How do you know if your Canadian non-profit is not really a charity under 149.1(l) of the ITA?
Posted under News | What's New from the Charities Directorate of CRA | Canadian Charity Law
CRA provides their answer in this piece from the APFF 2009 Conference.
ROUND TABLE ON THE FEDERAL TAXATION
APFF - 2009 CONFERENCE
Non-Profit Organizations Status
Generally, paragraph 149(1)(l) of the ITA provides that the income of a club, society or association (“the taxpayer”) is exempt from tax under Part I of the ITA for a period during which the taxpayer meets all the conditions stated therein. Among these conditions is the requirement that the corporation must not be, in the opinion of the Minister, a charity within the meaning assigned by subsection 149.1(l) of the ITA.
Paragraph 149(1)(l) of the ITA provides that the non-profit organization must obtain an opinion from the Minister to the effect that it is not a charity within the meaning assigned by subsection 149.1(1) of the ITA. However, no guidance is provided as to how to obtain such an opinion. Certain persons propose that the taxpayer presents a request for registration to the Charities Directorate in order to obtain a denial, which would constitute the opinion mentioned in paragraph 149(1)(l) of the ITA. However, this position does not seem to be unanimously supported.
Question to the CRA
What are the requirements of the CRA in this respect?
The Canadian tax system is founded on the principle of self-assessment. A taxpayer must carefully examine the way it is organized and operated in order to establish if it is a charity within the meaning assigned by subsection 149.1(1) of the ITA or a non-profit organization that can benefit from the tax exemption under Part I pursuant to paragraph 149(1)(l) of the ITA.
A taxpayer who wishes to know the circumstances under which an organization is granted or denied a registration as a charity can consult the publications of the CRA on this subject which are available on the CRA’s Internet site under the hyperlink “Charities and Giving”. We particularly refer you to question 3 under the link “Applying for registration” where the CRA specifies how an organization should state its purposes in its governing document to be considered charitable:
“To qualify for registration, an organization must be established and operated exclusively for charitable purposes (also referred to as objects). An organization that has a mix of charitable and non-charitable purposes cannot be registered. An organization’s purposes are stated in its governing document (constitution, trust deed, or incorporation documents). The purposes must be stated in precise rather than broad or vague terms to identify a recognized charitable purpose as clearly as possible. For more information and a non-exhaustive list of acceptable purposes, see [the link] Model objects (endnote 3) .”
A taxpayer that only carries on charitable activities must obtain a registration from the Charities Directorate if it wants to be recognized as such for the purposes of the ITA and benefit from the tax exemption under Part I pursuant to paragraph 149(1)(f) of the ITA. If the taxpayer receives an opinion that it is not a charity, this does not necessarily mean that it was not previously or will not subsequently be a charity. This is a question of fact. Moreover, if the CRA denies it registration as a charitable organization or a public or private foundation, this does not automatically mean that it is not a charity. For example, a charity that does not reside in Canada could not be registered even though it could be, in the opinion of the Minister, a charity within the meaning assigned by subsection 149.1(1) of the ITA.
Paragraph 149(1)(l) of the ITA states that in the opinion of the Minister, the taxpayer must not be a charity. However, this paragraph does not require that the taxpayer obtain such an opinion.
In the course of an advanced ruling request, the Income Tax Rulings Directorate may issue a ruling to the effect that the taxpayer is organized in such a manner so as to be able to benefit from the tax exemption provided in paragraph 149(1)(l) of the ITA. This Directorate would have previously obtained an opinion from the Charities Directorate to the effect that the taxpayer is not a charity within the meaning assigned by subsection 149.1(1) of the ITA. However, no advanced ruling will be issued confirming that the taxpayer operated in a manner which satisfies the conditions for the application of paragraph 149(1)(l) of the ITA because it is a question of fact which can only be resolved by considering all the activities of the taxpayer during the year in question. This determination cannot be made in advance or in a particular year, but only at the end of the year.
The CRA can, in the course of its audit program, ensure that the taxpayer, who takes advantage of paragraph 149(1)(l) of the ITA, is not a charity within the meaning assigned by subsection 149.1(1) of the ITA. A taxpayer who wishes to confirm its admissibility with respect to paragraph 149(1)(l) of the ITA in regard to its activities can contact its tax services office.
For more precise details concerning the differences between a charity and a non-profit organization for the purposes of the ITA, we invite you to consult the link “Registered charity vs. non-profit organization (endnote 4) where the CRA presents a comparative table for the two types of organizations.
October 9, 2009
This article is for information purposes only. It is not intended to be legal advice. You should not act or abstain from acting based upon such information without first consulting a legal professional.