Charitable and Non-Profit Organizations and Canada’s Income Tax Act
Charitable and non-profit organizations enjoy favourable treatment under Canada’s Income Tax Act (“ITA”). It is important to be aware, however, that these two types of organizations obtain and maintain their tax status in very distinct ways.
The ITA provides tax benefits to charitable organizations that have applied for and have received approval for “registered charity” status from the Minister of National Revenue. Charitable organizations who have not applied for registered status cannot enjoy favourable tax treatment. Non-compliance with the ITA’s requirements of registered charity status can result in a refusal or revocation of that status.
Charitable organizations are those which devote their energies primarily to charitable activities – activities relating to relief of poverty, advancement of education, advancement of religion, or any purpose which has a community benefit. Registered charities must ensure that their activities are charitable, and continue to be charitable. Other activities that are ancillary or incidental to an organization’s charitable ones will not necessarily cause a loss of status. For example, registered charities may partake in some non-partisan political activity related to providing general information to the public, although this political activity must not have any political purpose.
Importantly, a registered charity must also ensure that it devotes substantially all (at least ninety percent) of its resources to its charitable activities. While the law has recently changed to eliminate a minimum amount of donations from the previous year that must be spent on charitable activities, a registered charity may still have an obligation to disburse at least 3.5% of assets which are not used in its charitable programs or administration if such assets are valued at $100,000 or more.
Non-profit organizations, by contrast, do not have to register to receive the tax exemptions provided by the ITA. Rather, they need only meet certain eligibility requirements. To be eligible, a non-profit organization must be a club, society or organization that is not a charitable organization. It must be organized and operated for a listed purpose (social welfare, civic improvement or pleasure or recreation) or for another purpose that is not profit-related. Also, the non-profit organization’s income must not personally benefit a proprietor, a shareholder or any member. It should be noted that these restrictions do not mean that a non-profit cannot earn any income, but they constrain what may be done with those profits to enjoy tax exempt status.
A non-profit organization will continue to enjoy the tax exemptions provided by the ITA as long as it satisfies these eligibility requirements. Simply, if the non-profit organization does not, it will no longer be able to claim the ITA’s tax exemption.
Finally, it must be noted that the finer details under the ITA are different for each organization, even though both are tax exempt. For example, whether a non-profit must file tax and information returns depends on its source of income and value of its assets – a registered charity, however, must always file annual returns and statements. A non-profit organization may pay tax on certain property income, but none of a registered charity’s income is taxable. A registered charity can issue tax receipts to donors, but non-profit organizations cannot. Given this different tax treatment, it is important that close attention is paid to the different tax rules and requirements that apply to these organizations.
Disclaimer: This publication provides information only and is not intended to confer legal advice or opinion. If you have any further questions please consult a lawyer. Please note as well that many of the statements herein are general principles which may vary on a case by case basis.