Filing Returns for Non-Profit Organizations
by Arthur Drache

One of the major compliance problems which we have found over the years when dealing with non-profit organizations is their failure to file income tax returns. Over the years we have written about this on a number of occasions but we still find, even amongst professionals, a lack of knowledge about the requirements. This situation is exacerbated in those organizations which "do it themselves" without professional guidance.

Non-compliance with the rules stems, we believe, from the myth that because no tax will be due, no return must be filed. This may be true for unincorporated non-profits but those which are incorporated must file income tax returns, even though they report a zero tax liability. [1] Corporations which are registered charities, however, need not file income tax returns.[2]

In addition, non-profits (whether or not incorporated) must file form T-1044 if it receives investment income of $10,000 in a year, has assets in excess of $200,000 or has ever, in the past, been required to file because they previously met these tests.[3]

Now the fact is that a large percentage of organizations which have the obligation to file these returns do not do so. In many cases this happens because not only are those who run the operations unaware of the obligation but all too often, their professional advisers are also ignorant of the law. We might speculate that this often happens because the professional advice is given on a pro bono basis by people who have no special expertise.

What we have noticed is that very often when there is a change of accountants, the first bad news delivered to the client is the information that it is many years in arrears of its filings. This may not in itself be a serious problem in that the penalties associated with the non-filing of income tax returns is based on a percentage of tax owing. But the non-filing means that the tax authorities can go back as far as they wish in examining the finances of the organization. And since non-profit status is based on financial and legal "facts" rather than registered status as is the case of a charity, there is at least a theoretical possibility that the Revenue Agency could impose taxes for years gone by, based on a finding that the non-profit status is not in fact appropriate.

Where we run into this sort of situation (almost always brought to our attention by newly appointed accountants), we tend to recommend that the organization make a "voluntary disclosure" to the tax authorities. This is a procedure in which an errant taxpayer can confess his, her or it's sins, pay tax due (if any) but not suffer any penalties. While it is most often used in the context of individuals, it can, as we say, be used by a non-profit and offers a way to regularize and otherwise potentially serious situation.

The rules relating to voluntary disclosure are found in Bulletin 001 which is on the CRA general web site.[4]

The basic requirements for the use of the voluntary disclosure rule are:

·         It must be voluntary which means that no audit or other action triggered the disclosure

·         Disclosure must be complete

·         The disclosure must be with regard to information at least a year old.

If you do use the procedure, you should be prepared for the question which is almost always posed at the very outset. This has to do with whether the organization has been withholding taxes and so forth from its employees and making the statutory remittances. If the answer is "yes", the process will unfold with a request for financial statements for the years in question (though in some cases, the request may be just for recent years).

If the answer is "no" the organization has a serious problem and had best be looking for a lawyer to protect both the organization and its directors who might have personal liability!

Assuming that there is no problem with the withholding tax issue, the organization will be given time to put together the documentation, and our experience is that the authorities are reasonable with regard to the amount of time which is needed. In most cases, the result will be the Agency's equivalent of "go and sin no more".

But these may be situations where questions are raised about whether the organization is in fact a non-profit, often because of what the authorities consider to be an excess accumulation of capital. If that issue arises, negotiation (again probably with legal advisors involved) will be necessary. In one such case, the "settlement" involved the organization setting up a foundation, getting it registered as a charity, and transferring the excess capital to the new foundation.

A final word. You may not need your lawyer with you when you first approach the tax authorities with a voluntary disclosure, but at the very least, you should have your accountant. Indeed, in our experience, the best way to initiate proceedings is to have the accountant phone or write the local tax office to indicate (on a no names basis) that he or she has a client which wishes to make a voluntary disclosure. An appointment should then be made and the key person (or people) in the organization along with the accountant should be in attendance.

Our experience has been that using the voluntary disclosure procedure on behalf of a non-profit is the best way to get the slate wiped clean with regard to Income Tax Act obligations. Where nothing is done, it has been our experience that events may occur (say the sale of a golf course operated as a non-profit to a developer) which brings the tax authority's scrutiny.and that can create a much greater problem than can arise in a voluntary disclosure arrangement.

Those who are operating and advising non-profits which are not filing returns (and we know that there are thousands of them out there), this is the best advice we can offer.