fbpx

The Differences Between a Non-Profit Organization and a Charity

There is a large misconception in the non-profit world that incorporating a non-profit (also known as a “not-for-profit”) organization grants the non-profit charity status. It does not.

Although non-profit organizations and registered charities function under a non-profit basis, they are two different and separate entities. This article will explain the main differences between both entities and how their purposes differ.

What is a Non-Profit (also known as a not-for-profit) Organization?

A non-profit organization (also known as a “not-for-profit organization”) is a legal entity that is created under Canadian or Provincial laws. The non-profit organization is formed for purposes other than generating a profit to be distributed to its members, officers, directors…etc. This is what makes not-for-profit organizations distinct from business corporation which are, on the other hand, formed with the purpose of making a profit and distributing the profit to its shareholders.

In most cases, not-for-profit organizations are associations, clubs or societies that are not charities but rather are organized and operated exclusively for:

  1. Social Welfare
  2. Civic Improvement
  3. Pleasure
  4. Recreation, or
  5. Any other purposes except profit

Examples of Non-Profit Organizations are:

  1. Social, Hobby and Recreational Clubs (ex. Reading club, Golf Club, Women’s Society…etc.)
  2. Sports Organizations (ex. Football League, Soccer League…etc.)
  3. Religious, Educational & Scientific Organizations (ex. Mosque, Yoga Academy…etc.)

 

What is a Charity ?

Unlike Not-for-Profit Organizations, in order for an organization to become a registered charity in Canada, the organization has to meet a legal test and be accepted for registration by Canada Revenue Agency.

As such, the organization must meet the following criteria that is set out by Canada Revenue Agency:

1. The purposes of the organization must fall into 1 or more of the following categories:

  • The Relief of Poverty (ex. food bank, shelter, donations of clothing and household goods)
  • The Advancement of Education (ex. school, university, museum, scholarships)
  • The Advancement of Religion (ex. operating a building for religious worship, mosque, church)
  • Other Purposes that Benefit the Community (ex. operating animal shelters, benefiting at risk youth)

2. The organization must prove that it provides a real benefit to the public. The word public refers to either society as a whole or a certain group within society. In general, in order to comply with this criterion, the real benefit has to be:

  • Tangible: meaning that the benefit is recognizable and capable of being proved
  • Direct or Indirect: meaning that the benefit has to be a direct result or consequence of the activities of the organization or has to be an indirect benefit to the greater community
  • Net Benefit to the Public: meaning that there needs to be a substantive positive benefit that results from the activity

3. The organization must be incorporated or created in another way in Canada (ex. trust, by-law) and still be resident in Canada.

4.The organization must devote all its resources (ex. employees, volunteers, money, property) to its charitable activities.

With that being said, several organizations are doing good work, however they do not qualify for charity status according to the above test. An example of some of this organizations are:

  1. Organization for a Personal Benefit
  2. Organization for a Private Purpose
  3. Social Club
  4. Political Club
  5. Sports Club

Finally, it is important to note that if you have a registered charity, you cannot be considered a not-for-profit organization as well. You cannot meet both definitions at the same time.

 

The Differences between a Not-for-Profit (Non-Profit) Organization and a Registered Charity

1.  Purposes:

  • Non-Profit: Can operate for social welfare, civic improvement, pleasure, recreation or any other purposes except profit.
  • Charity: Must operate exclusively for charitable purposes, meaning relief of poverty, advancement of religion, advancement of education or any other charitable purpose

2. Registration:

  • Non-Profit: Does not need to register for income tax purposes
  • Charity: Has to be approved for registration by Canada Revenue Agency

3. Charitable Registration Number:

  • Non-Profit: Is Not Issued a Charity Number
  • Charity: Will receive a charity number upon approval of registration from Canada Revenue Agency

4. Tax Receipts:

  • Non-Profit: Cannot issue official donation receipts for tax purposes
  • Charity: Can issue official donation receipts for tax purposes

5. Spending Requirement:

  • Non-Profit: No spending requirement
  • Charity: Must spend a minimum

6. Designation:

  • Non-Profit: No designation
  • Charity: Receives a designation as a charitable organization, public or private foundation

7. Tax Exempt Status:

  • Non-Profit: Generally, exempt from paying income tax if they meet the following test: money that is generated cannot be paid to or used for the personal benefit of the non-profit members or owners
  • Charity: Exempt from paying income tax

If you want to incorporate a not-for-profit or register a charity in Canada or Quebec, please visit our incorporation of a not-for-profit page or contact us. We can’t wait to hear from you.