CRA recently released a letter which discusses acceptable uses of an accumulated surplus by a non-profit organization and whether a benefit to members could result from the use of an accumulated surplus under various scenarios.
The organization in question was an unincorporated professional organization with a mandate to provide a forum for members to share information, ideas, and provide professional development through conferences/workshops. CRA determined that the the use of the organization's accumulated surplus could result in a possible benefit to the members, in certain fact scenarios.
CRA had the following comments:
As discussed in paragraph 8 of Interpretation Bulletin IT-496R, Non-Profit Organizations, a 149(1)(l) organization may earn income in excess of its expenditures provided the requirements of the Act are met. However, if a material part of the excess is accumulated each year and the balance of accumulated excess at any time is greater than the association’s reasonable needs to carry on its non-profit activities, profit may be considered to be one of the purposes for which the association was operated.
You have asked whether the use of surplus funds to create academic scholarships for students at the universities and colleges where XXXXXXXXXX of the members are XXXXXXXXXX is an indication of a profit purpose. It is our view that where an organization has an accumulated surplus that is large enough to fund academic scholarships this could indicate that the organization may have retained earnings larger than is necessary to meet its not-for-profit objectives and therefore that organization may not be operating exclusively for a purpose other than profit. However, a review of all of the circumstances, including (but not limited to) how and why the surplus was accumulated and the length of time over which the surplus has been accumulated may indicate that the Organization does not have a profit purpose, notwithstanding the surplus. In addition, generally surpluses may not be viewed as reflecting a for-profit motive if the entity is taking reasonable business steps to reduce the surpluses e.g., by adjusting the costing of its products or services.
You have also asked whether the Canada Revenue Agency (CRA) would consider the income of an organization is payable to or available for the personal benefit of members where a paragraph 149(1)(l) organization uses surplus funds to reimburse members for the cost of personal tuition fees paid for post-secondary courses or for the cost of attending conferences provided by other organizations. It is our understanding that the mandate of the Organization is to provide professional development to members through conferences and workshops provided by the Organization. Therefore, a benefit to members may result where incidental profits are used to reimburse members for tuition fees or conference fees, unless the member attends as a delegate of the Organization (discussed below).
You have requested clarification of the term “delegate” that is used in paragraph 12 of IT-496R, which concerns members attendance at conferences as “delegates” of the 149(1)(l) organization. The term “delegate” generally refers to a person sent or authorized to represent others. It is the CRA’s view that a payment to attend a conference as a delegate of an organization, that is not directly for the personal benefit of a member but incidentally benefits a member, while mainly benefiting the organization, will not be considered to be a benefit to members. However, it is always a question of fact whether attendance at a conference is primarily for the member’s benefit or to further the objectives of the organization.
Finally, you have asked whether it is our view that the income of an organization is payable to or available for the personal benefit of members where the membership fee is paid by the member’s employer to an organization and a portion of that fee is reimbursed directly to the member by the organization. Generally, where a 149(1)(l) organization overestimates its annual membership fees and refunds the excess fees to its members in the year it will not be denied the exemption under paragraph 149(1)(l). The organization’s financial records together with the facts surrounding the distribution must support the characterization of the amounts as a refund of fees. However, in order to ensure that income is not available for the personal benefit of a member, the payments should be available, proportionately, to all members or groups of members of the organization and the organization should refund the fee directly to the employer that paid the fee on behalf of the member.
Here is a copy of the full redacted CRA letter.
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.