Over the last three years Canada Revenue Agency (CRA) has been conducting reviews of 1,440 Not-for-profit organizations (NPOs) out of an estimated 39,000 such organizations that file T2, T3 and T1044 returns. The purpose of this review, named the “NPO Risk Identification Project”, is to determine if there is abuse of Income Tax Act (ITA) section 149(1)(l), which provides for non-taxable status as an NPO under the ITA. In essence, CRA is seeking to determine if “Not-for-Profit” organizations are, in fact, operating a for-profit enterprise.
The CRA’s longstanding position on NPOs and section 149(1)(l) has been “that it is possible for an NPO to generate a profit, but the profit must be incidental and arise from activities that support the organization’s not-for-profit objectives.”(http://www.cra-arc.gc.ca/tx/nnprft/nprp-eng.html). There have been some notable cases where such revenue as an antenna lease in a strata corporation is deemed to be not “incidental” by CRA and represents a profitable enterprise. The major concern with cases such as this, where only a portion of the operation is deemed to be profit-geared, is that the entity loses its exemption under S149(1)(l) onallincome and among other things must pay tax on a deemed disposition of its assets. Ultimately, an NPO having a component of their operations considered to generate non-incidental profit could represents a risk to their status under section 149(1)(l).
The final report on the NPO Risk Identification Project has not yet been released and there may be recommended changes to the legislation depending on its findings. In the interim, it is important for NPOs to carefully review profit generating segments of their operation to determine if such items may be considered “non-incidental” to the operations. If it appears possible that your operations contain such a “non-incidental” revenue source, care
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.