This article is taken from our quarterly overview of Canadian news, a newsletter published by the Canadian member firms of Moore Stephens North America. These articles are part of our mission to become the partner of choice for your success by keeping you up to date.
The Income Tax Act (ITA) 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 of subsection 149.1(1) and that is established and operated exclusively for the purpose of social welfare, local improvement, recreation or entertainment, or any other non-profit activity….”.
In recent years, the CRA has had to rule on numerous occasions, through its technical interpretation process, as to whether, in its opinion, activities carried out by non-profit organizations, such as parking space rentals, revenues generated by the fibre optic network or other similar activities, could affect the organization’s tax status. However, in each of its technical interpretations, the CRA repeats the Court’s argument that profit must be incidental and in support of the organization’s objects.
Possible changes to the ITA
When the 2014 Federal Budget was presented, the Minister of Finance announced his intention to review the tax exemption for not-for-profit organizations, to determine whether it continues to be appropriately targeted, and whether sufficient transparency and accountability provisions have been put in place. To this day, it remains unclear whether the Liberal government elected in 2015 will hold this consultation. The Minister of Finance indicated in November 2016 that holding the consultation was still a possibility, but not a priority at the moment.
Case law
Case law has clarified that it is possible for a non-profit organization to diversify its sources of revenue, while maintaining its non-profit status for the purposes of the ITA. However, as the Court pointed out, in order for the organization’s status to remain unchanged, its activities must be linked to its mission and ancillary to it.
In recent years, it seems that the CRA has taken the same position as the Court. However, the CRA often takes a much stricter view of what is considered an incidental activity related to the organization’s mission.
Conclusion
We believe that non-profit organizations should exercise a certain degree of caution before diversifying their activities. We think it wise to first demonstrate that these activities are related to their mission and that they are ancillary to their activities. This is to ensure that your non-profit status will not be questioned by the CRA.
Written by Marcil Lavallée. This text was written as part of our quarterly overview of Canadian news, a newsletter published by the Canadian member firms of Moore Stephens North America.
