The terms "non-profit organizations" and "not-for-profit organizations" (NPOs) are used to describe entities that receive preferential treatment under the Income Tax Act, whereby the income they earn is generally not subject to income tax. In order to remain exempt, an NPO must meet all the following conditions:

  • it must be a club, society or association
  • it must not be a registered charity (which has its own set of rules)
  • it must be organized and operated exclusively for social welfare, civic improvement, pleasure, recreation, or any other purpose except profit
  • income generated by the NPO must not be payable or available for the personal benefit of any proprietor, member or shareholder.

The rules governing NPOs were introduced in 1917. The nature of the groups eligible for the exemption has changed over the years.  It now includes organizations with a wide variety of objectives such as professional associations, recreational or social clubs, multicultural organizations, organizations for civic improvement and low cost housing organizations, to name a few. They also range widely in size and sophistication. 

In 2009, Canada Revenue Agency (CRA) organized the Non-Profit Organization Risk Identification Project (NRORIP) to review and gain insight into how NPOs really operate in this country. The stated objective was to get a "better understanding of the issues these organizations face in complying with the Act and to evaluate their level of compliance with the Act." This sounds very gentle and co-operative, but the underlying concern of many in the sector was that CRA was worried that some NPOs may not be operating under the spirit of the legislation that was introduced so long ago, and may, in fact, have more of a profit motive than what is acceptable to CRA. .

The project examined 1,337 of the roughly 30,000 entities located in its database. The project was completed in 2012 and CRA recently issued the findings in a brief report in which it indicated that:

  • a significant number of entities were not operating exclusively for a purpose other than profit and would therefore be at high risk of not qualifying for the exemption under the Income Tax Act
  • a small number of entities had constituting documents indicating they were not organized exclusively for a purpose other than profit
  • a small number of entities made income available for the personal benefit of proprietors, members or shareholders.

These latter two categories were viewed as being at a lower risk of not qualifying as NPOs because the transgressions can be corrected easily.

In the February 11, 2014 federal budget, the Minister of Finance indicated that the government intends to "review whether the income tax exemption for NPOs remains properly targeted and whether sufficient transparency and accountability provisions are in place." The government also indicated it wants to improve the reporting requirements for NPOs so that the government and the public have more complete information about this sector. The government committed to issuing a consultation paper to allow stakeholders to comment on any proposals. However, there was no date given as to when we can expect this report.

In the meantime, CRA has indicated that it intends to use outreach activities and educational materials to advise NPOs of their income tax obligations.

If you think you might be at risk, we would suggest the following:

  • review your constituting documents to ensure they comply with your not-for-profit objectives and that they provide that no payments may be made for the personal benefit of any proprietor, member or shareholder. Many of you may be doing this already to comply with new corporations act legislation for not-for-profit entities (e.g. Ontario and federal incorporated entities)
  • analyze your current surplus on hand to determine what would be an appropriate use of that surplus to comply with your not-for-profit objectives
  • assess your organization's operations to ensure that profit making has not overshadowed the not-for-profit activities

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.