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.
However, in the TI the CRA confirms that an NPO can earn a profit as long as it is incidental and arises from activities directly connected to its not-for-profit objectives. For example, 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 notes that its views on NPOs are stated in Interpretation Bulletins IT-496R, "Non-profit Organizations", and IT-83R3, "Non-profit organizations - Taxation of income from property". In particular, paragraph 8 of IT-496R states that assets, representing accumulated income in excess of expenditures, used for purposes unrelated to its objects such as "loans to members, shareholders or non-exempt persons", cause an NPO to have profit as one of its purposes.
In the TI, the CRA says that an NPO that has funds available to provide loans to its taxable subsidiaries generally suggests that the NPO has retained earnings larger than necessary to meet its non-for-profit objectives and is therefore not operating exclusively for a purpose other than profit. Also, earning investment income to meet for-profit objectives such as financing the activities of a taxable subsidiary may also indicate that an organization is not operating for a purpose other than profit.
The CRA also says that an organization that uses income, whether incidental or not, to finance profitable activities in a taxable subsidiary suggests that it is likely not using its income to support its non-profit objectives.
As a result, the CRA concludes that an organization that provides loans to a taxable subsidiary would likely not qualify for the tax exemption available under paragraph 149(1)(l).
For more information, contact your KPMG adviser.
Information is current to November 27, 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.