NPOs are generally exempt from income tax under paragraph 149(1)(l) of the Act. For purposes of this provision, an NPO 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.
NPO with taxable subsidiary does not automatically lose status
In the TI, the CRA states that determining whether an organization qualifies for tax exempt status under paragraph 149(1)(l) in a particular year must be based on the facts of each case, which can only be obtained by reviewing all of the organization's activities for that year. The CRA does not consider the fact that an organization incorporates and holds shares of a taxable subsidiary to be sufficient cause for the organization to lose its tax-exempt status.
NPO can earn dividends from taxable subsidiary
The CRA notes 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. Thus, if an organization holds shares to earn income from property, it may be considered to have a profit purpose, even if the income from those shares is used to further the organization's not-for-profit objectives. However, the CRA also notes that it has accepted that an organization may still qualify for a tax exemption where it otherwise qualifies under paragraph 149(1)(l), but engages in an income-generating activity that is carried out in a taxable, wholly owned corporation, and the corporation pays dividends out of its after-tax profits to the organization to enable it to carry out its not-for-profit activities.
Other types of income may jeopardize NPO's tax exempt status
In the TI, the CRA notes that, where an organization receives management fees, rents, interest income, or other types of income from a taxable subsidiary, receiving that income may indicate a profit purpose that can only be determined by reviewing the facts. Further, an organization that has excess funds available to loan to a taxable subsidiary may not qualify as an NPO because the use of funds to make loans is "generally not supporting the organization's not-for-profit objectives".
Trust structure not addressed
In the CRA's view, an advance tax ruling request would be needed to deal with situations where, instead of a taxable subsidiary corporation, a trust fund was established to carry out the for-profit activities. Alternatively, if the structure is already in place, the CRA commented that the local Tax Services Office should review all of the facts and relevant agreements.
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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.