A non-profit organization is a group organized for any reason except to make a profit. Societies, associations, and clubs, non-profits can be organized for civic improvement or social welfare or for recreation and pleasure.
Like businesses, these organizations collect money in some way, have expenses, may pay salaries, and can earn income, but revenues must go back into the organization. Like charities, they are not required to pay income tax.
Charities are companies or non-profit organizations that register and are approved as a charity under the rules in the Income Tax Act relating to charitable organizations. Registered charities are able to issue charity donation receipts to their donors so that their donors can claim charitable tax credits on those donations. Non-profits that are not registered as charities with the CRA are not able to issue charitable donation receipts and so their donors cannot claim charity tax credits on those donations.
Generally speaking, credits for donations to U.S. charities can only be used against U.S. source income.
Non-profits may have to file a tax return when one of these three conditions is met:
- The organization is eligible to receive or has received:
- Rent in excess of $10,000
- Royalties in excess of $10,000
- Taxable dividends
- The organization holds assets valued at more than $200,000.
- They have filed a return in the past.
While charities are fully exempt from paying tax, non-profits are not. They may have to pay tax on capital gains or property income. Non-profits may have to file a T2 return, an information return (Form T1044) or both. Filing must be done within six months of fiscal year end. Please contact us to analyze the filing requirements of your non-profit organization.
Charities, by contrast, are generally only required to file a T3010 information return, as opposed to a tax return as charities do not pay taxes. A charities registration status and T3010 filing information (including every year’s financial information) is available on the Government of Canada’s Charities and Giving website. The CRA recommends that charities with revenues exceeding $250,000 obtain annual audited financial statements.
Penalties for Late Non-profit Tax Returns
If a non-profit organization is legally required to file information form T1044 and does not, it can be penalized $25 per day up to $2,500 for each year it has not filed. The same penalty will be imposed if an organization neglects to file a T2 return. As non-profits are often run by volunteers who might not know they were supposed to be filing every year, the penalties can add up and threaten the very existence of the organization.
If you’ve discovered that your organization should have been filing with the federal government and hasn’t been, the best thing to do is to work with your accountant to review your eligibility for the Voluntarily Disclosure Program. The CRA’s Voluntary Disclosure Program allows taxpayers to file outstanding returns without penalty and may allow some relief from interest.