Charity or non-profit: which structure fits your organization

Understand that these are two different things

Registered charities and non-profit organizations both operate without the intention of making a profit, which is why people treat them as interchangeable. For tax purposes they are not. A registered charity is established and operated exclusively for charitable purposes and must apply to the CRA to be registered. A non-profit organization, or NPO, is an association, club or society organized and operated exclusively for social welfare, civic improvement, pleasure, recreation or another purpose except profit. The CRA states that an organization operating as a charity cannot be treated as an NPO.

Separately from tax status, an organization in Ontario usually also chooses a legal form, for example a not-for-profit corporation. That choice and the CRA status are different decisions, so keep them apart when you plan.

Start with your purpose and who benefits

Write one paragraph describing what the organization will do and for whom. Charitable purposes fall into the CRA’s categories of relief of poverty, advancement of education, advancement of religion, and other purposes that benefit the community. A hobby club, a social group or a members’ association generally fits the NPO description instead.

Then test the plan against the CRA’s list of factors that may prevent registration. These include making any part of income available for the personal benefit of members, paying dividends, paying someone a salary to sit on the board, supporting or opposing a political party or candidate, and carrying on a business that is not a related business. A related business is one substantially run by volunteers or linked and subordinate to the charitable purposes. Policy dialogue that furthers the charitable purposes is treated differently from partisan activity. Only a full CRA review can decide eligibility, so use these as screening questions rather than a verdict.

Compare receipts, spending and filings

The biggest practical difference is donation receipts. Only a registered charity, as a type of qualified donee, can issue official donation receipts. An NPO cannot, including for membership fees. If donors will expect tax receipts, an NPO structure will not meet that need.

Charities are issued a registration number, must spend a minimum amount each year on their own charitable activities or qualifying disbursements, and file Form T3010 no later than six months after the end of the fiscal period. NPOs are not registered with the CRA and have no disbursement quota. They may have to file Form T1044 if they received more than $10,000 of taxable dividends, interest, rentals or royalties in the period, if their total assets exceeded $200,000 at the end of the previous period, or if they filed in an earlier period. The T1044 is also due six months after the fiscal period ends, and a corporation may separately have to file a T2 return.

Do not read this as a reason to avoid charity status. Registration brings an annual filing and spending discipline that suits some organizations well and others poorly.

Look at income tax and GST/HST

A registered charity does not pay income tax. An NPO is generally exempt, but it may have to pay tax on property income or capital gains. NPOs also need to watch that no income is payable to or available for the personal benefit of members.

GST/HST treatment differs too. Most supplies made by charities are exempt and charities use a special net tax calculation, while few supplies made by NPOs are exempt. Both can claim a partial rebate of GST/HST on eligible purchases, but an NPO qualifies only if it receives significant government funding. If you plan to sell tickets, run programs for a fee or rent space, ask how each activity is treated before you set prices.

Add the Ontario corporate layer

Ontario not-for-profit corporations are generally governed by the Not-for-Profit Corporations Act, 2010. A corporation that passes no organizational by-law within 60 days of incorporation is subject to the standard organizational by-law. Corporations also file an annual return through the Ontario Business Registry, so add that filing to your calendar.

Ontario classes a corporation as a public benefit corporation when it receives more than $10,000 in a financial year from non-member donors or from government grants or similar assistance. That affects the financial review required: for example, a public benefit corporation with revenue of $100,000 or less can waive a review by extraordinary resolution, while one with $500,000 or more needs an audit. Check the current rules for your revenue level.

Ontario also permits a not-for-profit to earn a surplus from commercial activities if it is reinvested in its not-for-profit purposes. Ask a lawyer about governing documents, since this guide is about tax and bookkeeping, not legal drafting.

Decide and prepare your records

Pick the structure that matches your purpose, funding plan and tolerance for ongoing filings, and write down why. Set up separate bank accounts, a chart of accounts that tracks restricted funds and program costs, and a record of who approved major spending. If you expect to apply for charity status, ask your accountant what financial information the application will need. An organization that begins as an NPO and later wants charitable status should plan the change, not assume it is automatic.