June 2007 NEWSLETTER: Putting the PROFIT into your Not-for-Profit
"Putting the PROFIT into your Not-for-Profit"
This newsletter is a free service to the North American not-for-profit community from William Harper Associates. Its focus is on helping organizations that do good, do better ... by identifying cost-saving or revenue-generating ideas, in order to dedicate more resources to the organization's Mission.
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June 2007: Putting the PROFIT into your Not-for-Profit
This month's PROFIT idea is … reduce your taxes!
Because we're not-for-profit, many people - even some association executives - assume that we just don't pay taxes. But, nothing could be further from the truth! Taxes can be one of the major costs that not-for-profit's incur. In fact - and you may find this hard to believe - many NPOs pay taxes that for-profit companies don't! You read that right: charities have to pay taxes that big, profitable corporations don't! Read on if that makes your blood boil even a bit.
Now, the purpose of this month's article is not to talk taxes directly. Many of my CA colleagues earn a healthy living talking taxes, and I'm not here to compete with them. I'm actually here to tell you that you should consider talking to some of them.
But, let's start with some of the basics: what taxes do we pay? The shorter question would be "what taxes don't we pay", since the answer to this is short: income taxes. Other than that, however, we pay our share (and, some would argue, more than our share) of most other taxes. What other taxes should we worry about? GST, for sure. PST (Provincial Sales Tax, or in some jurisdictions, Retail Sales Tax), probably. Property tax, if you operate out of owned or rented space. And others in specific situations.
So, the first lesson of today's article is: don't assume that you don't pay tax, and don't assume that it isn't really a big deal. It can be a big deal. It is worth taking note of it. And, it's well worth working to minimize your tax burden.
A quick glimpse at some of our tax burdens:
- GST - this is a biggie. To put this in its simplest terms, everyone pays GST (generally), but businesses get it all back (generally), whereas NPOs get only a portion of it back (generally). Yup, businesses pretty much get it all back (i.e. they pay no net GST), and NPOs, only a portion (about half, in the case of registered charities) - go figure! Now, in case you missed it, this is a generalization: there are plenty of variations and exceptions, and that's where those terrific CAs who actually "do tax" come in. You need to find out about the in's and out's of your GST tax burden. You need to minimize what you pay, and maximize what you recover.
- PST - if the GST is complex, the PST is complex and archaic! It's been around for many years, and the rules around PST are not at all straightforward. Generally (remember that term?), if you are the "end consumer" of goods, you may be paying PST on those goods (a common example is printed material). There is a complicated system of registrations and exemptions to avoid (not evade!) some of this tax liability (for example, if you are buying goods for resale), but, again, you need to determine the best position to be in.
- Property taxes - while the determination of property tax is more straightforward than GST or PST, there are also fewer ways of getting out of paying it! Some municipalities will rebate a portion of property taxes paid to registered charities - it's worth enquiring about whether any rebates are available in your area.
- Others - watch out for other taxes and levies sneaking into your operations. Look carefully at (and get expert advice on) major transactions (e.g. buying land), and on new types of activities (e.g. if you start selling professional development books or CDs).
So, what is to be done? Some of these taxes, such as property tax, are fairly straightforward to find out about rebate programs. Others, however, like the GST and PST, really need to be looked at by people with relevant training and experience. But, will the tax savings justify their professional fees? Who is to know ahead of time?
There is a solution to this, one that may cost you more or may cost you less than a traditional professional-fee engagement, but is sure to cost you less than you will save in taxes: some tax consultants will work on a percentage recovery method, where their fee is set as a percentage of the taxes recovered. The percentage will vary, by the size of your organization and the consultant's estimate of your tax position, but you should expect to pay less than half - and perhaps as little as a third - of your recovery to the consultant. And, be sure that this fee will include the consultant advising you on how to change your accounting and other systems to avoid continuing to pay the recovered tax items in the future.
Properly managing your liability for, and exposure to, taxes of various sorts can be one of the most profitable activities you can invest in.
William Harper is a Chartered Accountant, but he does not practice in the area of taxation.
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