Canada - English

CRA Concludes an NPO Entity is Not Tax-Exempt - by Pam Prior 

Canadian Tax Adviser


January 08, 2013


Pam Prior
Vancouver, Enterprise Tax


The CRA recently released an internal technical interpretation (TI) in which it considers whether a corporation under CRA audit as part of its NPO project is exempt from income tax. This TI differs from previous TIs on the taxable status of a non-profit organization (NPO) because the CRA provides jurisprudence to support the factors it considers when determining whether an entity has a for-profit purpose and its position that an entity that cannot achieve its objectives without making a profit must be organized and operated for a profit purpose (i.e., it cannot be an NPO). Lastly, the CRA provides its negative view on management fees that are not made on a cost recovery basis.


Unfortunately many of the facts have been severed from the technical interpretation. The facts that we are able to gather are as follows.


Canco was incorporated without share capital. Parent is the only member of Canco, which is also a non-share corporation and files its tax returns as an NPO. Canco generated income from, among other things, interest from bank accounts. Parent charges an annual management fee to Canco, without which Canco would show a profit in the years under audit. According to the TI, evidence supports that the management fee is unreasonable compared to actual work done.


Canco disposed of an unspecified property and reported a capital gain in its financial statements.


Canco owns a percentage of Subco's Class A common shares. The remaining Subco shares are owned by a corporation that is not an NPO.


Legislative Background

NPOs 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.


CRA Comments

In the TI, the CRA confirms that an NPO can earn a profit as long as that profit is incidental and arises from activities directly connected to its not-for-profit objectives. For example, the CRA confirms that an NPO's tax-exempt status would not be affected by incidental profits from maintaining reasonable operating reserves or bank accounts required for ordinary operations.


The CRA refers to paragraph 7 of Interpretation Bulletin IT-496R "Non-Profit Organizations", which provides a list of characteristics that the CRA considers in determining whether an entity has a profit purpose. The CRA also states that the Tax Court of Canada has agreed that these characteristics are reasonable for purposes of applying the tax exemption in the case BBM Canada vs. MNR (2008 DTC 4129). The characteristics include whether:


  • There is a trade or business in the ordinary sense
  • Goods or services are not restricted to members and their guests
  • The business is operated on a profit basis rather than a cost-recovery basis
  • The business is operated in competition with taxable entities carrying on the same trade or business.


Canco not an NPO
The CRA states that, based on the facts in the TI, including the large amount of retained earnings, it appears that Canco has not operated for a purpose other than profit. The CRA cites the Supreme Court in Woodward Pension Society (62 DTC 1002) to support its statement that, if the objectives of an organization cannot be achieved without the making of a profit, then the organization must be organized and operated for a profit purpose.


The CRA notes that, since Canco did not collect membership fees from its members, Canco's objective and ability to expand and purchase property (the type of property is severed in the TI), is only achieved by the earning of profits.


Management fees not on a cost-recovery basis
The CRA states that it is concerned that the management fees paid to Parent were not on a cost-recovery basis, and thus it appears that Canco may have made income available to its members by transferring amounts to Parent in excess of costs. The CRA and the courts do not accept that using profits to finance not-for-profit objectives is sufficient to negate a profit purpose. The CRA states that if an entity wishes to carry on a for-profit business for the purpose of providing funds to an NPO, the business should be carried on through a taxable entity and the funds provided to the NPO on an after-tax basis.


Shares of Subco held by Canco
The CRA states that the Subco shares held by Canco may indicate a profit purpose. However, the CRA confirms that an NPO can engage in an income-generating activity that is carried out in a taxable, wholly owned corporation, and if this corporation pays dividends out of its after-tax profits to the organization to enable the organization to carry out its not-for-profit activities, then the NPO may still qualify for the tax exemption under paragraph 149(1)(l).


The CRA states that the facts in the TI indicate that Canco had excess funds available to invest in a taxable corporation and there is no evidence to support that the use of funds in this manner supports Canco's not-for-profit objectives. The CRA cites paragraph 8 of IT-496R, which discusses assets representing accumulated excess income that are used for purposes unrelated to the organization's not-for-profit objectives, such as long-term investments to produce property income, or loans to members, shareholders or non-exempt persons. In these cases, the CRA may consider that an association is operated for profit.


The CRA concludes that it agrees with the CRA auditor that Canco was not operated for a purpose other than profit and that income has been made available to its member (Parent). Thus, Canco does not meet the requirements of a tax-exempt NPO under paragraph 149(1)(l).


For more information, contact your KPMG adviser.






Information is current to January 08, 2013. 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


Canadian companies may be interested in these recent publications: