comply with ongoing obligations, including filing an annual information return (Form T3010) and adhering to spending requirements known as the disbursement quota. This quota mandates that a minimum amount of funds be spent annually on charitable programs or gifted to other registered charities.
If your organization is unsure about the application process or compliance requirements, seeking legal advice is highly recommended to ensure your charitable status application meets CRA standards and to maintain your organization's charitable status in good standing.
What Do the Key Differences Mean?
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.
FAQ
What is a Not For Profit Corporation?
A Not For Profit Corporation is a legal entity incorporated to operate exclusively for purposes other than generating profit for its members.
Unlike for-profit corporations, any surplus revenue generated by a Not For Profit Corporation must be reinvested into the organization to further its mission rather than distributed to members or shareholders.
These corporations often serve social, recreational, educational, or charitable purposes and can be incorporated federally or provincially. Incorporation creates a separate legal entity, limiting the liability of its members and allowing the organization to enter contracts, own property, and sue or be sued.
How Does a Charity Issue Charitable Donation Tax Receipts?
Registered charities in Canada can issue official donation receipts to donors once they have been approved and registered by the Canada Revenue Agency (CRA). These receipts are issued for donations made to the charity and allow donors to claim tax credits on their income tax returns.
To issue these receipts, the charity must maintain its registered status and comply with CRA rules, including using its resources exclusively for charitable activities.
The receipts must include specific information such as the charity’s registration number, the amount donated, and the date of the donation.
What are Group Structures in a NPO?
Group structures in a Non-Profit Organization (NPO) refer to the organizational frameworks that allow multiple related entities or groups to operate under a common umbrella.
These structures can include federations, coalitions, or networks where individual clubs, associations, or societies retain their own legal identity but collaborate for shared purposes.
Group structures help NPOs coordinate activities, share resources, and enhance their collective impact while maintaining the independence of each member group. Different group structures can be used depending on the goals, legal requirements, and operational needs of the NPO.
Can a Charity or NPO hire Contractors or Subcontractors for Projects?
Yes. A Canadian registered charity or non-profit organization can hire independent contractors and subcontractors for projects.
For registered charities, CRA guidance explicitly says a charity can hire a company, private contractor, consultant or other intermediary to carry out work on its behalf. CRA even gives examples such as hiring a private medical laboratory or a contractor to complete a project. Canada
Subcontracting is also permitted. CRA guidance specifically states that neither the Income Tax Act nor common law prohibits a charity from using subcontractor agreements.
The important caveat is that there are really two separate issues:
Is the person genuinely a contractor rather than an employee? That is where the employee-vs-independent-contractor CRA test comes in. CRA looks at the actual working relationship, including control, tools and equipment, financial risk, opportunity for profit, and whether the worker can hire or subcontract help. Simply calling someone an independent contractor is not enough if they function more like an employee.
If the contractor is carrying out the charity's charitable activities, is the charity properly overseeing its resources?A registered charity generally needs to maintain appropriate direction and control over activities carried out through an intermediary and keep records showing how its resources are being used. CRA recommends having a detailed written agreement.
So, for example, a charity could absolutely hire:
a construction company to renovate a facility
an independent marketing or SEO consultant
an accountant or lawyer
an IT contractor
a consultant to deliver part of a charitable program
a contractor who then hires subcontractors to perform parts of the project
The last one is specifically contemplated by CRA, provided the charity can still demonstrate appropriate oversight of its resources through its arrangement with the primary contractor. Canada
And an NPO can hire contractors too. The charity-specific "direction and control" rules relate to registered charities and their charitable resources; they aren't a general prohibition on nonprofits hiring outside businesses.
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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