Revenue Diversification by Non-Profit Organizations

This article is from the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America. These articles are meant to pursue our mission of being the best partner in your success by keeping you aware of the latest business news.

The Canadian Income Tax Act defines a non-profit organization as “a club, society or association that, in the opinion of the Minister, was not a charity within the meaning assigned by subsection 149.1(1) and that was organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit….”

On several occasions over recent years, the Canada Revenue Agency has had to issue interpretations on this subsection in order to offer its opinion on whether activities carried out by non-profit organizations, such as the rental of parking spaces, income generated through fiber optic networks or other similar activities, could have an impact on the tax status of such organizations. In any case, the CRA has deferred to the courts in each of its interpretative notes, in holding that the profit must be ancillary and in support of the organization’s objectives.

Possible Changes to the Income Tax Act

During the presentation of the 2014 Federal Budget, the Minister of Finance made known his intention to reexamine the tax-exempt status of non-profit organizations. The review would be to determine whether such an exemption continued to be properly targeted and whether sufficient transparency and accountability provisions were in place. At the moment, it is still unclear if the liberal government, elected in 2015, will hold this review. In November 2016, the Minister of Finance stated that such a consultation remained possible but was not a priority at the time.

Case-law

The courts have clarified that a non-profit organization can diversify its income sources while still maintaining its tax-exempt status under the Income Tax Act. However, the courts have stated that, to avoid a change in tax status, the activities of the organization must be linked to its mission as well as be ancillary to it.

For some years now, the Canada Revenue Agency has taken the same stance as the courts. However, the CRA often takes a far more restrictive interpretation of what can be considered an ancillary activity with a link to the mission of the organization.

Conclusion

In our opinion, non-profit organizations should exercise a certain amount of caution before diversifying their activities. It would seem astute to first show that the new activities have a connection with their mission and that they are ancillary to those main activities. This would help ensure that your status as a non-profit organization will not be later disputed by the Canada Revenue Agency.

Contributed by Marcil Lavallée. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America.