Tax time can be stressful for nonprofit and charitable organizations in Canada, especially when the filing requirements are not well understood within the organization.
Even though not-for-profits don’t pay income tax, the requirement to file a tax return has been in place since 1993, and penalties exist for late filing. Organizations that may be filing their returns for the first time can set themselves up for success by having a clear idea of the nonprofit tax requirements set out in this article.
Understand the “Income Tax Act”
Both personal and corporate income taxes fall under Canada’s federal Income Tax Act, which is enforced by the Canada Revenue Agency (CRA). The complete text of the Income Tax Act is available to read online, in both English and French, though weighing in at 3,000 pages, it wouldn’t be considered light reading.
Both nonprofit organizations (NPOs) and registered charities are defined within the Act. The terms nonprofit and charity are often used interchangeably in everyday conversations, but there are important differences between the two types of not-for-profit organizations when it comes to tax filing. While charities must register with the CRA and can only operate for charitable purposes, nonprofit organizations can serve any number of purposes that do not generate a profit, including social welfare, civic improvement, pleasure or recreation. The tax forms that must be filed by registered charities and nonprofit organizations also differ.
The one aspect that charities and NPOs share in common is that they are both exempt from paying income tax. However, NPOs are not allowed to issue tax receipts for any donations they receive or for the membership fees they collect, while registered charities are required to do so.
Know your Tax Forms
The most basic form that nonprofit organizations will need to file is Form T1044, also known as the NPO Information Return. However, this is not the only form required since NPOs can choose to incorporate or remain unincorporated. Organizations that are incorporated must also file either a T2 – Corporation Income Tax Return or a T2 Short form.
Larger incorporated NPOs may also need to file Form T1044 if, during the fiscal year, they received dividends, interest, rental, or royalties exceeding $10,000, own assets totalling more than $200,000, or were required to submit form Form 1044 in the previous tax year. Finally, NPOs that are held by a trust, which are usually organizations that provide dining, recreational, or sporting facilities, must also file a T4013, T3 – Trust Guide form.
Registered charities must complete Form T3010 – Registered Charity Information Return and Form TF725 – Registered Charity Basic Information Sheet. The charity must include a copy of their financial statements with these forms, including any relevant notes. In addition Form T1235, a worksheet for directors, trustees and like officials, must be completed. A number of other worksheets and schedules may also need to be filed, depending on factors like the charity’s organizational structure or gifts received during the year.
Not-For-Profit Tax Time
The beginning and end of the fiscal year is not the same for every not-for-profit organization, as it is at the discretion of the organization to establish its own fiscal year period. Therefore the rule established by the CRA is that all returns are due six months after the end of the fiscal year for both charities and NPOs. For a not-for-profit organization that runs its fiscal in parallel to the calendar, from January to December, their returns would be due annually on June 30.
Penalties for Late Filing
Ideally, every organization will file on time, but if not, various penalties may be applied. If a registered charity fails to file their T3010 annual return by the due date, the charity’s registered status can be revoked by the CRA. A late-filing penalty of $500 may also be issued by the CRA anytime after the due date.
If the charity has not filed a return by seven months following the end of their fiscal year–so one month after their due date–the CRA will send a Notice of Intention to Revoke a Charity’s Registration (Form T2051A). In general, the legal process to revoke a charity’s registration will not begin until the tenth month after the charity’s fiscal year end. The CRA may also issue penalties if it receives tax receipts that are incorrect or incomplete, or if there are further problems with the charity’s books or other financial records.
The penalties for nonprofit organizations that file late are less severe as NPOs are generally under less stringent regulations compared to registered charities. If an NPO does not file its T1044, the CRA may issue a penalty of $25 per day, up to a maximum of $2,500 per year for each filing that was missed. NPOs also have the option of using the CRA’s Voluntary Disclosures Program, which would allow the organization to file outstanding tax returns.
Filing for the first time may still seem daunting for many not-for-profit organizations, but there are so many resources readily available that can help make it pretty easy. If you’re looking for assistance with these services please give our team a chat!
Year-end guide: December 2021
It’s a good idea to perform certain year-end tasks with your financial records at the end of the calendar year. Some of the tasks are just good financial housekeeping, while others are required by the government.
Fortunately, you can spread the tasks over the period from December to February.
The following sections outline information about the tasks to perform in each month, as well as employee-related tasks for the end of the year.
December is a good time to tie up loose ends for the closing year, to make profit distributions, and to start preparing for tax time with your accountant.
Create and send customer statements
The end of the year is a good time to remind your customers of any outstanding balances that they owe to you, or to send them a statement of their activity throughout the year.
It’s not mandatory, but you can choose to distribute profits (also known as Retained Earnings) to the owners or partners at the end of the year.
Prepare for taxes
Many small business owners use an accountant, especially at tax time.
If you haven’t already done so, now is a good time to give your accountant access to your QuickBooks Online company so they can review your financial reports and other data, and even make any necessary changes before the end of the year.
January is when you should reconcile your accounts, prepare summary reports, and (optionally) close your books for the previous calendar year.
If you haven’t already done so, it’s also a good time to get in touch with your accountant and talk about preparing for tax time.
Reconcile your accounts
At the end of the year, and when you prepare your taxes, you’ll want to have the most up-to-date and correct information in your financial reports. Reconciling can help ensure that.
When you reconcile an account, you compare the beginning balance and transactions listed in your QuickBooks Online company file with your monthly bank or credit card statements to make sure they match. Reconciling is like balancing a chequebook, as you review your bank statement to make sure it matches the amounts you recorded in your cheque register.
The process helps to ensure that important financial reports, like your Balance Sheet, are accurate.
Reconciling can seem intimidating if you haven’t done it before, or if you haven’t done it for a while if we can be of assistance please get in touch
Run Balance Sheet and Profit and Loss reports
The start of the new year is the natural time to run reports and evaluate how your business performed over the previous year.
Running reports is also an essential part of preparing for taxes.
The two most important reports that you and your accountant will need are the Balance Sheet and Profit and Loss reports, and it’s a good idea to run these reports at the beginning of the year. Make sure the date range in the Transaction Date field for these reports covers the year you’re reporting on.
The bulk of your year-end work should be complete by February, with just a task or two to finish up and prepare for taxes.
Prepare for taxes
An accountant is a valuable resource, especially at tax time. If you don’t have one or are looking for a change give us a call
Payroll – Do you have employees?
If you have employees (not independent consultants or contractors), there are additional tasks you should complete at the end of the year, along with additional government forms to file and deadlines to meet.
- If you use standard QuickBooks Online Payroll, you can access information about year-end payroll tasks in QuickBooks Online by selecting Employees from the left menu, and then selecting Payroll year-end guide.
- If you use a different payroll provider, it’s important that you consult them for items and forms to complete for the end of the year.
Review these important direct deposit cut-off dates as you plan your year-end payroll work.
|Payroll date||Approve payroll by|
|December 24, 2021||December 22, 2021|
|December 25, 2021||N/A on holiday|
|December 26, 2021||N/A on holiday|
|December 27, 2021||N/A on holiday|
|December 28, 2021||N/A on holiday|
|December 29, 2021||December 23, 2021|
|December 30, 2021||December 24, 2021|
|December 31, 2021||December 29, 2021|
|January 1, 2022||N/A on holiday|
|January 3, 2022||N/A on holiday|
|January 4, 2022||December 30, 2021|
|January 5, 2022||December 31, 2021|
Other dates to remember
As you work through your year-end plan, don’t forget these important dates for your T4 and RL-1 forms.
- January 4, 2022- Electronic filing options are available online with Canada Revenue Agency and Revenu Québec.
- February 28, 2022- The deadline to export your T4 file and submit T4s and RL-1s with CRA and Revenue Quebec. You also must provide your employees a copy for their own records, which they use to do their personal income tax.
Many businesses operate using the Internet. Doing business like this is also called e-commerce. This page contains information on e-commerce and on reporting requirements for doing business on the Internet. There is also information on capital cost allowance for computer software and website development costs.
E-commerce is the delivery of information, products, services or payments by telephone, computer or other automated media. This definition includes the many kinds of business activities that are being conducted electronically. However, e-commerce is much more comprehensive than just purchasing goods and services electronically.
E-commerce can also include retail transactions that take place by:
- automated banking machine
- credit card
- debit card
- television shopping
- secure private computer networks through electronic data interchange
- the delivery of government services
- business that is handled over the Internet
Reporting Internet business activities
All existing tax laws that apply to businesses also apply to business conducted over the Internet. If you earn income from one or more webpages or websites, you may need to report the web addresses and the income they earn. Depending on your business structure, you have different reporting requirements.
Webpages and websites to report
Indicate your webpages or websites that generate income. If you have more than five webpages or websites, specify the top five income generators. If they do not generate income, such as telephone directory websites and information-only webpages, you do not need to report them. Examples of webpages or websites that you should include are:
- webpages and websites that allow the completing and submitting of an order form, the checking-out of a shopping cart or similar transactions
- online marketplace websites where your goods or services are sold
- webpages and websites hosted outside of Canada
- advertisements, programs or traffic to your site that generate income
Report the gross income received from all of your Internet business activities as a percentage of your total gross income. If you cannot determine the exact percentage, give a reasonable estimate. See the headings below for how to report it depending on your business structure.
If your corporation earns income from one or more webpages or websites, you are required to file Schedule 88, Internet Business Activities, along with your corporation income tax return (T2) for tax years where your filing due date is after December 31, 2014.
If your partnership earns income from one or more webpages or websites, currently you do not have to report Internet income information separately.
If you earn income from one or more webpages or websites, complete the Internet business activities section of the following forms that apply to you, along with your general income tax and benefit package (T1):
Capital cost allowance – computer software and website development costs
In general, computer software or website development costs are either:
- current and deductible in the year they are incurred
- capital and deductible under the rules in the Income Tax Act for capital cost allowance
For more information on general principles for capital cost allowance, see Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance.
If it is computer software that is a depreciable asset, include it Class 12. If it is system software, include it in Class 8, 10, 29 or 40.
“Computer software” includes system software and a right or a license to use computer software.
“Systems software” refers to the general operating system that enables running the application of programs, directs and coordinates the different operations of the computer. This includes all of the input and output between the keyboard, the computer screen, the printer, the disk drives and other peripheral equipment.
Generally, software is considered depreciable if it is of an enduring nature, which generally means that its useful life is anticipated to be beyond one year.
There are no specific provisions in the Act regarding the treatment of website development costs but some of the principles in the Income Tax Folio S3-F4-C1 can apply to website development costs.
Whether a website development cost is current or capital is always a question of fact.
If a website development cost is a capital cost it may be for the acquisition of “general purpose electronic data processing equipment” and therefore included in Class 10(f) or it may be for the acquisition of computer software and therefore included in Class 12(o).
Cryptocurrency is a relatively new innovation that requires guidelines on taxation so that Canadians are aware of how to meet their tax obligations. The Senate reviewed the issue of taxation on cryptocurrency in 2014 and recommended action to help Canadians understand how to comply with their taxes, which the Canada Revenue Agency (CRA) is doing by presenting this guide.
Tax treatment of cryptocurrency for income tax purposes
Cryptocurrency is a digital representation of value that is not legal tender. It is a digital asset, sometimes also referred to as a crypto asset or altcoin that works as a medium of exchange for goods and services between the parties who agree to use it. Strong encryption techniques are used to control how units of cryptocurrency are created and to verify transactions. Cryptocurrencies generally operate independently of a central bank, central authority or government.
The following pages outline the income tax implications of common transactions involving cryptocurrency. When we refer to cryptocurrency in this publication, we are talking about Bitcoin or other similar virtual currencies.
The CRA generally treats cryptocurrency like a commodity for purposes of the Income Tax Act. Any income from transactions involving cryptocurrency is generally treated as business income or as a capital gain, depending on the circumstances. Similarly, if earnings qualify as business income or as a capital gain then any losses are treated as business losses or capital losses.
Taxpayers have to establish if a cryptocurrency activity results in income or capital because this affects the way the revenue is treated for income tax purposes. Not all taxpayers who buy and sell cryptocurrency are carrying on business activity.
When you use cryptocurrency to pay for goods or services, the CRA treats it as a barter transaction for income tax purposes. A barter transaction occurs when two parties exchange goods or services and carry out that exchange without using legal currency. For more information, please review our archived content on barter transactions.
To figure out the value of a cryptocurrency transaction where a direct value cannot be determined, you must use a reasonable method. Keep records to show how you figured out the value. Generally, the CRA’s position is that the fair market value is the highest price, expressed in dollars that a willing buyer and a willing seller who are both knowledgeable, informed and prudent, and who are acting independently of each other, would agree to in an open and unrestricted market. For example, you could choose an exchange rate taken from the same exchange broker you are using or an average of midday values across a number of high-volume exchange brokers. Whichever method you choose, use it consistently.
If you hold more than one type of cryptocurrency in a digital wallet, each type of cryptocurrency is considered to be a separate digital asset and must be valued separately. For example, a Bitcoin is valued separately from a Litecoin.
Reporting business income or capital gains from the disposition of cryptocurrency
What is a disposition?
This refers to the way you get rid of something, such as by giving, selling or transferring it. In general, possessing or holding a cryptocurrency is not taxable. But there could be tax consequences when you do any of the following:
- sell or make a gift of cryptocurrency
- trade or exchange cryptocurrency, including disposing of one cryptocurrency to get another cryptocurrency
- convert cryptocurrency to government-issued currency, such as Canadian dollars
- use cryptocurrency to buy goods or services
Is it business income or capital gain?
The income you get from disposing of cryptocurrency may be considered business income or a capital gain. In order to report it correctly, you must first establish what kind of income it is.
The following are common signs that you may be carrying on a business:
- you carry on activity for commercial reasons and in a commercially viable way
- you undertake activities in a businesslike manner, which might include preparing a business plan and acquiring capital assets or inventory
- you promote a product or service
- you show that you intend to make a profit, even if you are unlikely to do so in the short term
Business activities normally involve some regularity or a repetitive process over time. Each situation has to be looked at separately.
In some cases, a single transaction can be considered a business, for example when it is an adventure or concern in the nature of trade. Whether you are carrying on a business or not must be determined on a case by case basis. For more information, please review our archived content on an adventure or concern in the nature of trade.
Another factor in deciding if there is a business activity is the date when the business begins. If you are still setting up or preparing to go into business, you might not be considered to have started the business. You usually have to undertake significant activity that is part of your income-earning process. Any funds or property you receive before your business begins are not generally considered to be business income. Similarly, you cannot claim deductions for income tax purposes before the business begins. For more information, please review our archived content on the start of business operations.
Some examples of cryptocurrency businesses are:
- cryptocurrency mining
- cryptocurrency trading
- cryptocurrency exchanges, including ATMs
Paragraphs 9 to 32 of Interpretation Bulletin IT-479R : Transactions in securities, provide general information to help you figure out if transactions are income or capital gains. Although the discussion of income and capital in this interpretation bulletin is helpful, remember that cryptocurrencies are not Canadian securities under the Income Tax Act.
Reporting as either income or capital gain
Generally, if disposing of cryptocurrency is part of a business, the profits you make on the disposition or sale are considered business income and not a capital gain. Buying a cryptocurrency with the intention of selling it for a profit may be treated as business income, even if it’s an isolated incident, because it could be considered an adventure or concern in the nature of trade.
If the sale of a cryptocurrency does not constitute carrying on a business, and the amount it sells for is more than the original purchase price or its adjusted cost base, then the taxpayer has realized a capital gain.
Capital gains from the sale of cryptocurrency are generally included in income for the year, but only half of the capital gain is subject to tax. This is called the taxable capital gain. Any capital losses resulting from the sale can only be offset against capital gains; you cannot use them to reduce income from other sources, such as employment income. You can carry forward your capital losses if you do not have any capital gains against which to offset those losses for the year or any of the preceding three years.
For more information on capital gains, see Guide T4037, Capital Gains.
Trading cryptocurrency for another type of cryptocurrency
Generally, when you dispose of one type of cryptocurrency to acquire another cryptocurrency, the barter transaction rules apply. You have to convert the value of the cryptocurrency you received into Canadian dollars. This transaction is considered a disposition and you have to report it on your income tax return. Report the resulting gain or loss as either business income (or loss) or a capital gain (or loss).
Example 1: Business income or loss
Alice regularly buys and sells various types of cryptocurrencies. She pays close attention to the fluctuations in the value of cryptocurrencies and intends to profit from the fluctuations. Her activities are consistent with someone who is engaged in the business of day trading. In 2017, Alice sold $240,000 worth of various cryptocurrencies, which she originally purchased for $200,000. Her net profit is $40,000. Since Alice is actively trading in cryptocurrency, which is a commercial activity, she has to report business income of $40,000 on her 2017 income tax return.
Example 2: Capital gain or loss
Tim found a deal on a living room set at an online vendor that accepts Bitcoin. Tim acquired $3,500 worth of Bitcoin to buy the furniture with. By the time he bought the furniture and converted his remaining Bitcoin back into dollars, the value of Tim’s Bitcoin had increased by $500. The gain realized by Tim was on account of capital, so Tim has to report a $500 capital gain on his income tax return. However, only 50% of that capital gain is taxable.
Example 3: Trading one type of cryptocurrency for another
On July 30, 2018, Francis bought 100 units of Ethereum, which had a value of $20,600. For this purchase, Francis used 2.5061 Bitcoins, which were trading at $8,220 per unit on that day, or the equivalent of $20,600. We consider that Francis disposed of those Bitcoins. Francis originally bought those Bitcoins for $15,000 and exchanged them for 100 units of Ethereum at a value of $20,600, resulting in a capital gain. It is calculated as follows:
$20,600 [fair market value of 2.5061 Bitcoins at the time of transaction]
– $15,000 [adjusted cost base of 2.5061 Bitcoins, their original purchase price]
$5,600 capital gain
$5,600 capital gain taxed at 50% = $2,800 taxable capital gain
If, on the other hand, the original purchase price of the 2.5061 Bitcoins had originally been $25,000, but at the time that Francis exchanged them for 100 units of Ethereum they were worth only $20,600, he would have a capital loss. It is calculated as follows:
$20,600 [fair market value of 2.5061 Bitcoins at the time of transaction]
– $25,000 [adjusted cost base of 2.5061 Bitcoins, their original purchase price]
$4,400 capital loss
$4,400 capital loss × 50% = $2,200 allowable capital loss
This example assumes that the cryptocurrency in question was held as an investment on account of capital; however, if this transaction occurred in the course of conducting a business, the entire amount of $5,600 would need to be reported as income in the first transaction and the entire $4,400 would be reported as a loss in the second transaction.
Earning cryptocurrencies through mining
Cryptocurrencies are commonly acquired in two ways:
- bought through a cryptocurrency exchange
- earned through mining
Mining involves using specialized computers to solve complicated mathematical problems which confirm cryptocurrency transactions. Miners will include cryptocurrency transactions into blocks, and try to guess a number that will create a valid block. A valid block is accepted by the corresponding cryptocurrency’s network and becomes part of a public ledger, known as a blockchain. When a miner successfully creates a valid block, they will receive two payments in a single payment amount. One payment represents the creation of new cryptocurrency on the network and the other payment represents the fees from transactions included in the newly validated block. Those who perform the mining processes are paid in the cryptocurrency that they are validating.
The income tax treatment for cryptocurrency miners is different depending on whether their mining activities are a personal activity (a hobby) or a business activity. This is decided case by case. A hobby is generally undertaken for pleasure, entertainment or enjoyment, rather than for business reasons. But if a hobby is pursued in a sufficiently commercial and businesslike way, it can be considered a business activity and will be taxed as such.
Valuing cryptocurrencies either as capital property or inventory
To file your income tax return, you need to know how to value your cryptocurrencies. This depends on whether they are considered capital property or inventory. When cryptocurrencies are held as capital property, you must record and track the adjusted cost base so that you can accurately report any capital gains.
If the cryptocurrencies are considered to be inventory, use one of the following two methods of valuing inventory consistently from year to year:
- value each item in the inventory at its cost when it was acquired or its fair market value at the end of the year, whichever is lower
- value the entire inventory at its fair market value at the end of the year (generally, the price that you would pay to replace an item or the amount that you would receive if you sold an item)
You might have to use other methods of valuing inventory, depending on the type of business you have. For example, property described in the inventory of a business that is an adventure or concern in the nature of trade must be valued at the cost you acquired the property for.
You will have to compare the cost and the fair market value of each item to figure out which is lower. You then use the lower figure for each item (or each class of items if specific items are not easily separated) to calculate the total value of your inventory at the end of the year.
“Cost” as used in the phrase “cost at which the taxpayer acquired the property,” means the original cost of the particular item of inventory (for example, a block of cryptocurrency), plus all reasonable costs incurred to buy that particular block of cryptocurrency.
Use the same inventory method from year to year. Please review our archived page on inventory .
For more information on valuating inventory, including the special rules for an adventure in the nature of trade, please review our archived content on this topic here.
Keeping books and records
If you acquire (by mining or otherwise) or dispose of cryptocurrency, you have to keep records of your cryptocurrency transactions. This also applies to businesses that accept cryptocurrency as payment for goods and services.
Cryptocurrency exchanges have different standards for the kinds of records they keep and how long they keep them. If you use cryptocurrency exchanges, we suggest that you export information from these exchanges periodically to avoid losing the information necessary to report your transactions. You are responsible for keeping all required records and supporting documents for at least six years from the end of the last tax year they relate to.
You should maintain the following records on your cryptocurrency transactions:
- the date of the transactions
- the receipts of purchase or transfer of cryptocurrency
- the value of the cryptocurrency in Canadian dollars at the time of the transaction
- the digital wallet records and cryptocurrency addresses
- a description of the transaction and the other party (even if it is just their cryptocurrency address)
- the exchange records
- accounting and legal costs
- the software costs related to managing your tax affairs.
If you are a miner, also keep the following records:
- receipts for the purchase of cryptocurrency mining hardware
- receipts to support your expenses and other records associated with the mining operation (such as power costs, mining pool fees, hardware specifications, maintenance costs, and hardware operation time)
- the mining pool details and records
Please note that different types of software are available to track cryptocurrency trades and maintain records. The CRA does not endorse any particular software, so choose the type of software that is best for you to help with your record keeping.
For more information, please review our link on keeping records.
How does the GST/HST apply to cryptocurrency?
Where a taxable property or service is exchanged for cryptocurrency, the GST/HST that applies to the property or service is calculated based on the fair market value of the cryptocurrency at the time of the exchange.
If your business accepts cryptocurrency as payment for taxable property or services, the value of the cryptocurrency for GST/HST purposes is calculated based on its fair market value at the time of the transaction.
Keep all records that show how you calculated the fair market value.