Taxes for Nonprofit Organizations and Corporations

Aiming for altruistic ideas rather than profits, nonprofit organizations (NPOs) include groups, societies and clubs that operate for the benefit of society. They are similar to businesses and charities. However, there are nuanced differences between all three of these categories, and the Canada Revenue Agency (CRA) has different reporting requirements for each type of entity.

A nonprofit organization is a group organized for any purpose except profit, including social welfare, civic improvement, and pleasure or recreation.

NPOs are similar to businesses and charities in how they operate.

For example, all of these entities have expenses, such as rent, utilities and payroll, and they all collect money from clients, customers or contributors. However, the key difference between these organizations lies in how they treat their profits or revenues.

When a business generates revenue, it may choose how it wants to use that money. The leaders of the business, whether it is a sole proprietorship, a partnership or a corporation, may reinvest the money in the business, pay it to stockholders, give themselves bonuses or almost anything else.

In contrast, NPOs must put any revenues they have back into the organization. NPOs can pay salaries to their employees and directors, and they may be allowed to hold some assets or cash from year to year.

Because of their nonprofit status, NPOs are more similar to charities than businesses. However, in spite of the many ways these two groups overlap, the CRA treats them differently for tax and registration purposes.

Both charities and nonprofit organizations do not have to pay income tax.

The CRA bans both of these organizations from using their income to benefit members. However, charities are operated exclusively for charitable purposes, while NPOs may operate for the benefit of social welfare, pleasure, sport, recreation or any nonprofit purpose.

For example, if you have an organization that accepts donations to create scholarships for at-risk youth to play basketball, you likely run a charity. However, if you run a not-for-profit recreation centre where youth can play basketball, you likely have an NPO.

Essentially, charities face more regulation.

• They must register as charities.
• When they receive donations from taxpayers, they must issue donation receipts.

At the end of the fiscal year, charities and most NPOs must file an information return, and NPOs may also have to file a T2 form as well.

If you decide to set up an NPO, you can set up an informal one, but you should consult with a lawyer or tax adviser to ensure you are meeting the requirements in your province or territory.

Alternatively, you may incorporate your nonprofit organization.

• To set up a not-for-profit corporation, you must fill out and submit Form 4001, Articles of Incorporation, and Form 4002, Initial Registered Office Address and First Board of Directors.
• Then, search your name using a NUANS Name Search Report to ensure no other corporations are using it.
• Finally, pay the fee and begin to create your bylaws and record-keeping processes.

At the first meeting to organize your newly formed not-for-profit corporation, you need to create bylaws. You and the other directors may create your own bylaws, or you may use an online Bylaw Builder from Corporations Canada. You may want to address financial record keeping in your bylaws.

Once you establish your not-for-profit corporation, you have to maintain financial records in compliance with the Canada Not-for-profit Corporations Act.

• Annually, you must give all of your members a financial statement detailing the activities of your not-for-profit corporation.
• Prepare financial statements in accordance with the Canadian generally accepted accounting principles as defined in the Canadian Institute of Chartered Accountants Handbook.
• Make sure that your members receive them between 21 and 60 days prior to your annual meeting.

Additionally, not-for-profit corporations must submit to financial reviews based on their gross annual revenues.

For example, if your not-for-profit corporation has less than $50,000 in revenues, you must appoint a public accountant unless all of your members unanimously vote against it. Then, your accountant must review your financial records, or your members may request an audit.

If your organization collects more than $50,000 in revenue, the public accountant you appoint must conduct an audit of your finances.

NPOs do not have to pay taxes, but they may have to submit Form T1044, Non-Profit Organization Information Return.

If your NPO has received or is eligible to receive taxable dividends, interest, rent or royalties worth more than $10,000, you have to file an information return.

Similarly, if the NPO’s assets exceed $200,000, it has to file an information return for the following fiscal period. Once your NPO files an information return, it must submit one every fiscal period as long as it continues to be an NPO.