Tips From an Expert
by Susan Bernhardt
Arts organizations serve an important role in our societies, creating ecosystems which promote artistic expression, celebrate culture and diversity, as well as teach practical skills. Often overlooked is the financial management of arts organizations. At the heart of every successful organization is a sound set of financials that tell the story of the organization and forecast the future. Here is a small list of items to consider in your financial management:
- Know who you are: All non-profit organizations and charities are exempt from paying income taxes.
Non-profit societies register as either non-profit organizations with the province (under the BC Societies Act) or as registered charities with the federal government. All organizations are required to file annual returns with the government showing their financial activity during the year. BC Societies will file a T2 (usually a “T2 Short Form”). Registered charities file the annual charity return (T3010). Only registered charities can issue receipts for donations. These receipts provide individual taxpayers and corporations with lucrative tax credits, but also require a robust record keeping system. In addition, some grant funders only give money to other registered charities. These laws are beginning to change, opening up new revenue streams for non-profit organizations. - Know what deferred revenue is: Good accounting practice requires matching revenue earned in a year and the expenses associated with it.
Nowhere is this more important than in non-profit accounting. Grants issued by funders often restrict spending to the end goal of the project. Organizations must ensure grant money is only spent on approved expenses. At the end of the fiscal year, if an organization has only spent half the grant money on approved expenses, the unspent money must be moved into “deferred revenue” where it will be ready to be used the following year on approved expenses. In for profit environments, any leftover money at the end of the year is regarded as “profit.” This is not true for non-profit organizations where profit is not the end goal. Not matching grant revenue to approved expenses can cause reporting and cash flow issues. - Know your sales taxes: Non-profit organizations are not exempt from charging sales taxes on their goods and services.
However, the sales tax rules are different than in business corporations.- Registration for collecting GST, the federal 5% Goods and Service Tax, is required when a non-profit/charity exceeds $50,000 in earned revenue. Earned revenue includes the sale of goods or services, but does not include donations. For profit corporations must register when revenue exceeds $30,000.
- Registration for the PST, the 7% BC Provincial Sales Tax, is required when an entity sells any goods on the list provided by the BC government. (https://www2.gov.bc.ca/gov/content/taxes/sales-taxes/pst/charge-collect)
- Generally, non-profit entities file GST the same way as business entities (GST revenue earned less GST on expense paid). Registered charities have different rules. Charities are eligible for a 50% rebate on the GST paid for expenses in their organizations. Charities collecting GST on goods and services can also claim a refund on a portion of the GST collected.
- Many other rules govern sales taxes and charities. Acquiring the services of an accounting professional in this area benefits an arts organization.
- Know where you are going: Annual budgets are a must for any non-profit organization.
Unlike for profit corporations, non-profits and charities rely on donations and grants. Tight oversight is required of operating budgets as these are funded largely by sales, donations and operating grants. Availability of grant programs can define the projects an organization takes on. Nothing is certain. As well, cash flow in non-profits can be complicated as funding comes in large amounts, but must be used for expenses for a project over a long period (sometimes years). Bank account balances do not define the health of the organization. - Know your audience: Financial reports for non-profits have many users including:
- Board members: Board members of non-profits and charities are legally liable for the financial activities of the organization. Members of boards are comprised of people with diverse backgrounds, providing valuable knowledge in visioning for the organization. It is important that all people, both those with financial acumen and those with little, are given financials that make sense to them. Sometimes this involves changing the reporting provided to make it more accessible. Inviting your bookkeeper to attend a board meeting or write a report is also helpful.
- Funders: have different reporting requirements. Be aware of reporting obligations outlined in grant agreements.
Non-profits and charities abide by different standards than for-profit organizations. Ensure your books reflect this.
Susan Bernhardt has over 20 years experience with non-profit accounting. Currently, she leads the bookkeeping team for the Arts BC Shared Services program which provides bookkeeping services to arts organizations in BC.
To learn more, see artsbc.org/shared-services
Read our Q&A profile on Susan here
