Key Non-Profit Requirement Discussed by the CRA
By: Arthur Drache

                In 1992 we argued a case [1] which revolved around whether a particular union run fund was a non-profit organization.

Paragraph 149(1)(l) of the ITA provides that the income of a club, society or association) is exempt from tax under Part I of the ITA for a period during which the taxpayer meets all the conditions stated therein.  Among these conditions is the requirement that the corporation must not be, in the opinion of the Minister, a charity within the meaning assigned by subsection 149.1(l) of the ITA.

In the LIUNA case, Tax Court Judge Donald Bowman raised the question as to whether steps had been taken to ascertain the Minister's opinion as to whether the organization was a charity. The following is from the reasons for Judgement.

"The question whether the fund was a charity arises again in the context of paragraph 149(1)(l).

70     No evidence was adduced by the appellant to establish that the fund was not, in the opinion of the Minister, a charity within the meaning of subsection 149.1(1).

71     Counsel for the respondent's (CRA)position was somewhat ambiguous. He said:

The Minister has assumed that it was not the whole thing, so what we have to do is go through each and every part. And the first hurdle the taxpayer has to overcome is to establish that it is a club, society or association that in the opinion of the Minister was not a charity. Now, I'd started to say before we don't really know what the Minister thinks about it being a charity or not because as far as I'm aware they've never asked to be registered as a charity; and until you asked to be registered as a charity, then the Minister just doesn't really address what's going on here.

I suppose an argument could be made that this is education and if this is education, then it's charitable.

72     I raised with Mr. Drache the question of ascertaining the Minister's opinion by applying to him for registration as a charity. The Minister's refusal would have satisfied this condition in paragraph 149(1)(l). Mr. Drache replied:

I do not follow that practice, Your Honour. I consider that to be a waste of time. I am being paid to make a determination of whether we should or should not do -- I am not talking about in the context of this case but in the context of a charity. If I know that it is not going to be registered as a charity it is not my practice to spend time and effort in order to get a negative result.

73     The result of this is that we have no evidence of the Minister's opinion and no admission. Mr. Gibson's position that "what we have to do is go through each and every part" indicates that he intended to put the matter in issue. It is trite law that the onus of proof is upon the taxpayer who challenges an assessment and that it is for the taxpayer who seeks an exemption to satisfy every constituent element of the statutory provision granting the exemption. I should have thought that it would have been a simple matter to ascertain the Minister's opinion by asking the question on discovery. This evidently was not done and in the absence of any evidence I would have had to conclude that the appellant had failed to satisfy the onus of proof on this point. I think, however, that if it were the Minister's position that this aspect of the appellant's qualification as an exemption was lacking, that is to say the Minister's opinion was that it was not a charity, the Minister would have the obligation of specifically pleading that point and the onus of putting his opinion before the Court. The Minister's opinion, whether that opinion be right or wrong, is, like any other state of mind, a matter of fact. It is a fact that is peculiarly within the Minister's knowledge and it would be unfair to impose on an appellant the onus of establishing a fact relating to the Minister's state of mind when it could easily be established by the Minister."

                With all that as background, we were fascinated by an answer given by the CRA[2] at a meeting of the Association of Financial Planners held in April, 2009.

The question was what are the requirements of the CRA in the context of showing that an organization cannot be registered as a charity.

                  "Paragraph 149(1)(l) of the ITA states that in the opinion of the Minister, the taxpayer must not be a charity.  However, this paragraph does not require that the taxpayer obtain such an opinion.

                In the course of an advanced ruling request, the Income Tax Rulings Directorate may issue a ruling to the effect that the taxpayer is organized in such a manner so as to be able to benefit from the tax exemption provided in paragraph 149(1)(l) of the ITA.  This Directorate would have previously obtained an opinion from the Charities Directorate to the effect that the taxpayer is not a charity within the meaning assigned by subsection 149.1(1) of the ITA.  However, no advanced ruling will be issued confirming that the taxpayer operated in a manner which satisfies the conditions for the application of paragraph 149(1)(l) of the ITA because it is a question of fact which can only be resolved by considering all the activities of the taxpayer during the year in question.  This determination cannot be made in advance or in a particular year, but only at the end of the year.  (Our emphasis.)

                In fact, the only way a non-profit can be assured on the minister's opinion is to apply for charitable registration and have that application rejected. This is precisely what we told the court in the LIUNA case along with the comment that we try not to waste client's money by making an application which we know will fail. A lot of larger law firms do not have qualms about such an approach even though it is a costly way to ensure what is usually obvious to anybody working in the field. [3]

                Once again the ruling by the CRA is a model of obfuscation and has a distinct lack of usefulness and value. Why are we not surprised?