One of the commonest questions I hear from founders is: “Should we set up a charity or a non-profit?”
People frequently use the two terms (i.e. “charity” and “non-profit”) as if they mean the same thing. In law, they do not. The choice of which to pursue shapes everything that follows. That makes it one of the most important decisions you will face.
At Bussey Ainsworth we specialise in Canadian charity and non-profit law. I’ve been doing this work for decades, and have seen just about everything under the sun. I wrote this blog post to help founders like you understand the difference between a charity and a non-profit, and how to decide which to choose.
The similarity
The most important thing to understand is that while every charity is a non-profit, not every non-profit is a charity.
Both have this core thing in common: neither exists to make its founders rich. As the term non-profit suggests, neither organization is created for the purpose of generating profit. For those who work for “non-profits,” you understand what I am saying.
This doesn't mean that staff working for either organisation can't be paid a fair wage. But it does mean that no one owns the organisation the way an owner owns a business. There are no shareholders, and no one is entitled to take home the profit at the end of the year.
Money that comes in, whether from fees, donations, or grants, has to serve the organisation's purposes. A non-profit can still run a surplus in a good year, keep reasonable reserves, and pay fair salaries for work actually done. What it cannot do is hand that surplus to its founders, members, or directors as profit.
The principle even outlasts the organisation. If a non-profit or charity is ever wound up, what is left cannot be divided among the people who ran it. It has to go to another non-profit or charity doing similar work.
The biggest difference: the tax receipt
But, while non-profits and charities have commonalities, the law treats the two very differently.
Here’s the single biggest difference between the two: A registered charity can issue official donation receipts.
Donors use tax receipts to lower their taxes. In brief, Canada uses a system of non-refundable tax credits, which reduce the amount of tax you owe but rarely return the full amount of tax paid on the donated income. For individual taxpayers, donations do not lower your gross income. Instead, they generate a tax credit that is applied directly against your total tax bill.
Charity tax law in Canada is among the most generous in the world, meaning that donors to Canadian charities will receive a significant portion of their donations back as a tax credit.
That power to issue tax receipts is the reason most groups that rely on personal giving want charitable status.
A non-profit cannot issue those receipts. Its members and supporters give without a tax credit.
So, if your plan depends on donations, grants, or foundation funding, you almost certainly need to be a charity. Most foundations will only fund registered charities.
What a non-profit is, and when it fits
A non-profit is a club, society, or association run for social welfare, recreation, civic improvement, or any purpose except profit, and except charity.
Think of a curling club, a ratepayers' association, a professional body, or a community league. It pays no income tax on most of its activity, and it files a simpler return, and only once it passes certain size thresholds.
It is not a charity, nor can it give its earnings to its members.
What a charity is, and what it asks of you
A charity must be set up for purposes the law treats as charitable:
- relieving poverty
- advancing education
- advancing religion
- other purposes that benefit the community
In exchange for the receipting power, it accepts more rules:
- an annual return to the CRA
- limits on its activities
- careful record-keeping
- ongoing oversight.
More power, more responsibility.
For most groups that raise money from the public, that trade is worth making.
The receipt is what opens the door to individual donors and to foundations. But it is a privilege the CRA expects you to keep earning each year, by staying inside your stated purposes and keeping your paperwork in order.
Weighing a charity against a non-profit?
We help founders choose the right structure and get it set up properly the first time, from anywhere in Canada. Rated 5.0 on Google.
A simple way to choose
Ask one question first. Do you need to give your donors a tax receipt? If yes, you are heading toward charitable status. If no, a non-profit may be simpler and faster.
Of course, not every organization can qualify as a charity. Even if you want to issue tax receipts, if your organization doesn’t meet the standards to be a charity, you won’t be able to.
So, the next step is to ask what your purpose is. If it fits the charitable categories and you want to raise donations, that points to a charity. If you are forming a members' club or association, that points to a non-profit.
An example: a group wants to run after-school tutoring funded by community donations. They need receipts and their purpose is educational, so seeking charity status is a fit.
On the other hand, a group of neighbours forming an association to maintain a shared lake road needs neither receipts nor charitable purposes, so maintaining a non-profit status is a fit.
Why this matters before you file
The structure is hard to undo. Switching later can mean new filings, sometimes a whole new entity, and lost time. Getting it right at the start saves months.
This is the conversation I have with clients before any paperwork. If you have already decided on charitable status, our charity registration page walks through what comes next.
If you’re having a hard time deciding, I can help you with that.
We can help you choose
I have spent much of my career in charity and non-profit law, including a decade as general counsel to a national association of charities. Choosing the right structure is the first thing I help new organisations get right.
If you are weighing a charity against a non-profit for a project in Ontario or anywhere in Canada, I am glad to help. You can book a consultation here.
Barry W. Bussey, Ph.D. (Leiden), has practised law for over 30 years. During that time, he served for ten years as Director of Legal Affairs for a national charity-sector association, appeared at every level of the judiciary, including five times before the Supreme Court of Canada, and taught as an adjunct law professor. He practises real estate, wills and estates, charity, and non-profit law in Peterborough with Bussey Ainsworth.
This article is for general information only and does not constitute legal advice. The right structure depends on your organisation’s specific facts. Please consult a lawyer before you file.
