What's the difference between charity or social enterprise in Canada?

Many people confuse charities and social enterprises because both aim to create positive social change. The key difference lies in how they operate and fund their activities.

A charity is a not-for-profit organisation that relies mainly on donations and grants. A social enterprise uses business activities to generate income and can be for-profit or not-for-profit.

Charities focus on a specific public benefit, such as relieving poverty or protecting the environment. They must reinvest any surplus to support their cause.

Social enterprises blend purpose with commerce. They use profits from selling goods or services to fund their mission, sometimes sharing profits with investors.

Understanding these distinctions helps organisations choose the right model for their goals and funding strategies. This knowledge also clarifies legal requirements, tax benefits, and how each structure affects governance and sustainability.

How does a nonprofit organization differ from a charity?

While these phrases are often used interchangeably in everyday speech, the Canada Revenue Agency (CRA) provides a useful chart that highlights the distinctions between their legal definitions under the Income Tax Act.

In Canada, the term "nonprofit" is typically used to describe organizations that fall into one of three categories:

Registered Charity

Charities differ from not-for-profit corporations in that they operate programs that fulfill the charitable activities specified by the Charities Directorate of the Canada Revenue Agency. These organizations are subject to registration and regulation by the CRA, and they possess the authority to provide tax receipts to contributors.

Foundation

Canadian foundations are a specific type of registered charity whose primary purpose is to allocate funds to qualified donees. These entities may provide grants (donations) to other charities, function as a funding source for another charitable organization (such as hospital foundations), or engage in their own charitable initiatives.

Nonprofit corporation

Incorporated as a distinct legal entity apart from its directors and members, some organizations may decide against registering as a charity with the CRA. While they are permitted to generate profits, any earnings are utilized to advance their corporate objectives and are not distributed among shareholders, members, or directors.

Which option is suitable for you?

The choice of which option to pursue is contingent upon the nature of your planned activities. While charities offer certain advantages, such as the ability to provide tax receipts to donors, favorable income tax treatment, and a high level of public confidence, not-for-profit corporations and social enterprises encounter fewer regulatory restrictions when it comes to generating revenue through events, fundraising, and product sales. Here are some alternatives to establishing a charity:

Collaborating with an established charitable organization

Utilize online platforms like CanadaHelps, CharityData, or the CRA's registry of approved charities to investigate established charitable organizations that offer comparable services or advocate for the same cause.

Functioning as a nonprofit organization

In situations where your goals involve both charitable and non-charitable activities, establishing a nonprofit corporation may be more suitable. Nonprofits have more flexibility in their operations, despite not being able to provide tax receipts. Compared to charities, nonprofits face less stringent rules in the following areas:

• Political involvement (charities have limitations)
• Organizing fundraising events and other types of events (charities are required to follow receipting protocols)
• Charging user fees (charities are required to follow receipting protocols, which nonprofits are not bound by).

Operating as a social enterprise or commercial entity

If your program or service is beneficial to both the community and the participants, and the fees or sales from related products generate revenue that surpasses the cost of running the program(s), establishing a social enterprise could be a viable option. In addition, commercial enterprises can recover all of the GST/HST/QST they pay through input tax credits, while charities receive only approximately half of the tax rebate.

Legal Structures and Registration

Legal structures shape how organisations operate, raise funds, and meet regulations. Different forms suit charities and social enterprises based on their goals and financial activities.

Registration with government authorities is a key step to gain legal recognition and follow the right rules.

Common Legal Structures for Charities

Charities often use structures like company limited by guarantee, incorporated association, or charitable trust.

A company limited by guarantee is popular as it limits liability for members and provides a clear governance framework. It must comply with the Charities Act and register on the relevant charities register.

An incorporated association suits smaller groups. It is easier to manage but is mainly for local operation and has limits on fundraising scope.

Charitable trusts involve holding assets for a charitable purpose. They require trustees and follow strict rules on asset use.

All these structures must register with a charities register and meet reporting and operational requirements under Canadian law.

Common Legal Structures for Social Enterprises

Social enterprises can use for-profit or not-for-profit legal forms depending on their mission and funding model.

Common choices include:

• For-profit corporations, sometimes structured as a social purpose business under corporate law.
• Co-operative corporations, which focus on member control and community benefit.
• Nonprofit corporations, which reinvest profits back into the mission.

Social enterprises must ensure their legal form supports social goals. Their structure influences marketing, governance, and tax requirements.

Unlike charities, social enterprises are not always required to register on a charities register. They must comply with corporate regulations.

Business Registration Requirements

Registration depends on the structure and jurisdiction.

Charities must register with the Canada Revenue Agency (CRA) to receive charitable status and tax benefits.

They also register with provincial charities registers when applicable.

Social enterprises often register with corporate regulators such as Corporations Canada or provincial bodies like ASIC (in provinces using Australian terms) or their Canadian equivalents.

Registration requires submitting governance documents, mission statements, and financial plans. It also triggers ongoing reporting, such as annual financial statements and compliance with governance standards.

Proper registration protects organisations and builds trust with donors, partners, and customers.

Tax Concessions and Financial Benefits

Tax treatment and financial advantages differ significantly between charities and social enterprises. Access to exemptions and special status affects funding options, reporting obligations, and eligibility for government grants.

Understanding these elements helps organisations choose the best structure for financial efficiency and compliance.

Tax Exemptions for Charities

Charities registered with the Canada Revenue Agency (CRA) often qualify for income tax exemptions. They do not pay tax on income directly related to their charitable activities.

Charities must apply for and maintain this status through the CRA and follow strict rules about their operations and financial reporting.

Registered charities may also receive exemptions on certain provincial taxes and property taxes, depending on local regulations. These tax reliefs reduce operating costs and free up resources to advance their mission.

Charities must file annual returns with the CRA to retain their tax-exempt status. Failure to meet compliance requirements can result in penalties or loss of exemption.

Tax Treatment of Social Enterprises

Social enterprises do not automatically receive tax exemptions like registered charities. They are typically subject to ordinary business taxes, including income tax and, where applicable, GST/HST.

Social enterprises can sometimes benefit from specific tax concessions if they operate under certain nonprofit legal structures or reinvest profits to advance social goals. They have flexibility in how they use and distribute profits.

Social enterprises that focus on trading activities must comply with standard business tax rules. This includes filing regular tax returns and maintaining proper financial records.

Tax advantages depend on the entity type and activities rather than a broad exemption.

Deductible Gift Recipient Status

Deductible Gift Recipient (DGR) status allows donors to claim income tax deductions for donations. Only registered charities usually qualify for DGR status in Canada.

This status enhances fundraising capacity because donors receive financial incentives to give. DGR can be crucial for charities relying on philanthropy and government grants.

Social enterprises generally do not have DGR status. This limits their ability to attract tax-deductible donations unless they form an affiliated charitable arm or register as a charity themselves.

The presence or absence of DGR affects the type and source of funding available to organisations.

Fundraising and Income Sources

Fundraising and income generation differ significantly between charities and social enterprises. Charities rely mainly on donations and grants, enjoying certain tax advantages.

Social enterprises focus on revenue from selling goods or services, which supports their social goals while covering costs.

Fundraising Models

Charities primarily raise money through donations, grants, and public fundraising events. These activities often benefit from tax concessions, allowing donors to receive tax receipts, which encourages giving.

Government grants are also a key funding source, supporting activities that provide public benefit or aid.

Social enterprises may accept donations but focus less on traditional fundraising. Their income mainly comes from customers who buy their products or services.

This approach offers more flexibility but generally does not offer the same tax receipt benefits as charities.

Trading and Commercial Activities

Social enterprises operate by trading goods or services that directly support their social missions. This business model allows them to generate reliable income and become sustainable without depending solely on external funding.

Charities can engage in commercial activities but face more rules and limits. Any profits must be reinvested into charitable programs.

Charities only receive partial recovery on sales taxes paid (like GST/HST), while social enterprises can usually recover these taxes fully.

Grant and Donation Eligibility

Charities have access to a wider range of government grants due to their registered status and clear public benefit focus. Being a registered charity also allows them to issue official tax receipts, which helps attract donations.

Nonprofits and social enterprises often have fewer opportunities for grants and cannot provide tax receipts. They face fewer restrictions when delivering services or charging user fees, allowing them to combine business activities with social impact.

Governance, Compliance, and Regulation

Charities and social enterprises must follow specific rules and standards to operate legally and effectively. These rules ensure they manage resources responsibly and maintain public trust.

Different bodies and regulations set these requirements and oversee compliance. Proper governance is essential to meet these obligations and align with public policy.

Key Regulatory Bodies

In Canada, registered charities fall under the Canada Revenue Agency (CRA), which regulates their status, tax benefits, and public reporting. The CRA enforces the Charities Act, which outlines rules for charitable activities and fundraising.

Social enterprises structured as corporations often register under provincial laws or as companies limited by guarantee. In some provinces, the Office of the Superintendent of Bankruptcy or provincial corporate registries oversee these entities.

The Australian Charities and Not-for-profits Commission (ACNC) is not relevant in Canada but may be mentioned for comparison. Canadian charities do not report to ACNC but must comply with the CRA’s rigorous standards.

Agencies like the Australian Securities and Investments Commission (ASIC) govern for-profit companies and some social enterprises internationally. Canadian social enterprises may be subject to provincial securities regulators if they raise capital.

Reporting and Compliance Obligations

Registered charities must file an annual T3010 Registered Charity Information Return with the CRA. This report details finances, donors, and programs.

Failure to file can lead to penalties or loss of charitable status.

Social enterprises, especially those legally structured as non-profits, have varying reporting needs. Non-profits often submit annual returns to provincial authorities detailing their activities and finances.

For-profit social enterprises file corporate documents with bodies like Industry Canada or provincial registries, alongside tax filings.

Both types must follow fundraising rules under the Charities Act and maintain transparency in spending and governance. Regular audits or reviews may be required to ensure compliance.

Governance Standards

Charities require a board focused on strategic direction, ethical practice, and compliance with the Charities Act and CRA guidelines. Boards must avoid conflicts of interest and supervise use of funds efficiently.

Social enterprises may have more flexible governance depending on their structure. For not-for-profit organizations, the board’s role resembles that of a charity, emphasizing accountability and mission focus.

If a social enterprise is a company limited by guarantee, governance aligns more with corporate law and regulations, including oversight by provincial authorities.

Regardless of structure, governance frameworks should support sustainability, legal compliance, and social impact goals to build trust with stakeholders.

Choosing the Right Model

Selecting the appropriate model depends on the organisation’s goals, funding sources, and how it plans to operate. The right choice influences legal obligations, tax status, and governance structures.

When to Choose a Charity Structure

A charity is best for organisations with a clear charitable purpose like poverty relief, education, or environmental protection. It must operate as a not-for-profit, reinvesting any surplus to further its mission rather than distributing profits.

Charities typically rely on grants, donations, and philanthropy. They benefit from tax exemptions and may qualify for status allowing donors to claim tax deductions.

However, they must meet strict regulations, including annual reporting to the Canadian Revenue Agency and following governance rules.

If an organisation wants to access these benefits, including public fundraising and formal oversight, a charity structure is the appropriate choice.

When a Social Enterprise is More Suitable

Social enterprises combine business activities with a social or environmental mission.

They generate income by selling goods or services and use profits to support their purpose.

Unlike charities, social enterprises can be for-profit or not-for-profit.

This flexibility allows different options for profit distribution and investment.

Organisations that want to scale impact through commercial means and face fewer financial restrictions often choose this model.

Social enterprises follow business laws, including consumer protection and tax rules.

They do not need to register as charities unless they meet specific criteria.

This approach suits mission-driven organisations that want to use commercial strategies.

Hybrid and Group Models

Some organisations use a hybrid approach to balance social impact and financial sustainability.

For example, a charity may own a for-profit company to carry out commercial activities.

The for-profit company can support the charity’s work with its profits while protecting the charity’s status.

A for-profit company might also put a mission lock in its constitution, limiting profit distribution and keeping focus on social goals.

These models need clear legal agreements and governance to separate roles and money flow.

They work well for organisations that need to manage risk and use both charitable support and business growth.

Conclusion

Charities and social enterprises both aim to make a positive difference in society, but they use different methods.

Charities rely on donations and grants, while social enterprises use business methods to create lasting impact.

Understanding these differences helps people choose the right approach for their goals.

For advice on starting or managing a charity or social enterprise, contact B.I.G. Charity Law Group.

We offer expert guidance on legal and operational matters.

Reach out by email at dov.goldberg@charitylawgroup.ca or call 416-488-5888 for more information.

To explore your options, schedule a FREE consultation with B.I.G. Charity Law Group at CharityLawGroup.ca.

Our experience can help organisations make a lasting social impact.

Frequently Asked Questions

This section explains how social enterprises and charities differ in their structure, funding, and purpose.

It also covers the definitions and qualifications of these entities under Canadian law.

What is the difference between a social enterprise and a charity?

A social enterprise generates income by selling goods or services and uses profits to support its social goals.

A charity relies mainly on donations and grants to fund its activities and provide services.

Social enterprises focus on business sustainability while addressing social problems.

Charities depend on external funding and must follow strict rules about their operations.

What is a social enterprise in Canada?

In Canada, a social enterprise is a business that aims to create social or environmental benefits through its commercial activities.

It earns revenue from sales or fees and reinvests profits to further its social mission.

Social enterprises balance financial performance and social impact.

They are not regulated like charities and can operate as for-profit or nonprofit entities.

What qualifies as a charity in Canada?

A charity in Canada must register with the Canada Revenue Agency (CRA) and operate only for charitable purposes such as poverty relief, education, or other community benefits.

Charities can issue tax receipts to donors and must follow strict regulations for their activities and financial reporting.

What qualifies as a social enterprise?

A social enterprise qualifies by combining business activities with a commitment to social goals.

It must generate revenue that covers its costs and direct profits toward social causes.

This model can take different legal forms but always focuses on sustainability through income generation linked to its mission.

Is a social enterprise an NGO?

Not always. Some social enterprises operate as nonprofit organisations or NGOs, but many are for-profit businesses.

The main difference is that social enterprises use business methods to achieve social impact.

NGOs usually rely on donations and grants, while social enterprises earn revenue through market activities.

What is the difference between a social enterprise and a nonprofit organization?

A nonprofit organization does not distribute profits to members or shareholders. It relies on donations, grants, or fees to support its activities.

Some nonprofits engage in commercial activities, but this is not always the case.

A social enterprise earns income through business operations. It focuses on social impact and often has more flexibility in generating revenue than traditional nonprofits.