7 Key Differences Between Non-Profits and Charities in Canada
In Ontario, Canada, organizations focused on helping the community and doing charitable work can choose to either become a non-profit organization or apply for registered charity status. Both options aim to serve the public good, but they differ in their legal setup, rules, and benefits. It’s important for organizations to understand these differences before deciding which path to take.
Online Business Registry will explain all key differences between a Non-Profit Organization and a Registered Charity in Ontario and will help you to make the right decision.
Understanding the Basics
What is a Non-Profit Organization?
A nonprofit organization is formed to provide some public or mutual benefit other than offering net earnings to its shareholders. Examples of these organizations include sports clubs, community associations, and cultural groups. The entity does not operate to generate a profit but instead exists to offer either a service or an opportunity.
Key characteristics:
- Operates without the purpose of earning a profit.
- The revenues are reinvested into the activities of the organization.
- Can participate in social, recreational, or cultural activities.
What is a Registered Charity?
In contrast, a registered charity is a legal form of non-profit organization because it has been given a narrow purpose: to advance public benefit. In Canada, charities are registered with the Canada Revenue Agency and subject to strict regulation in order to maintain their status.
Key characteristics:
- Must have purposes that fall under one of four categories: relief of poverty, advancement of education, advancement of religion, or other purposes beneficial to the community.
- Can issue official donation receipts for tax purposes. Required to devote resources to charitable activities.
Key Differences Between Non-Profit and Registered Charity
1. Legal Differences:
- Non-Profits are typically incorporated under provincial laws, such as the Ontario Corporations Act or the Canada Not-for-profit Corporations Act (if federally incorporated). This legal status provides recognition as a separate entity with limited liability for members and directors.
- A Registered Charity in Ontario is a specific type of non-profit organization that has obtained charitable registration from the Canada Revenue Agency (CRA) under the Income Tax Act.
2. Tax Differences:
Non-Profit Organization
- Exempt from paying income tax but cannot issue tax receipts for donations.
- May need to charge and remit HST depending on activities.
Registered Charity
- Fully tax-exempt and eligible to issue official donation receipts, encouraging donations.
- Must file an annual T3010 Charity Information Return to maintain its registration.
3. Purpose and Activities
- Non-Profits are guided by a specific mission or purpose that aligns with charitable objectives. Common areas of focus include social services, health care, education, arts and culture, environment, and advocacy.
- Registered Charities must exclusively operate for charitable purposes as defined by the Income Tax Act, such as relieving poverty, advancing education, promoting religion, or other purposes beneficial to the community.
4. Funding and Fundraising
Non-Profit Organization:
- Membership fees.
- Events revenues.
- Sponsorships or grants from private and public sources.
- Fundraising events are limited in that they cannot provide any tax-deductible receipts.
Registered Charity:
- Grants through governments and foundations.
- Public donations, with the added benefit of issuing tax receipts.
- Events organized as fundraising campaigns backed by tax benefits donated.
5. Reporting and Accountability
Non-Profit Organization:
- File annual returns with the Ontario government.
- Keep proper financial records.
Registered Charity:
- Filing the T3010 annually with the CRA.
- Keeping proper records of all activities and expenses.
- Being transparent about how the funds are used to achieve the charitable goals
6. Eligibility Requirements
Non-Profits can be registered by non-residents in Canada, while Registered Charities can not. At least 50% of the directors in a Registered Charity must be Canadian Citizens or Permanent Residents (PR).
7. Registration Process:
- Non-Profit Organizations do not have to go through a formal registration process for income tax purposes.
- Registered Charities must apply to the Canada Revenue Agency (CRA) and be approved for registration as a charity. It also receives a charitable registration number once approved by the CRA.
Choosing Between a Non-Profit Organization and a Registered Charity
When to Opt for a Non-Profit Organization
- You focus on offering member-oriented services to people, sports, or cultural events.
- You do not have to issue tax-deductible receipts.
- You want simpler administration and fewer regulatory requirements.
When to Register as a Charity
- Your purpose falls within the activities generally regarded as charitable in nature, including the relief of poverty, education, and the betterment of your community.
- You want to attract donations with tax-deductible receipts. You’re ready to meet the CRA’s high reporting standards.
Key Takeaways
- Not all nonprofits are registered charities, although all registered charities are nonprofits.
- A not-for-profit in Ontario serves a broader range of purposes and has fewer restrictions.
- A registered charity has tax advantages but involves greater regulation and legal requirements.
- In the case of choosing, one has to consider the aims, the needs for funding, as well as the capacity to meet the requirements put forth by the regulators. It is also advisable to consult a legal or tax professional in making the right choice on behalf of your organization.
FAQ: Differences Between a Non-Profit and a Registered Charity in Canada
1. What are the main differences between a non-profit organization and a registered charity?
- Purpose: Non-profit organizations (NPOs) can work on a variety of causes, but registered charities have to focus only on specific charitable goals. These include helping the poor, promoting education, supporting religion, or doing things that benefit the community.
- Registration: Registered charities need to apply to the Canada Revenue Agency (CRA) to get charitable status. NPOs don’t have to register with the CRA unless they meet certain filing rules.
- Tax Benefits: Registered charities can give tax receipts to donors, but NPOs can’t do that.
- Reporting Requirements: Registered charities must file a yearly T3010 form to report their activities. NPOs might need to file a T1044 form, but that depends on their finances.
2. Can a non-profit organization become a registered charity?
Yes, an NPO can apply to the CRA to become a registered charity. But it has to meet the CRA’s rules about what counts as charity work and activities. It also needs to follow strict rules, like using all its money and resources only for charity purposes.
3. Are all registered charities non-profits?
Yes, all registered charities are non-profits, but not all non-profits are registered charities. Registered charities are a specific subset of non-profits that meet additional CRA requirements.
4. Can a registered charity engage in business activities?
Registered charities can engage in related business activities (those that are directly connected to their charitable purposes). Any unrelated business activities are generally not permitted. Non-profits, on the other hand, can engage in business activities as long as profits are not distributed to members and are reinvested to support their objectives.
5. What are the tax obligations of a non-profit organization?
Most NPOs are exempt from paying income tax, provided they meet CRA’s criteria for non-profits. However, they may be required to file a T1044 if their gross revenue exceeds $200,000, they have assets of more than $200,000, or they are otherwise required to report.
6. What are the tax obligations of a registered charity?
Registered charities are also exempt from paying income tax, but they must comply with CRA’s reporting requirements, including filing the annual T3010 and adhering to strict rules on spending and operations.
7. Where can I find more information about registering as a charity or operating a non-profit?
For detailed guidance about registering a Charity in Ontario, visit the Online Business Registry, Blog section. More information about Non-Profit Organizations in Ontario you can find here.
In summary, while both non-profit organizations and registered charities in Ontario share a commitment to serving the public good, registered charities enjoy additional tax benefits and regulatory privileges. The choice between non-profit status and registered charity status depends on the organization’s charitable activities, fundraising needs, and long-term goals.
If you are still confused which type of business is more suitable for you, get a free consultation from Online Business Registry: simply give us a call at 416-628-9349 or send us an email to info@ontario-business.ca and our filing agents will give you a clear explanation and advice to determine the most appropriate legal structure based on the organization’s mission and objectives.