Non-Profits in a Nutshell
By Arthur Drache
A recently published CRA letter[1] which deals with the indicia of a non-profit organization under paragraph 149(1)(l) offers nothing particularly new but does, in our view, give a succinct outline of the administrative rules.
In general terms, paragraph 149(1)(l) of the Act provides that the taxable income of an organization is exempt from tax under Part I of the Act for a period throughout which the organization meets all of the following conditions:
* it is a club, society or association;
* it is not a charity;
* it is organized and operated exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit; and
* its income is not available for the personal benefit of a member or shareholder.
The CRA generally reviews an organization's constating documents, such as its articles of incorporation, by-laws and other relevant documents when determining how the organization is organized. These documents provide information as to the objects of the organization and, in some instances, how the organization will be operated. In addition, how the assets will be distributed upon the dissolution of the organization and whether the organization is authorized to pay dividends or make other payments to its members will be relevant when determining whether income of an organization is available for the personal benefit of its members.
The letter goes on to make the following points, with which we agree.
* An organization can earn profits, but the profits should be incidental and arise from activities that are undertaken to meet the organization's not-for-profit objectives (these profits are referred to below as "incidental profits").
* Earning profits to fund not-for-profit objectives is not considered to be itself a not-for-profit objective.
* An organization should fund capital projects and establish (reasonable) operating reserves from capital contributed by members, from gifts and grants, or from accumulated, incidental profits.
* Capital contributions, gifts and grants, and incidental profits should generally be accumulated solely for use in the operations of the organization (including funding capital projects or setting up operating reserves) and should not be used to establish long-term reserves designed primarily to generate investment income.
* Maintaining reasonable operating reserves or bank accounts required for ordinary operations will generally be considered to be an activity undertaken to meet the not-for-profit objectives of an organization. Consequently, incidental income arising from these reserves or accounts will not affect the status of an organization.
* Limited fundraising activities involving games of chance (e.g., lotteries, draws), or sales of donated or inexpensive goods (e.g., bake sales or plant sales, chocolate bar sales), generally do not indicate that the organization as a whole is operating for a profit purpose.
"In determining whether an organization is operated for any purpose except profit, the activities of the organization must be reviewed both independently and in the context of the organization as a whole. Generally, we consider an organization that is offering its services at or near the cost of those services to be operating for a purpose other than profit. (Our emphasis)
This is an important point as it makes it clear that a non-profit can charge for its services with the caveat that amounts charged should be geared to cost recovery, not profit making.
A further and final caution.
"An organization will not be exempt from tax pursuant to paragraph 149(1)(l) of the Act if earning profits is a purpose of the organization, even if the profits are destined to support the not-for-profit purposes of the organization or another organization. This "destination of funds" argument has been rejected by the Canada Revenue Agency and the courts on numerous occasions for both charities and 149(1)(l) organizations."