Tax time can be stressful for nonprofit 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.
Understanding the Income Tax Act
Both personal and corporate income taxes fall under Canada’s federal Income Tax Act, which is enforced by the Canada Revenue Agency (CRA). The complete text of the Income Tax Act is available to read online, in both English and French, though weighing in at 3,000 pages, it wouldn’t be considered light reading.
Both nonprofit organizations (NPOs) and registered charities are defined within the Act. The terms nonprofit and charity are often used interchangeably in everyday conversations, but there are important differences between the two types of not-for-profit organizations when it comes to tax filing. While charities must register with the CRA and can only operate for charitable purposes, nonprofit organizations can serve any number of purposes that do not generate a profit, including social welfare, civic improvement, pleasure or recreation. The tax forms that must be filed by registered charities and nonprofit organizations also differ.
The one aspect that charities and NPOs share in common is that they are both exempt from paying income tax. However, NPOs are not allowed to issue tax receipts for any donations they receive or for the membership fees they collect, while registered charities are required to do so.
Know your Tax Forms
The most basic form that nonprofit 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. Organizations that are incorporated must also file either a T2 – Corporation Income Tax Return or a T2 Short form.
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 Form 1044 in the previous tax year. 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.
Not-For-Profit Tax Time
The beginning and end of the fiscal year is 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 in parallel to the calendar, from January to December, their returns would be 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 their 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 nonprofit organizations that file late are less severe as NPOs are generally under less stringent regulations compared to 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.
Filing for the first time may still seem daunting for many not-for-profit organizations, but there are resources readily available that can help.