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
a club, as society or other association;
that is not a registered charity under section 149.1;
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
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
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
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.
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).