Charity vs. Nonprofit: Which One Fits Your Cause?
When searching for Canadian organizations striving to help others, you’ll often come across the terms “charity” and “nonprofit”. While registered charities and nonprofit organizations both operate on a nonprofit basis, there are some distinct differences you need to be aware of.
Each has its own structure, purpose, and regulatory obligations under Canadian law, which is why understanding how they differ is important for policymakers, volunteers, and donors alike.
In this charity vs nonprofit article, we compare the two, so you’re able to distinguish the differences between them and know which one fits your chosen cause.
What is a charity?
In Canada, a charity is a type of nonprofit organization operating exclusively for charitable purposes. Registered charities are charitable organizations, public foundations, or private foundations that are created and resident in Canada.
Their resources must be used for charitable activities and have purposes that apply to one or more of the categories below:
- Relief of poverty (food banks, soup kitchens, and low-cost housing units).
- Advancement of education (colleges, universities, and research institutes).
- Advancement of religion (places of worship and missionary organizations).
- Purposes beneficial to the community (animal shelters, libraries, and volunteer fire departments).
Once an organization has been granted charitable status and received an official registration number, they’re exempt from paying income tax and can issue tax receipts for donations.
If an organization is not registered, they do not qualify for these advantages. This is a crucial aspect of fundraising and generating public support.
What is a private foundation?
A private foundation is a type of charitable organization that receives funding from an individual, family, or business, rather than having a wide donor base. Contributing to the foundation’s capital, these donations are typically invested to distribute funds through grants for individuals or other nonprofits. The foundation may also fund charitable programs.
What is a nonprofit organization?
A nonprofit organization is an association, club, or society that’s organized and operated exclusively for social welfare, civic improvement, pleasure, recreation, or any other purpose except profit.
While a nonprofit can earn revenue, it must use these funds to pay employees and other operating costs. Any additional earnings or donations must go towards its objectives or back into the community, without personal financial gain.
Nonprofit organizations can vary in their purposes and activities. Here are some examples:
- Social, recreational, or hobby groups (bridge clubs, curling clubs, and golf clubs).
- Certain amateur sports organizations (hockey associations, baseball leagues, and soccer leagues).
- Certain festival organizations (parades and seasonal celebrations).
If an organization is operating as a charity, it can’t be considered a nonprofit organization. The Canada Revenue Agency (CRA) tax services offices decide if an organization qualifies for tax-exempt status as a nonprofit organization.
Differences between charity and nonprofit
While registered charities and nonprofit organizations both operate on a nonprofit basis, there are some differences.
Purpose
Charities:
- Must have purposes that are charitable and fit into one of the four recognized categories:
- Relief of poverty
- Advancement of education
- Advancement of religion
- Other purposes beneficial to the community (e.g., health services, environment, arts, etc.).
- Their activities must be for public benefit.
Nonprofits:
- Have a broader range of purposes that do not necessarily need to be charitable.
- They can exist to promote social welfare, civic improvement, recreation, or other non-commercial objectives.
- A nonprofit can benefit specific members (e.g., professional associations, sports clubs) as long as no profits are distributed.
Legal and tax status
Charities:
- Must be registered with the CRA to gain registered charity status.
- Registered charities receive a charitable registration number from the CRA.
- They can issue official donation receipts for income tax purposes.
- Charities are exempt from paying income tax.
- Generally must pay Goods and Services Tax (GST)/Harmonized Sales Tax (HST) on purchases.
- May claim a partial rebate of GST/HST paid on eligible purchases.
- Most supplies made by charities are exempt.
- Calculates net tax using the net tax calculation for charities.
Nonprofits:
- Do not have to register with the CRA, unless they want to apply for tax-exempt status.
- Nonprofits cannot issue tax-deductible donation receipts.
- While nonprofits are generally exempt from paying income tax, they must meet specific requirements to maintain this status.
- May have to pay tax on property income or capital gains.
- Nonprofits must ensure no income or assets benefit members, directors, or officers (except for reasonable compensation for services).
- Must pay GST/HST on purchases.
- May claim a partial rebate of GST/HST paid on eligible purchases only if it receives significant government funding.
- Few supplies made by nonprofit organizations are exempt.
- Calculates net tax the standard way.
Fundraising and donations
Charities:
- Can raise funds through donations and issue charitable tax receipts to donors.
- Eligible to apply for grants, including those from government programs or foundations that are restricted to registered charities.
- Donations made to charities are tax-deductible for the donor.
Nonprofits:
- Can raise funds but cannot issue tax receipts for donations.
- Often rely on membership fees, sponsorships, or program revenues rather than donations.
- Access to grants and funding opportunities may be more limited compared to registered charities.
Regulatory oversight
Charities:
- Face stricter regulations and reporting requirements under the CRA, including the requirement to file the T3010 annual return.
- Must ensure that all resources are used for charitable purposes and report on fundraising and activities.
- Must spend a minimum amount on its own charitable activities or as gifts to qualified donees.
Nonprofits:
- Have fewer reporting obligations than charities but must still file a T1044 information return if certain financial thresholds are exceeded.
- They are subject to general laws governing corporations or unincorporated associations, depending on their structure.
- Don’t have a spending requirement.
Profit usage
Charities:
- Profits must directly further their charitable purposes.
- They cannot distribute profits to directors, members, or stakeholders.
Nonprofits:
- Profits must be used to further the nonprofit’s stated goals.
- While they cannot distribute profits to members or stakeholders, they are allowed to run commercial activities as long as the profits benefit the organization’s purpose.
Fundraise for a charity with GoFundMe
Getting to grips with the difference between charity and nonprofit organizations in Canada is vital for people who want to make informed decisions about donations and getting involved. By acknowledging these distinctions, you’ll be better placed to contribute to an organization that fits your cause.
Having read this charity vs nonprofit comparison, you may have decided that partnering with a charity is the route to go down. If so, you can donate or fundraise for a charity using GoFundMe.
If you want to make a difference in the lives of Canadians and raise as much funds as possible, GoFundMe is ready to help.