Charity vs Not-for-profit organization
Often the term “registered charity” is used interchangeably with “not-for-profit organizations (NPOs)”. While both terms fall under the larger description of the voluntary, not-for-profit or community benefit sector. However, while both organizations operate on a not-for-profit basis, they are defined differently under the Income Tax Act (ITA). If an organization meets the definition of a “charity,” it cannot be considered a not-for-profit organization under the ITA.
Registered charities are established and operate exclusively for charitable purposes.
These purposes could be to relieve poverty, advance education or religion, or contribute to the greater good of a respective community. Examples of registered charities include food banks, research institutes, places of worship, missionary organizations, and animal shelters. In order to become a registered charity, an organization must apply to the CRA to be approved. Then, the CRA will designate a registered charity as a charitable organization, public foundation, or private foundation. A registered charity has the ability to issue official donation receipts for income tax purposes. Also, it has an obligation to spend a minimum amount on its own charitable activities or as gifts to qualified donees.
In terms of tax obligation, a charity is exempt from paying income taxes. However, they must file an annual information return (Form T3010) within six months of its fiscal period end.
Conversely, an NPO is established and can operate for any purpose except for exclusively charitable purposes or for-profit. An NPO can operate for social welfare, civic movement, pleasure, sport, recreation, or any other non-profit purpose. Examples of NPO’s include golf clubs, hockey associations, baseball leagues, parades, and seasonal celebrations. An NPO does not have to go through a registration process with CRA but cannot issue official donation receipts. An NPO is generally exempt from paying income tax but may be taxable on property income or capital gains in terms of tax obligation.
If incorporated, NPOs are required to file a T2 return and may be required to file an information return (T1044) if specific criteria are met within six months of its fiscal period end.
The CRA explains the difference in greater detail and includes an informative chart of the differences between registered charities vs NPOs here.