Did you know your nonprofit organization can use an eCommerce store to help fund operations?
Not only will selling online help you reach a larger audience of donors, it can also diversify your funding by introducing a new revenue stream. Nonprofit eCommerce ventures represent a valuable source of unrestricted funds—and can cost less to run than many fundraising events.
World Vision is a great example of a nonprofit that’s furthered its vision and goals by making eCommerce all about giving.
So, whether your focus is books, online courses, or branded merchandise, here are some key things to consider when setting up a nonprofit eCommerce store.
Differences Between Donations and the Sale of Goods
Donations are money or gifts given without the expectation of receiving anything in return. The sale of goods, meanwhile—which includes selling products online—involves the giving of money in exchange for goods or services.
This is an important distinction because, although you can issue tax receipts for donations if your non-profit is a registered charity, you usually can’t issue tax receipts for the sale of goods.
If your organization doesn’t correctly distinguish between the two correctly, you could inadvertently:
- Issue tax receipts for the wrong transactions
- Get flagged for an audit by the CRA
- Lose your charitable status
Here’s a brief example of donations versus the sale of goods.
Let’s say your charity has a fundraising event and sells tickets for $50 each. You can issue tax receipts to attendees for the cost of those tickets, less any advantages gained through their purchase.
If, on the other hand, your charity sells t-shirts as part of its non-profit eCommerce efforts, you can only issue tax receipts for the difference between what buyers pay for your shirts and their direct cost (i.e. the value of your profit on that sale).
That means if your shirt costs $10 and sells for $10, you can’t issue tax receipts for its purchase. However, if your shirt costs $10 and sells for $30, you can issue tax receipts for the $20 difference because it would be considered a donation.
Donations
Tax Implications for Donors
- Charitable Tax Receipts: When an individual makes a donation to a registered charity without receiving any goods or services in return, they are eligible to receive a charitable tax receipt. This receipt can be used to claim non-refundable tax credits on their personal income tax return, reducing the amount of tax owed.
Regulatory Considerations for Charities
- Issuing Receipts: Charities must follow CRA guidelines when issuing official donation receipts. These receipts must include specific information such as the charity's registration number, the donor's name, and the amount donated.
- Use of Funds: Donations must be used in accordance with the charity's stated purposes and activities as registered with the CRA.
Selling Goods for Fundraising
Tax Implications for Purchasers
- Non-Eligible for Full Tax Receipt: When a charity sells goods (e.g., merchandise, event tickets), the purchaser receives a product or service in exchange for payment. As a result, they are generally not eligible to receive a charitable tax receipt for the full amount paid.
- Partial Tax Receipts (Advantage Calculation): If the amount paid exceeds the fair market value (FMV) of the goods or services received, the purchaser may be eligible for a partial tax receipt for the difference. The charity must calculate the "advantage" received and issue a receipt accordingly.
Tax Implications for Charities
- GST/HST Obligations: Charities may be required to collect and remit Goods and Services Tax (GST) or Harmonized Sales Tax (HST) on the sale of goods and services. However, certain supplies by charities are exempt or zero-rated. Charities need to determine the correct tax status of their sales.
- Business Number Registration: If a charity's taxable revenues exceed the small supplier threshold (generally $50,000 over four consecutive quarters), it must register for a GST/HST account.
Regulatory Considerations for Charities
- Related Business Activities: The CRA allows charities to engage in business activities that are related to their charitable purposes. These activities can include selling goods or services that promote the charity's objectives.
Examples of Related Businesses
- Linked by Purpose: The business promotes the charity's mission (e.g., a health charity selling medical supplies).
- Subordinate to Charitable Purpose: The business is a minor aspect of the charity's operations and does not detract from its charitable work.
- Unrelated Business Restrictions: Charities are generally prohibited from carrying on unrelated business activities. Engaging in such activities can jeopardize their charitable registration status.
- Volunteer Requirement for Unrelated Businesses: If a charity operates a business unrelated to its purposes, it must be substantially run by volunteers (90% or more) to comply with CRA regulations.
Key Differences Between Sales and Donations Summarized
Tax Receipts
- Donations: Eligible for full charitable tax receipts.
- Sales of Goods: Not eligible for full tax receipts; may receive partial receipts if payment exceeds FMV.
GST/HST Considerations
- Donations: Not subject to GST/HST.
- Sales of Goods: May be subject to GST/HST; charities must assess tax obligations.
Regulatory Compliance
- Donations: Must be used for charitable purposes as registered.
- Sales of Goods: Must ensure business activities are related to charitable purposes or meet volunteer requirements to avoid penalties.
Avoiding High eCommerce Processing Fees
To operate an online store, you’ll need to integrate a payment processor (like Square, Stripe, or PayPal) with an eCommerce platform so donors can make payments online.
Finding a payment processing tool with the lowest fees will help you avoid having credit card charges (typically 2-4% per transaction) and merchant processing charges (often 10-30 cents per transaction) eat into your revenue.
Stripe, for example, makes discounted processing fees available for nonprofit eCommerce. Alternatively, you could ask your buyers (many of whom will be unaware that credit card purchases trigger a charge) to cover your fees by ticking a box on your store’s check-out page.
Other approaches for reducing transaction fees include:
Choose Payment Processors Offering Non-Profit Discounts
- Research Specialized Providers: Some payment processors specialize in serving non-profits and offer reduced fees. Examples include CanadaHelps, iATS Payments, and Blackbaud Merchant Services.
- Discounted Rates: These providers may offer lower transaction fees, monthly fees, or waive certain charges entirely for registered charities.
Try Negotiating with Payment Processors
- Direct Negotiation: Contact your current payment processor to negotiate lower rates based on your non-profit status and transaction volume.
- Leverage Competitive Offers: Use quotes from other processors as leverage to secure better terms.
Encourage Interac e-Transfer Payments
- Lower Fees: Interac e-Transfers typically have lower fees compared to credit card transactions.
- Direct Bank Transfers: Encourage donors to use direct bank transfers, which can be more cost-effective.
Encourage Payment via Cash
- Fee-Free Options: Accepting cash eliminates processing fees entirely. Promote offline fundraising events where these payment methods are more practical.
Collecting and Remitting Sales Tax
As a rule of thumb, most products and services supplied by registered charities in Canada are exempt from GST / HST, whereas most supplies provided by other non-profit organizations are taxable (PST requirements vary by province).
If you provide taxable supplies—and you’re not considered a small supplier—you’ll need to register for GST / HST and remit taxes collected on the sale of goods.
For help determining which supplies are taxable, and which taxes you’ll need to tag on, it’s best to consult your accountant when setting up an eCommerce store. You should also track your transactions closely to ensure you set aside and remit the correct sales tax amounts.
Analyzing Your Margins
Profit may not be driving your nonprofit eCommerce venture, but examining your monthly and quarterly profit margins will help you decide whether your online store is a meaningful source of revenue generation.
Here’s a quick way to calculate your profit margin percentage:
Don’t forget to include indirect expenses like wages and social media advertising in addition to direct costs like shipping and manufacturing. A quicker and easier method that is a little less accurate involves dividing net profit by sales.
Keeping Accurate Inventory Records
Using an inventory management system to track the in-and-out movements of stock is essential for ensuring what’s on hand matches what’s in your accounting records.
Performing monthly inventory audits will discourage internal theft and make it easier to maintain sufficient inventory to meet expected sales. Creating budgets and cash flow forecasts, meanwhile, will help you set informed minimum and maximum inventory levels for your online store.
As a non-profit, it’s important to focus on initiatives that can enhance your cause and revenue.
If you’re unsure how to build a nonprofit eCommerce store with a bookkeeping system that can track your success, Enkel can help. Contact us to learn more about our nonprofit bookkeeping services.
