In a technical interpretation published on November 18, 2014,
the Canada Revenue Agency ("CRA") commented on whether
revenue earned by a non-profit organization (the
"Association") in respect of the sale of lottery tickets
should be subject to tax in the hands of the Association. The
Association in question provided "funding and support to imbed
physical activity as a way of life" and obtained its funding
through the sale of Lotto 6/49, Lotto Max, Pro-Line, and Scratch
'n Win tickets. After deducting the expenses that it
incurred to sell the lottery tickets, the Association was
generating a surplus on the ticket sales.
CRA used this technical interpretation as an opportunity to
confirm its already published position on whether non-profit
organizations can earn profits from a business activity and still
maintain their tax-exempt status. CRA confirmed that a
non-profit organization will not be exempt from tax under paragraph
149(1)(l) of the Income Tax Act if earning profits is a
purpose of the organization. CRA takes this position even if,
as in the case of the Association, the profits are being used to
support the not-for-profit purposes of the particular organization.
However, CRA has accepted that a non-profit organization can
earn profits, provided that those profits are incidental and arise
from activities directly connected to the organization's
not-for-profit objectives. According to CRA, this means that
in order for an organization to maintain tax-exempt status, any
profits from a business activity must: (1) not be in amounts that
are significant or material; (2) be generated by the activities
that the organization carries on in order to meet its
not-for-profit objectives; (3) be used to further the
organization's not-for-profit objectives; and (4) not be made
available for the personal benefit of the organization's
CRA recognizes that non-profit organizations often rely on
fundraising, which by its very nature can be said to be an activity
that is meant to earn a "profit". CRA accepts that
certain fundraising activities can be carried on by a non-profit
organization without risking the organization's tax-exempt
status. As a general rule, provided the scope of fundraising
activities (including fundraising activities that involve games of
chance) by a non-profit organization, in comparison to the
organization's other activities, is not so significant that
fundraising can be considered a purpose of the organization, the
organization will remain tax-exempt.
In the Association's case, CRA took the position that the
profits generated by the sale of the lottery tickets could affect
the Association's tax-exempt status since it did not appear
that the profits were incidental or arose from activities directly
connected to the Association's not-for-profit objectives.
The question of whether fundraised amounts are incidental in
relation to the needs of a non-profit organization to carry on its
activities is a question of fact to be determined with regard to an
organization's particular circumstances. Unfortunately,
the technical interpretation does not contain a description of the
facts that CRA considered in this instance in order to determine
that the profits did not appear to be incidental or arising from
activities directly connected to the Association's
If a non-profit organization wishes to carry on a for-profit
business for the purpose of funding its not-for-profit purposes,
CRA has recommended that the business be carried on through a
taxable entity and that the funds be provided to the non-profit
organization on an after-tax basis.
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.
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