Not for Profits Can't Even Give it Away

Adam Aptowitzer

In 1985, Richard Pryor and John Candy starred in a movie called "Brewster's Millions". The absurd pretence of the movie was the Richard Pryor (playing Brewster) had to spend $30 million in 30 days without acquiring anything in order to receive an inheritance of $300 million. Unfortunately, the situation is vaguely reminiscent of the situations not for profits with surplus money may find themselves given that they cannot acquire too great of a surplus and cannot pay any income for the personal benefit of a member, shareholder, or proprietor.

The CRA, in a recent ruling, provides some guidance on the payment of funds to members by a not for profit. The ruling dealt with a share capital corporation (as opposed to the no share capital corporations which form the bulk of not for profits) that had sold some land and wanted to disburse the funds to its members. It took the opportunity to review some of the circumstances in which an organization can pay funds to its members.

The first and likely most recurring situation is a return of member's dues. In theory, there is nothing wrong with the organization returning amounts paid by the members to the organization. However, in circumstances where the organization has provided some (non monetary) benefits to its members the organization would have to deduct the value of these benefits from the amounts being returned to the member. Of course, this would involve keeping good records and a proper valuation of the value of the benefit.

Sometimes, members may make some sort of capital payment to the corporation (this is easiest to imagine in the case of a share capital corporation). The return of such capital can occur without affecting the organization's not for profit status. For example, if three members contribute $1000 to get the corporation started, the corporation can then return this money when it has funds from other sources. Keep in mind though that this transaction may have to meet some other technical provisions of the Income Tax Act.

If the organization's income is as the result of a capital gain then the amount of the gain can be distributed to the members without risking its not for profit status. Probably, the most obvious example is land owned by the corporation that when sold has earned a profit. Securities are a different issue as owning them in the first place may be a breach of the corporation's not for profit status.

Of course, the organization could simply decide to keep the money, but if the income is not used to further the organization's objects, it may run the risk of amassing too much surplus which could again risk the organization's status. While the CRA has generally been unsuccessful in assessing not for profits as profitable organizations, the whole area of retaining and returning money to members is fraught with danger for not for profits -and experienced counsel should be consulted by not for profits in these situations.