The Canada Revenue Agency (CRA) is currently reviewing the operations of not-for-profit organizations (NPOs) to determine if their operations are consistent with the definition of NPOs in the Income Tax Act (the Act).
NPOs are only taxable in limited situations. However, if NPOs are considered to be carrying on a business, they will lose their non-taxable status and essentially become taxable on all of their operations.
An NPO is defined in the Act as a club, society or association that is not a charity and that is organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit.
To be an NPO, no part of the income of the organization can be payable to, or be available for the personal benefit of any member, unless the member is a Canadian amateur athletics association.
Clubs established for recreation, such as golf, curling and ski clubs are examples of the types of organizations that are widely operated as NPOs. Other examples include social clubs, condominium corporations, business development associations, professional associations, museums, and associations that provide assistance for disadvantaged groups or provide other social services but are not charities.
The interpretation of the phrase “organized and operated exclusively for… any other purpose except profit” appears to be the main focus of the CRA’s current investigations. CRA Interpretation Bulletin IT-496R, issued in 2001, confirmed a long-standing administrative policy that it was possible to earn incidental income in the NPO, provided that the NPO was not carrying on a business. The bulletin cites operating in a normal commercial manner, offering goods or services to non-members, operating on some basis other than cost recovery and operating in competition with taxable entities carrying on the same trade or business as examples of when an NPO might be considered to be operating with a purpose of making a profit.
In 2009, the CRA released two Technical Interpretations that signaled a change in policy by broadening its interpretation of when an organization might be operating with a profitable purpose — indicating for example that profits earned in an NPO must generally be unanticipated and incidental, not planned for, and that operating on an overall net cost recovery basis may be considered to be operating with a purpose of making a profit if one or more activities of the NPO operate at profit to support other activities of the NPO. Based on feedback from the CRA project, it does appear this will be less of a concern where the ancillary revenue is received from members.
The current audit project raises the question as to whether not-for-profit golf clubs may be considered to be carrying on a business if they charge fees to non-members for activities of the club, or charge non-members for the use of facilities such as for a business conference or for a wedding.
Other areas of NPOs currently under audit are the structure of the NPO, and whether the structure prohibits or allows payments to members that may be considered to be amounts payable for the benefit of members. In many cases, this secondary focus may not be of significant concern, as often any weakness can be corrected by making changes to the constitutive documents or by making relatively minor changes to how the NPO operates.
The project findings will increase the CRA’s intelligence in the NPO sector and will assist in the determination of:
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The level of non-compliance of NPOs with respect to required reporting;
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Any significant data gaps that may require mandatory filing of prescribed forms; and
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Whether recommendations to the Department of Finance for more robust legislation are necessary.
As one possible solution, we suggest that consideration should be given to changing the tax rules so that NPOs can earn minor amounts of commercial income without losing their NPO status as long as tax is paid on this income.
Based on initial feedback from the CRA audits, it appears that the CRA is applying a fairly hard line on the “organized and operated exclusively for a purpose other than profit” condition. However, to our knowledge they are conducting these audits as information gathering exercises and have not assessed NPOs based on the audits. Our advice to you if you are involved in an NPO in some capacity is to monitor this issue, but not to take any specific action until we see how this CRA audit project concludes. We believe the federal government may make changes to the tax rules for NPOs and in particular, will provide specific guidance to NPOs on what will and won’t be allowed. In the meantime, contact your BDO advisor if you need additional information.
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