A simple Donate now button only collects Email and Name, not the mailing address needed to create tax receipts.

Is the Paypal account registered as a charitable account (see: http://www.paypal.com/cgi-bin/webscr?cmd=p/gen/ua/use/index_frame-outside&ed=nonprofit)

It occurs to me that there is far more paper work for Charitable donations than non charitable donations. Tax receipts coming to mind.
That and Paypals reporting system may not be the most intuitve or easy to work into the the Donations Processing Process.

As such, a preexisting solutions meant to manage charitable donations may be helpful.
I've asked BlackbaudNow if they support Canadian Charitable Donations and am awaiting a reply.
Reply: Currently we can only process transactions in US dollars, so to be able to use BlackbaudNow you would need to set up a PayPal account that processes in US dollars.

(The pricing for WebNow is 4.95% +$.30 per transaction, inclusive of PayPal fees. No setup or monthly fees are charged for any of the products within the BlackbaudNow suite: WebNow, DonorNow, EmailNow. )

See:
http://nonprofit.about.com/od/onlinefundraising/a/paypalandnonprofits.htm
http://www.blackbaudnow.com/

I can also set up a form/button that collects the needed information for a Donation - mailing address etc. but I believe I would need access to the paypal account to tell it to collect and report the extra information. Or I can point you to the documenation.

The Paypal provided widget for createing Donation buttons is available at:
https://www.paypal.com/cgi-bin/webscr?cmd=_donate-intro-outside

More advanced buttons:
https://www.paypal.com/cgi-bin/webscr?cmd=_pdn_donate_techview_outside

You can also log into the paypal account then goto:
https://www.paypal.com/row/cgi-bin/webscr?cmd=_xclick-donations-factory
This asks less questions than the un loged in version above.

I meant to also include:

https://www.paypal-portal.com/charity/
https://www.thepaypalblog.com/2008/01/helping-non-pro/