Non-profit organizations are generally exempt from income tax under paragraph 149(1)(l) of the Act. For purposes of this provision, a non-profit organization is a club, society or association (other than a charitable organization or foundation as defined in subsection 149.1(l)) organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit. To qualify, no part of the organization's income must be payable to, or available for the personal benefit of, any proprietor, member or shareholder.
Although many of the facts about the entity have been severed from the TI, the following information is still included:
- The entity was incorporated under the Canada Corporations Act.
- The entity was formed by its members to protect and serve their interests.
- An amount net of commissions paid are distributed to members at specified times throughout the year.
- There is a time lag between when the entity receives funds and when funds are distributed to members. Monies collected are invested until needed for distribution.
- The entity defrays expenses with investment income in an effort to keep commissions charged to its members as low as possible.
At issue is whether the investment income jeopardizes the entity's ability to claim the NPO exemption under paragraph 149(1)(l), especially in conjunction with the entity's objective of minimizing commissions charged to members.
In the TI, CRA notes that the courts have recognized that an organization claiming a paragraph 149(1)(l) NPO exemption can earn a profit, as long as the profit is incidental and arises from activities directly connected to its not-for-profit objectives. The CRA says, that, for example, it generally considers maintaining reasonable operating reserves or bank accounts required for ordinary operations to be an activity undertaken to meet an organization's not-for-profit objectives. As a result, the CRA's view is that incidental profits that arise from these accounts will not affect the tax-exempt status of an organization.
The CRA says that it appears the entity has non-profit reasons for distributing amounts collected to members on a periodic basis rather than immediately when received, and it is reasonable to expect that the funds will be invested during that time. However, the CRA says it would be a concern if the entity is accumulating funds for the purpose of increasing its ability to generate investment income, and that an entity that delays distributions to members to increase funds available for investing could be considered to be operating for a profit purpose and would not qualify for the NPO tax exemption under subsection 149(1)(l).
The CRA further notes that an organization can maintain a reasonable reserve, such as for identifiable operating purposes or for a specific future capital project.
In concluding the TI, the CRA states that its comments assume that the investment income belongs to the entity. However, if the investment income is actually the members' income (i.e., the entity is merely the members' agent for this income), then the income would be taxed in the member's hands and would not affect the entity's tax status.
For more information, contact your KPMG adviser.
Information is current to November 13, 2012. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.