Canada: Tax changes to non-profit organizations likely
07 March 2014
Posted by: Authors: C Falk, S Grauer, and J.G. Morand
Author: C Falk, S Grauer, and J.G. Morand (McCarthy Tétrault LLP)
Paragraph 149(1)(l) of the Income Tax Act (Canada) exempts from Canadian federal income tax a range of clubs, societies and associations commonly referred to as non-profit organizations (NPOs).
To qualify for the paragraph 149(1)(l) exemption (which has changed very little since 1917):
- the organization must be a club, society or association;
- the organization must not be a charity in the opinion of the Minister of National Revenue;
- the organization must be organized and operated exclusively for purposes other than profit; and
- no part of the organization’s income may be payable to or otherwise available for the personal benefit of any member or shareholder of the organization.
Unlike registered charities, which must apply for tax-exempt status and will typically benefit from tax-exempt status until such time (if any) as their registration is revoked, there is no application procedure in respect of paragraph 149(1)(l). If an organization takes the position that it is entitled to the paragraph 149(1)(l) exemption and the Canada Revenue Agency (CRA) subsequently disagrees, the organization may be liable for back taxes, interest and penalties if it turns out that the organization was not tax-exempt.
In 2009, the CRA launched an audit project aimed at NPOs, given the CRA's view that there were "indications of non-compliance in the NPO sector." The CRA explained that the purpose of the project was to assist in determining "the level of non-compliance, any significant data gaps that may require mandatory filing of prescribed forms, and whether recommendations to the Dept. of Finance for more robust legislation are needed." This audit project is now complete and, on February 17, 2014, the CRA released its report, which is available on the CRA’s website. In the report, the CRA notes that a "significant portion" of the randomly selected incorporated organizations would fail to meet at least one of the conditions set out above. Questions and answers are also available on the CRA's website.
The release of the CRA report follows comments made by the Government as part of the 2014 Federal Budget that the Government intends to "review whether the income tax exemption for NPOs remains properly targeted and whether sufficient transparency and accountability provisions are in place." It is expected that the Government will release a consultation paper and will consult with stakeholders.
This article first appeared on lexology.com.