There is lots of confusion about the differences between these two separate but similar entities available to those individuals who wish to operate for the betterment of the community.
The short answer to the difference between the two options is that if the businesses focus on gaining donations from individuals and companies to support a segment of the community with the ability to provide donation receipts, it is more likely that this corporation would seek to be charitable.
If the focus of the business is to provide a group of individuals to gather for sports, or is an association of individuals, this is more likely a not for profit business.
It has become increasingly important for individuals operating either a not for profit or charitable business to establish the business legally. As a leading support to the not for profit community to start and maintain an incorporation for organizations in Canada, we offer the following general information to help you determine different aspects of incorporating either a not for profit or charitable organization in Canada.
First, let’s clarify the commonly used names for both not for profit or charitable organizations.
A Not For Profit can also be known as:
- Non-business entity
- Voluntary organization
A Charitable Organization can also be known as
Not For Profit Organizations
These organizations are established typically to benefit a segment of the community, such as a sporting club, an association for individuals with a common goal or theme, hobby groups, and festivals, such as seasonal parades and events.
As a first example, if you are establishing a men’s hockey club and intend to rent space at a local arena, where you will be forming a membership of players who will contribute to the ice time, along with any other fees, such as insurance associated with the game, the Not For Profit Incorporation provides you with legitimacy to the arena, insurance, players and league. It also separates the club’s liability from those who organize and maintain the club.
As a second example, if you wish to come together with neighbors to dispute or protect your community, a Not For Profit incorporation provides legitimacy for you and your group to pursue Municipal, Provincial or Federal government avenues to approach and be recognized by a government body. In most cases, the government will only address the concerns or agenda as a single entity incorporated business. In most cases, it has become increasingly important that a Not For Profit organization is established, and in most cases, unless formed, an individual agenda or formation will not be recognized.
How to Set up a Not For Profit Incorporation
With establishing a Not For Profit, there is a legal separation between the individuals who operate the business and the business itself. Many people do not view a Not For Profit as a business, but it absolutely is. The difference between a profit and not for profit business is that the organization’s funds as a not for profit are not established or maintained for the benefit of the individual owners but for the community. The income from the business is not to financially reward its directors, and if the funds in the corporation are not used within the year, the funds should remain within the corporation or distribute to the benefit of the community, such as at the end of the season banquet.
To establish a Not For Profit organization, Articles of Incorporation must be prepared and filed with either the Provincial government where the business operates within or with the Federal government and imported into the Province where the business operates. Not For Profit Articles of Incorporation are required to start the business legally. There is a minimum of three individuals needed to establish the corporation and throughout the corporation’s lifetime. If one person decides to leave the organization, a new person must replace the departing director.
The requirements for filing a Not For Profit Incorporation
- Not For Profit Articles of Incorporation must be prepared
- A minimum of 3 directors are required; they do not need to be residents of Canada.
- Address of the Corporation must be a Canadian address and can be a resident’s address if a separate business address is not available.
- Directors addresses. The directors are not required to reside in Canada.
- Signatures of directors
- Objects of the corporation, this is what the corporation activity is, how the corporation will assist the community. The general rule is that the object clauses are 2 to 6 paragraphs of intentions for the business activity.
- A NUANS report is mandatory if the corporation is being established in Ontario, Alberta, PEI, New Brunswick, Nova Scotia, North West Territories, and Canada.
- Payment for incorporation, NUANS and government fee
When the incorporation has been completed, a fiscal year-end is to be determined. The year-end can be established within a year out from the incorporation date. For example, if the business was incorporated on July 11 of 2020, the corporation can use its fiscal year-end date anytime from July 11, 2020, to July 11, 2021. From the fiscal year-end, the corporation has 6 months to file its first tax return. In general, there are no taxes payable as a Not For Profit corporation however, a T2 tax return is still required. The organization is to pay any HST or GST payable and may have partial benefits to HST or GST.
This organization does not require acceptance from Revenue Canada, aka CRA, for tax purposes and does not have the ability to provide tax receipts to donors. There is no spending requirement, and there is, in general, no tax payable; however, each year, the organization must file a T2 tax return.
These organizations are specifically established to assist the community with charitable activities such as the advancement of religion and relief of poverty, such as food banks, soup kitchens and low-cost housing, private foundations, the advancement of education, libraries, and animal shelters.
As a first example, individuals may want to gather together to form a religious organization for the advancement of religion. In completing a charitable organization, the church is able to take in revenues from individuals and provide official donation receipts to those individuals who donate. Typically, the funds are used to maintain and improve a church property, support a soup kitchen or food banks to assist those within the less fortunate community.
As a second example, private foundations may be established where an organization or family establishes a foundation to take revenues as a charity and provides those funds to third-party charities they wish to support. The foundation is able to provide official receipts to individuals or businesses who support their endeavours.
The requirements for filing a charitable organization
Both the Nonprofit corporation and Charitable Organization have very similar requirements to establish the incorporation. The listed requirements above for the nonprofit corporation remain the same as for the charitable. However, with a charitable organization, a secondary requirement to gain charitable status is required in Canada. When the incorporation has been completed with the Province or with Canada, the organization must apply to the Canada Revenue Agency, also known as Revenue Canada or CRA, and be approved as a charitable organization. A charitable registration number will be provided to those organizations approved by Revenue Canada to issue official tax receipts to those who provide donations.
The CRA website is available to those who wish to gain additional information regarding both establishing both a not for profit and charitable organization at https://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs04970.html
The charitable application requirements are provided through Revenue Canada or CRA at this website https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/registering-charitable-qualified-donee-status/apply-become-registered-charity/apply.html
When the corporation has established itself and has been granted the charitable status in Canada, the corporation may issue official tax receipts to charitable donors for tax purposes.
Who can incorporate or Not For Profit or Charity?
There does not appear to be any specific requirements to the three individuals coming together to operate a not for profit organization, however, a charity has clear restrictions that the individual directors for the corporation require the directors of the corporation act independently of each other and are not related in terms of being of the same family, by marriage or common law relationship.
A Charitable organization must file an annual information return (Form T3010) within the same timeframe as provided with the Not For Profit incorporation. It must be filed six months from the established fiscal year-end which can be a year out from incorporation. This provides the corporation an eighteen-month window from the date of incorporation to file its first return.
Director or personal benefits to members
Whether the business is incorporated as a NFP or a Charity, the corporation’s directors cannot use the corporation’s income for personal benefit. This simply means that if the corporation has residual revenues after expenses, the corporation’s directors cannot take and use these monies for their own personal interests.
Tax Exemption Status
Although each corporation is required to file a tax return each year, typically, neither corporation will be required to pay income tax. A Not For Profit may have tax obligations on property income if applicable.
Deciding between Federally or Provincially incorporating
The Federal Incorporation is typically sought after, when a corporation plans to have a Canada-wide Charity or Non Profit organization. Sometimes people want the highest level of name protection available in Canada, and outside of completing a Trade Mark, a Federal incorporation provides this. Suppose your organization is limited to a geography within a Province such as a hockey league in the Province of Ontario. In that case, the Federal incorporation may not be something you want to pursue.
Nonprofit vs for profit
As discussed earlier, a not for profit organization is established to assist the community, a purpose except profit. Nonprofit earnings outside of expenses and employee salaries stay within the organization or be distributed to donees. A for profit business is established to make profits and for those who own the business to do with the revenues as they see fit.
What are eligible donee’s?
Once the charitable status is granted, the organization has a responsibility to spend a minimum amount of time on its charitable activities or provide financial gifts to qualified donees, including other registered charities. A listing of those who hold qualified donees are available at: https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/charities-giving-glossary.html#qualdonee
To find out additional information regarding obtaining charitable status, here is the link to the Charities Directorate. This government link provides what is required and additional information related to setting up under the Canadian Registered Charities.
The Canadian Government understands the important role that charities can have in the lives of Canadians, and are committed to supporting charities as the country continues to recover from the Covid-19 pandemic. Find out more about what Revenue Canada is doing to help ensure charities are able to continue working and supporting their communities throughout this difficult time: https://www.canada.ca/en/revenue-agency/campaigns/covid-19-update/covid-19-charities.html
Registering under the Income Tax Act as a charity
To be able to issue tax receipts to those who contribute to the organization, the Income Tax Act requires that the organization apply and be accepted as a registered charity in Canada. The federal government provides how to apply for a registered charity in a four-step process. Here is the link to gain further information: https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/registering-charitable-qualified-donee-status/apply-become-registered-charity.html
To assist you further, there is a document checklist available also via the Government of Canada to assist you with a checklist of requirements: https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/registering-charitable-qualified-donee-status/apply-become-registered-charity/apply/create-application-checklist.html
Each organization is very individual and specific when it comes to obtaining the charitable tax number with Revenue Canada. We recommend obtaining the assistance of professionals such as accounting or legal professionals to help you provide the details required to establish the charitable status in Canada.
Ontario Business Central has helped individuals establish both Not For Profit and Charitable Organizations in Canada since 1992. We cannot provide a legal opinion; however, we can assist you in preparing and filing the required documents to establish the organization at either the Federal or Provincial level.
Feel free to reach out to us directly if you have any additional questions. We hope you find this information useful in your pursuit to assist the community.
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Ontario Business Central Inc. is not a law firm and cannot provide a legal opinion or advice. This information is to assist you in understanding the requirements of registration within the chosen jurisdiction. When you have legal or accounting questions, it is always recommended that you speak to a qualified professional.
Laura Harvey is an entrepreneur herself as the owner of Ontario Business Central Inc. Her passion has always been about supporting the entrepreneurial spirit and advancement within Canada.
Laura authors in-depth blogs for Ontario Business Central assisting entrepreneurs and business owners to start, manage and grow their businesses. She has almost 30 years of expertise as a corporate specialist and 25 years of being an entrepreneur. Laura has the unique position of supporting a community that she also belongs to. She walks the walk right along with you.
You can find Laura on Linkedin and Twitter.