Canada Revenue Agency (CRA) conducts an annual review to see how organizations which claim the tax exemption under paragraph 149 (1) (l) of the Income Tax Act  (the Act) operate.  It is not an audit, but helps CRA see where issues exist and create programmes that may, in the end, make it easier for organizations to understand the rules and remain in compliance.

Who Qualifies for Tax Exempt Status?

Paragraph 149(1)(l) applies only to those organization that are:

  1. a club, as society or other association;
  2. that is not a registered charity under section 149.1;
  3. that operates exclusively for society welfare, civic improvement, pleasure or recreation.

Furthermore, the organization may not make a profit, and must not benefit any proprietor, member or shareholder. There is an exception for a proprietor, member or shareholder which is itself a club, a society or other association promoting amateur athletics.

Note that registered charities have their own set of taxation rules under 149.1 of the Act.

Non-profit organizations to which Section 149(1)(l) apply (NPOs) include everything from very large incorporated entities down to small informal organizations.  There are many thousands of such organizations in Canada, with the exact number being unknown as there is no requirement that they all be registered under the Act.

Problems identified by CRA

In its annual review published  in 2014, the CRA found that there were a number of organizations which incorrectly identified themselves as NPOs, for various reasons.  A few of them were actually charities, whether registered as such or not, and therefore did not qualify for NPO status.  A significant number of organizations were off-side because they actually were earning profits which were then generating surpluses.

So what's wrong with profits?

Contrary to what many people believe, an NPO may only generate profits through activity that is incidental to its main purpose.  It does not matter whether the profits are used to carry out the organization's purpose;  it is the fact that profits are being generated other than incidentally that will put the NPO off-side.  The earning of profits cannot be one of the purposes of the NPO, regardless of the use of the funds.

Fortunately, it appears to be clear to most NPOs that their members are not allowed to personally benefit from the organization or its assets.

If in doubt get some help

However, given the percentage of NPOs that were unclear about earning and retaining profits, it is also clear that many such organizations struggle with the concept of what, exactly, an NPO may and may not do while raising funds while still maintaining its tax-exempt status.  CRA intends to work with the NPO sector to educate and inform them.  In the meantime if you operate an NPO and have questions, please don't hesitate to contact Maria Holman.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.