In 2009, the CRA commenced a broad review of the non-profit organization sector. You or your clients may have received a CRA questionnaire asking that the NPO provide information or documents in respect of its structure, activities, bylaws, finances, and membership.
Generally, NPOs have been exempt from tax in Canada since the introduction of the income tax in 1917. Under paragraph 149(1)(l) of the Income Tax Act, no Part I tax is payable by a club, society or association that is not a charity, is organized and operated for any purpose other than profit, and no part of the income of which is payable to any proprietor, member or shareholder. Currently, there may be up to 80,000 NPOs in Canada that qualify for the tax exemption under paragraph 149(1)(l). Prior to 2009, the CRA had not undertaken a general review of this sector.
Recently, the CRA published a report and Q&A on the Non-Profit Organization Risk Identification Project (NPORIP). In its report, the CRA stated the review revealed that many NPOs would fail to meet at least one of the requirements set out in paragraph 149(1)(l) of the Act:
The NPORIP was designed to provide the CRA with insight into the way certain organizations—those seeking an exemption from tax under paragraph 149(1)(l) of the Act—operate under the income tax rules. The NPORIP has given the CRA a better understanding of the issues these organizations face in complying with the Act, and, in particular, has highlighted a number of areas where the non-profit sector’s understanding of the law differs from that of the CRA. In addition, the NPORIP has revealed a significant issue with compliance by these organizations in several key areas.
The report provides only a high-level summary of its findings, none of which are surprising:
- The NPORIP identified a small number of cases where the NPO was, in fact, a charity;
- The NPORIP identified a small number of cases where the NPO’s governing documents (such as articles of incorporation, letters patent, and by-laws) indicated that it was not organized exclusively for a purpose other than profit;
- The NPORIP noted a variety of activities with apparent profit motives carried out by a wide range of NPOs; and
- The NPORIP identified a small number of cases where the NPO had income payable or made available for the personal benefit of a proprietor, member, or shareholder.
The report states that the CRA will seek to improve its education and outreach in the NPO sector, so as to increase awareness and compliance. Additionally, the CRA indicated that a copy of the report had been provided to the Department of Finance for the purpose of reviewing the NPO legislative framework.
We don’t think the report is the final word on this issue from either the CRA or the Department of Finance. In fact, in its 2014 federal budget, the Department of Finance stated:
… Budget 2014 announces the Government’s intention to review whether the income tax exemption for NPOs remains properly targeted and whether sufficient transparency and accountability provisions are in place. This review will not extend to registered charities or registered Canadian amateur athletic associations. As part of the review, the Government will release a consultation paper for comment and will further consult with stakeholders as appropriate.
We expect that future legislative changes (i.e., increased reporting requirements) may be forthcoming in the next few years.