For board members and executives joining the nonprofit community from other industry sectors, the issues around taxation can be quite novel. Nonprofits, for example, are exempt from paying income taxes. Yet every nonprofit has a number of important tax obligations, and officers and directors are responsible for ensuring the organization complies with these.
While nonprofits may be exempt from paying income taxes, for instance, it is the responsibility of management and the board to review the organization’s mission and goals at the end of each fiscal year to ensure that activities are consistent with nonprofit purposes. Otherwise, the organization may not qualify for tax exemptions. This could arise, for example, in situations where profits exceed a “reasonable need” to carry on an organization’s nonprofit activities. Or where a nonprofit exceeds a reasonable amount of time to use surpluses. Or where an organization uses profits for purposes that are not directly related to the mission of the organization, such as long-term investing.
Deciding to incorporate
Many nonprofits incorporate in order to establish the organization as a separate legal entity. This limits the liability of officers, directors and members, and also enables the organization to own property, secure loans, and sign contracts in its own name. As well, funders often feel more comfortable donating to an entity that has legal status.
While a nonprofit corporation can earn a profit, to avoid jeopardizing its nonprofit status, the organization cannot distribute this profit to members, directors or officers. It must be used to advance the mission of the organization.
Filing your return
Most nonprofits are required to file information form T1044 annually with the Canada Revenue Agency no later than six months after the end of their fiscal period. This applies in the following situations:
- the organization received or was entitled to receive taxable dividends, interest, rents or royalties aggregating more than $10,000 in the fiscal period;
- the total assets of the organization were more than $200,000 at the end of the immediately preceding fiscal period; or
- a return had to be filed for a previous fiscal period.
Nonprofit organizations located in Quebec have additional information filing requirements.
Registered charities have different tax treatment than nonprofits. Like nonprofits, they are also exempt from paying income tax, but unlike nonprofits, they are allowed to issue charitable donation receipts for tax purposes. As well, charities are generally required to disburse 80% of the funds for which they issued tax receipts on charitable activities or provided gifts to qualified donees. Registered charities are also required to submit annual financial statements with information form T3010A for fiscal periods that end in 2008, and T3010B for fiscal periods ending in 2009 and later (and for those registered in Quebec, also form TP-985.22-V). This information is then available to the public, unless the charity is a religious organization.
GST and PST
When it comes to commodity taxes such as the goods and services tax (GST) and provincial sales taxes (PST), there are other key differences between registered charities and nonprofits. Charities, for example, receive certain tax exemptions. They do not have to charge GST/HST for most of the goods and services they provide. As well, most can claim a rebate of 50% on the purchase of eligible expenses, including general operating and overhead expenses (rent, utilities, administration expenses, etc); employee/volunteer allowances and reimbursements; and capital property including buildings, equipment, vehicles, office furniture and computers.
Nonprofits, on the other hand, should charge GST and PST on many of the services they supply. If an organization’s total taxable annual sales exceed $50,000, it is required to register for GST. If, however, the nonprofit has more than one branch or division, each branch may be considered separate for GST/PST purposes and can make taxable sales of up to $50,000 without having to collect and remit the tax. Nonprofits whose sales fall below this threshold may still choose to register for GST if they wish to claim input tax credits (ITCs) for the expenses they incur in making taxable sales. Some nonprofits that are more than 40% government funded are also eligible to claim 50% rebates similar to charities.
Registrants must report and remit GST and PST on a monthly, quarterly or annual basis, depending on total taxable sales. Directors of nonprofit organizations are liable for unremitted GST.
Given the complexity of commodity taxes and the many qualification and compliance issues, management should consult with a tax specialist to clearly understand the nonprofit’s obligations. A specialist can also provide valuable advice regarding how to minimize the tax burden.
Source deductions and additional requirements
Source deductions are another tax responsibility for incorporated nonprofits that pay remuneration to employees. All directors must ensure that a corporation meets its obligations for remitting government source deductions. These include employee income tax deductions, Canada Pension Plan, or other pension plan contributions and employment insurance payments. If the corporation fails to meet these obligations, directors can be held personally liable, as well as jointly and severally with other members of the board.
There are also filing requirements if a nonprofit has paid employees more than $500 of remuneration during the year, provided taxable group term life insurance benefits, or paid CPP/QPP contributions or employment insurance premiums. In these cases, the organization must file T4 information returns as well as summary forms of source deductions and employer contributions. Nonprofits in Quebec are also required to file RL-1 and RLZ-1.S-V forms.
Directors are responsible for ensuring a nonprofit remits the appropriate source deductions and files the necessary forms, and collects and remits applicable GST and PST. If the organization does not meet these requirements, directors can be held liable for amounts owing, along with interest and penalties.
So when it comes to “taxing issues,” understanding and meeting obligations is critical. It’s equally important to manage taxes effectively. By using every available tax advantage, a nonprofit can minimize its tax burden, maximize cash flow, and carry out its mission with confidence.
Stephen Meek, FCA, is a partner of BDO Dunwoody LLP. He provides taxation and advisory services to nonprofit, private, and public organizations. You can reach Stephen at (905) 946-1066 or smeek@bdo.ca.
