Although a Non-Profit organization (NPO) may be thought to be the same as a charitable organization there are significant differences.
A NPO can either be incorporated or not incorporated. A NPO is a club, society, or association that is not a charity. It is organized and operated solely for:
■ Social welfare
■ Civic improvement
■ Pleasure or recreation
■ Any other purpose except profit
No part of the income of the organization can be payable to or otherwise available for the personal benefit of any proprietor, member, or shareholder, unless the organization’s primary purpose was to promote amateur athletes in Canada.
A NPO is exempt from tax on all or part of its taxable income for a fiscal period, if it meets all of the above requirements for that period. However a NPO may be taxable on property income (interest, dividend, rent) or on capital gains.
A NPO cannot issue tax receipts and therefore any payments to a NPO cannot be claimed on an individual’s personal tax return as a donation.
The type of return that NPO has to file depends on whether or not the organization is incorporated.
An NPO that is incorporated in Canada has to file a T2 corporation income tax return.
In addition, the organization may be required to file a T1044 “Non-Profit Organization (NPO) Information Return” if:
• It received or was entitled to receive taxable dividends, interest, rentals, or royalties totaling $10,000 or more
• The total assets of the organization exceed $200,000
• It had to file a T1044 return previously
If the NPO’s main purpose is to provide dining, recreational or sporting facilities for its members, its property may be considered to be property of a trust, in which case the NPO may have to file a T3 trust return.
Charities must apply to the Canada Revenue Agency for charitable status. The courts have identified four categories of charity:
• Relief of poverty
• Advancement of education
• Advancement of religion
• Certain other purposes that benefit the community in a way the courts have said is charitable
An organization’s purposes must fall within one or more of these categories to be considered for registration as a charity.
A charity must be established and operate exclusively for charitable purposes. Once charitable status is approved, the organization can issue tax receipts for donations. A charity is exempt from income tax and is not required to file a T2 corporation income tax return. However a charity is required to file a T3010 Registered Charity Information Return.
A charity is required to spend a minimum amount each year on its own charitable activities or on gifts to other registered charities (disbursement quota). This is calculated based on the value of the charity’s property not used for charitable activities or administration. This property includes bank accounts, investments, as well as land and buildings.
Although both NPOs and Charities are exempt from income tax, they may be required to register for and charge goods and services/harmonized sales tax (GST/HST) depending on the services provided.
Related page: Tax Services