For the most part, non-profit organizations are run almost identically to for-profit businesses. There are expenses, managers, employees and in some cases clients. Unlike a for profit business where all sales and income is defined as revenue, non-profit organizations gather revenues through things like donations, investments and grants from governments or other organizations.
Due to the major differences between the two types of revenue generating entities, the Canada Revenue Agency applies different tax standards to each, meaning the accounting will be carried out in significantly different ways. Understanding the tax requirements of a non-profit vs a for profit business is vital for proper financial management and transparency.
Types of Non-Profits in Canada
The CRA has grouped non-profits into two categories: Registered charities and non-profit organizations. The major difference between the two organizations lies in the tax credits available to each. An NPO may not issue receipts for donations that can be claimed by individuals for charitable tax credits on their annual returns. Registered charities on the other hand may do so, so long as they are officially registered with the CRA as a charity. An NPO only has to register for non-profit status in their province, not on a federal level with the CRA.
There are also some key differences between private and public sector NPOs. Certain financial reporting standards apply based on whether or not an NPO is privately operated or if it happens to be a Government Funded NPO. GFNPOs and private NPOs must adhere to standards outlined in the PSA Handbook which instructs each type of organization about which financial records are necessary to meet the CRA standards.
While there are many similarities, GFNPOs are asked to provide more financial records for applicable transactions or circumstances than their private sector counterparts. With help from the PSA Handbook and other official guidebooks, it is relatively simple to keep track of these requirements for GFNPOs and private NPOs.
Tax Requirements for Non-Profit Organizations
There are some cases where NPOs will have to pay income tax in a similar way to for profit businesses. This usually applies to property income or capital gains, and NPOs of all types must pay sales tax. However, some registered charities can claim tax rebates on some of their company purchases. An NPO may only claim these rebates if their purchases were originally funded by the government. When it comes to the tax forms that each type of NPO files, it will depend on whether or not the NPO in question is incorporated. For incorporated NPOs, a T2 Corporate Tax Income Form must be filed, similar to a for profit corporation. For NPOs that are not incorporated, Form 1044, the NPO Information Return, must be filed. Each of these NPO returns must be filed within six months of the end of the calendar fiscal year.
To learn more about how to keep your NPO running smoothly according to the standards set by the CRA, be sure to consult the tax experts at Genesa CPA. We can make it easy to meet all the necessary tax requirements, so you can focus on maximizing the amount of charitable work conducted by your non-profit.