On February 17, 2014, CRA released a report on its Non Profit Organization Risk Identification Project (NPORIP). The report was the result of a three-year review process in which CRA reviewed the tax compliance of a range of non-profit organizations (NPOs) claiming tax exempt status under paragraph 149(1)(l) of the Income Tax Act. Although the long-awaited and much anticipated report was quite short (a mere four pages), CRA reported that the insights it has gained from the project will prove to be helpful in assisting it to educate those operating within the sector on the requirements of and their obligations under the Act.
In order to qualify as a tax exempt NPO under paragraph 149(1)(l), an organization must meet the following requirements:
a) The organization is not a charity;
b) It is organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit;
c) It is in fact operated exclusively for the same purpose for which it was organized or for any other purposes mentioned in (b); and
d) It does not distribute or otherwise make available for the personal benefit of a member any of its income (subject to certain narrow exceptions).
The Canada Revenue Agency (CRA) reports that there are approximately 30,000 NPOs currently claiming the 149(1)(l) tax exemption. The term "NPO" encompasses many different types of organizations. Starting in 2009, CRA reviewed 1,337 randomly selected NPO files to determine each organization's compliance with the Act.
The Report indicates that CRA concluded that a "significant portion of incorporated organizations would fail to meet at least one of the requirements set out in paragraph 149(1)(l) of the Act". CRA reported the following findings:
are instances where NPOs are actually charities.
Unregistered charities (i.e., organizations with exclusively charitable purposes and activities) do not qualify for a tax exemption under the Act. Such organizations must either be registered as charities, or will be taxable. CRA found that some organizations were either registered charities that were erroneously filing NPO tax returns or charities at common law which did not qualify for the 149(1)(l) exemption.
are instances where NPOs are organized for profit
As we have previously highlighted, there are certain instances where CRA will permit the generation of profit by an NPO on the condition that such profit is incidental to the non-profit activities of the organization. CRA noted that of the organizations reviewed, there were many which maintained "disproportionately large capital or operating reserves" which could not be justified as "incidental" to the organization's activities.
Furthermore, CRA reported that some organizations maintained governing documents that explicitly indicated that the organization was organized for purposes that were not exclusively non-profit. Also reported was that many organizations were engaged in activities with "apparent profit motives". CRA noted that many organizations had a common misperception that the fact that these profits were used to fund non-profit activities therefore made the earning of profits acceptable.
are some instances where income is made available to
One of the foremost differences between NPOs and business corporations is that an NPO, unlike a business corporation, may not make any portion of its income available for the personal benefit of any proprietor or member. CRA determined, however, that some organizations reviewed did, in fact, make such income available to proprietors or members and, as such, were in non-compliance with the Act.
Misinterpretation of paragraph 149(1)(l).
Paragraph 149(1)(l) uses broad language and permits many types of organizations to qualify as an NPO. CRA reported, however, that as a result of misinformation or error by "non-specialist volunteers", good faith intentions to comply with the Act were sometimes thwarted by a lack of knowledge and/or familiarity with the relevant provisions of the Act and compliance thereunder.
Based on its research, CRA has concluded that many NPOs would be found to be offside of paragraph 149(1)(l) of the Act and, as such, are erroneously claiming the tax exemption provided by the paragraph. CRA has determined that education and outreach to industry participants is vital to enhancing compliance. CRA has committed to increasing NPOs' understanding of their obligations through targeted outreach activities, client service, and education. CRA has promised to review and revise its educational materials provided online with respect to NPO compliance and forward its report to the Department of Finance Canada to support the consideration of a review of the current legislative framework.
It is important to note that Budget 2014 announced the Government's intention to review the legislation with a view of determining whether the tax exemption provided to NPOs in paragraph 149(1)(l) remains properly targeted and whether sufficient transparency and accountability provisions are in place.
In light of CRA's conclusions and as a general recommendation, NPOs are advised to consult with and seek the opinion of counsel with respect to their compliance under paragraph 149(1)(l) of the Act. We would be pleased to assist and to advise NPOs on any issues related to the maintenance of their tax exempt status.
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.