Tax time can be stressful for non-profit and charitable organizations in Canada, especially when the filing requirements are not well understood within the organization.
Even though not-for-profits don’t pay income tax, the requirement to file a tax return has been in place since 1993, and penalties exist for late filing. Organizations that may be filing their returns for the first time can set themselves up for success by having a clear idea of the nonprofit tax requirements set out in this article.
Know Your Tax Forms
The most basic form that non-profit organizations will need to file is Form T1044, also known as the NPO Information Return. However, this is not the only form required since NPOs can choose to incorporate or remain unincorporated. Incorporated organizations must also file either a T2 – Corporation Income Tax Return or a T2 Short form.
All incorporated NPOs must file a T2 return annually, regardless of whether they owe taxes. The return is due six months after the end of the organization's fiscal year. NPOs generally report zero taxable income but must still file the return, and financial statements should be attached to the T2 return. Unincorporated associations are not required to file a T2 return but have other tax filing obligations.
Larger incorporated NPOs may also need to file Form T1044 if, during the fiscal year, they received dividends, interest, rental, or royalties exceeding $10,000, own assets totalling more than $200,000, or were required to submit Form 1044 in the previous tax year. This form collects information about the organization's activities, assets, and income, and must be filed within six months after the end of the fiscal period. Failure to file can result in penalties of $25 per day, up to a maximum of $2,500.
Finally, NPOs that are held by a trust, which are usually organizations that provide dining, recreational, or sporting facilities, must also file a T4013, T3 – Trust Guide form.
Registered charities must complete Form T3010 – Registered Charity Information Return and Form TF725 – Registered Charity Basic Information Sheet. The charity must include a copy of their financial statements with these forms, including any relevant notes. In addition Form T1235, a worksheet for directors, trustees and like officials, must be completed. A number of other worksheets and schedules may also need to be filed, depending on factors like the charity’s organizational structure or gifts received during the year.
GST/HST Returns: NPOs registered for the Goods and Services Tax/Harmonized Sales Tax (GST/HST) must file returns. Filing frequency depends on the organization's total annual revenues from taxable supplies:
- Annual: Revenues of $1.5 million or less.
- Quarterly: Revenues between $1.5 million and $6 million.
- Monthly: Revenues over $6 million.
Some NPOs may be eligible for public service bodies' rebates. Even if no GST/HST is collected, a nil return must still be filed if registered.
Not-For-Profit Tax Time
The beginning and end of the fiscal year are not the same for every not-for-profit organization, as it is at the discretion of the organization to establish its own fiscal year period. Therefore, the rule established by the CRA is that all returns are due six months after the end of the fiscal year for both charities and NPOs. For a not-for-profit organization that runs its fiscal year in parallel with the calendar, from January to December, its returns are due annually on June 30.
Penalties for Late Filing
Ideally, every organization will file on time, but if not, various penalties may be applied. If a registered charity fails to file its T3010 annual return by the due date, the charity’s registered status can be revoked by the CRA. A late-filing penalty of $500 may also be issued by the CRA anytime after the due date.
If the charity has not filed a return by seven months following the end of their fiscal year–so one month after their due date–the CRA will send a Notice of Intention to Revoke a Charity's Registration (Form T2051A). In general, the legal process to revoke a charity’s registration will not begin until the tenth month after the charity’s fiscal year end. The CRA may also issue penalties if it receives tax receipts that are incorrect or incomplete, or if there are further problems with the charity’s books or other financial records.
The penalties for non-profit organizations that file late are less severe as NPOs are generally under less stringent regulations than registered charities. If an NPO does not file its T1044, the CRA may issue a penalty of $25 per day, up to a maximum of $2,500 per year for each filing that was missed. NPOs also have the option of using the CRA’s Voluntary Disclosures Program, which would allow the organization to file outstanding tax returns.
Late Filing Penalties Summary
- T2 Return: Penalties start at 5% of the unpaid tax, plus 1% for each complete month the return is late, up to 12 months.
- T1044 Return: $25 per day, minimum $100, maximum $2,500.
- Interest Charges: Applied on unpaid taxes and penalties.
- Audits: Non-compliance may trigger an audit by the CRA, leading to further scrutiny and potential penalties.
Filing for the first time may still seem daunting for many not-for-profit organizations, but there are resources readily available that can help.
