The terms non-profit and charity are often used interchangeably although the entities are not necessarily the same. “Non-profit” usually describes social clubs, professional groups, recreational & sporting clubs, fraternal organizations and trade groups. “Charity” usually refers to organizations that promote religious, educational or scientific endeavours or those providing some form of care or help to disadvantaged or unfortunate members of society.
The usual reason for carrying on business as a non-profit or charitable organization is to take advantage of exemption from the payment of income tax.
Non-Profit Organizations
Non-profit organizations are created for the purpose of carrying on activities of benefit to the community and are of a patriotic, charitable, philanthropic, religious, professional, sporting or athletic nature. Non-profit organizations can operate as a corporation, a trust, a partnership or an unincorporated association. The basic types of non-profit organizations are associations (ratepayers’ associations, business or trade associations, community associations), sporting and athletic organizations; social clubs; service clubs (Rotary, Lions, Kiwanis & Optimist) and charitable organizations.
A non-profit organization is not required to register under the Income Tax Act in order to qualify for tax exemption, but it must meet the following criteria:
- must be a club, society or association,
- cannot be a charity as described in s. 149.1(1) of the Income Tax Act,
- must be organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except for profit, and
- cannot have any part of its income payable to or available for the personal benefit of the proprietors, shareholders or members (unless paid to an amateur athletic association).
If the Minister determines that the organization is, in fact, a charity, then it must register as one or it will not be exempt from income tax.
Upon dissolution, a non-profit organization may distribute its remaining assets among its members unless prohibited from doing so by its by-laws.
Charitable Organizations
Charities are a special category of non-profit organization with additional tax incentives available to them under the Income Tax Act if they are “registered”. Registration entitles the organization to relief from income tax and capital gains taxes and allows it to provide donors with charitable receipts.
To qualify as a charity, the organization’s purpose must be exclusively “charitable” and must fall into one or more of the following categories:
- the relief of poverty;
- the advancement of education;
- the advancement of religion; and/or
- the advancement of other charitable purposes which benefit the community as a whole.
In addition, object or purposes of the charity must promote a public benefit of a nature recognized by the courts.
A charity may apply to the Canada Revenue Agency for registration and, once registered, is exempt from the requirement to pay income tax. In addition, a charitable organization can issue charitable donation receipts for tax purposes. Generally, a registered charity also has to disburse 80% of the funds for which it issued charitable donation receipts.
Upon dissolution a registered charity is required to distribute its remaining assets to other registered charities.
Summary
- Registration – a charitable organization must register with Canada Revenue Agency in order to be exempt from income tax; a non-profit organization need not register.
- Tax implications – neither non-profit nor charitable corporations are required to pay income tax.
- Charitable Donation Receipts – only charitable organization can issue charitable donation receipts.
- Disbursement of Earnings – a registered charity must disburse 80% of the funds for which it issued charitable donation receipts; a non-profit organization is not so restricted.
- Dissolution – upon dissolution, a registered charity is required to distribute its remaining assets to other registered charities; a non-profit organization may distribute its remaining assets among its members unless prohibited from doing so by its by-laws.