Canada: CRA Reports On Its Non-Profit Organization Risk Identification Project

Last Updated: April 7 2014
Article by Natasha Smith

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:

1.         There 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.

2.         There are instances where NPOs are organized for profit purposes.
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.

3.         There are some instances where income is made available to members.
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.

4.         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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Natasha Smith
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions