April 24, 2018
Tax Reporting Requirements for Non-profits in Canada
NOTE: This blog, which was originally posted on April 21, 2017, has been revised and updated for 2018.
The term NPO, short for not-for-profit organization (non-profits), is often used to refer to both charities and NPOs. Apart from the requirement that no income shall be available for the personal benefit of a member, charities and NPOs are quite different for income tax purposes.
The main difference lies in their purpose.
Charities – According to the Canada Revenue Agency (CRA), a charity must be operated exclusively for one of four distinct charitable purposes:
Relief of poverty
Advancement of education
Advancement of religion
Other purposes that benefits the community as interpreted by the courts
Non-profits – An NPO on the other hand, cannot fit under any of the charitable purposes mentioned above and must be operated exclusively for:
Pleasure or recreation, or
Any other purpose except profit
A charity has the advantage of issuing income tax receipts to donors and must be registered with the Canada Revenue Agency (CRA) in order to do so. Interestingly, an organization that meets one of the charitable purposes listed above cannot opt to be an NPO simply by not registering. In that case, it will fall under neither category. It is therefore important for an organization that seeks NPO status to pay attention to its purpose, both on paper and in fact.
NPOs are required to file a T2 Corporation Income Tax Return if they are incorporated. Incorporation is not required for societies in B.C.; however, they may want to do so if seeking funding or grants. Certain NPOs are deemed to be trusts and are required to file a T3 Trust Income Tax Return to report certain investment income.
The interest charges and penalties for not filing a T2 or T3 return are based on income taxes payable, which NPOs generally do not pay. They can, however, be taxable on certain property income or if they undertake an off-side commercial activity or investment. In this case, the CRA’s Voluntary Disclosure Program (VDP) may be considered, which could waive up to 10 years of interest and penalties, if specific conditions are met.
In addition to the T2 return, a T1044 NPO Information Return is also part of NPO Tax Filing Requirements if:
Certain property income exceeds $10,000,
Assets exceed $200,000, or
A T1044 return was required to be filed at any time in the past.
The penalty for not filing the T1044 return is $25 per day, up to a maximum of $2,500.
The CRA reviewed over 1,300 NPOs between 2009 and 2011 as part of its NPO Risk Identification Project and concluded that many would not qualify for the tax exemption and would be reassessed if audited. In response, the government indicated in the 2014 Budget that it intended to review whether the income tax exemption for NPOs remains properly targeted. The new Liberal government has confirmed that this consultation remains a possibility, but is currently not a priority.
Given some of the uncertainties discussed above, NPOs should pay attention to NPO Tax Filing Requirements as well as information returns with the CRA. Some of the benefits of filing T2 returns annually include starting the clock on a statute-barred period and receiving a GST refund (as CRA will usually withhold the refund until a T2 return is filed).
The above content is believed to be accurate as of the date of posting. Canadian and US Tax laws are complex and are subject to frequent changes. Professional tax advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.