The CRA has recently posted some questions and answers on the Non-Profit Organization Risk Identification Project, which reviews non-profit organizations that are not Canadian registered charities.
Q1. What is a non-profit organization (NPO) as described in paragraph 149(1)(l) of the Income Tax Act?
A.1 Non-profit organizations (NPOs) are not defined in the Income Tax Act. However, an organization that files under paragraph 149 (1)(l) of the Act must be a club, society, or association that is organized and operated exclusively for social welfare, civic improvement, pleasure or recreation, or any other purpose except profit. No income earned by the organization can be available for the benefit of its members. Furthermore, the organization cannot be a charity. For more information on NPOs, go to Non-Profit Organization Risk Identification Project.
Q2. How many NPOs are registered in Canada?
A.2 The Income Tax Act does not require NPOs to register to get a tax exemption. Therefore, estimates on the size of the non-profit sector vary widely and it is difficult to get accurate data.
Q3. What type of returns should an NPO file?
A.3 The type of return that an NPO has to file depends on whether or not the organization is incorporated.
An NPO that is incorporated in Canada has to file a T2 corporation income tax return.
In addition, an NPO as described in paragraphs 149(1)(e) or 149(1)(l) may have to file a T1044 information return if:
•it received or was entitled to receive taxable dividends, interest, rentals, or royalties totaling $10,000 or more;
•the total assets of the organization exceed $200,000; or
•it had to file a T1044 return previously.
If the NPO’s main purpose is to provide dining, recreational or sporting facilities for its members, its property may be considered to be property of a trust, in which case the NPO may have to file a T3 trust return.
Q4. Why has the Canada Revenue Agency (CRA) started the Non-Profit Organization Risk Identification Project?
A.4 Each year, the CRA conducts a number of review activities to promote compliance with the laws it administers. These reviews help maintain the integrity of the Canadian tax system, as well as Canadians’ confidence in the fairness of the system. The CRA started this research project to help characterize and quantify compliance and to measure tax-at-risk in the NPO sector. The CRA is conducting this review for research purposes and no reassessments are being considered at this time, except in the most egregious cases.
Q5. Has the CRA audited the 149(1)(l) NPO sector in the past?
A.5 Up to now, there has not been a specialized program that focused on auditing NPOs from an income tax perspective. However, audits have been conducted in the NPO sector in the past, and these were undertaken to confirm whether an organization claiming NPO status qualified or continued to qualify for the benefits accorded to NPOs under the ITA. A number of NPOs that file T2 (corporation income tax returns) or T3 (trust tax returns) have been selected for audit in the past through regular T2 or T3 screening processes.
Q6. How many NPOs will the CRA review this year?
A.6 The CRA has identified about 39,000 NPOs that file T2, T3 and/or T1044 returns. It will review 480 NPOs this year, for a total of 1,440 NPOs over three years.
Q7. How has the CRA been selecting the NPOs that are now being reviewed?
A.7 The CRA randomly selected files from the identified population of 39,000 NPOs to make sure the findings are statistically valid.
Q8. How has the CRA communicated with NPOs regarding this initiative?
A.8 The CRA made its first contact with selected NPOs through a phone call, and followed that up with an initial letter requesting information from the NPO. After getting feedback from the NPO, a revised letter was prepared to better clarify the purpose of the project.
Q9. What was the objective of the education letter that was sent to NPOs?
A.9 Some NPOs received an education letter as part of the project to help raise awareness of the rules governing the benefits available to them under the Income Tax Act.
As of April 23, 2012, the CRA stopped issuing education letters to NPOs being reviewed as a result of concerns expressed by the non-profit sector. If NPOs are unclear about the purpose of the education letter, they should contact the director of their local tax services office for further information.
Q.10 What are the consequences if an organization identifying itself as an NPO is found not to qualify for NPO status?
A.10 An organization must meet all the requirements under paragraph 149(1)(l) of the Income Tax Act throughout the period for which returns are filed in order to qualify for NPO status.
When an organization’s status changes (when it becomes or stops being an NPO), it is considered to have disposed of its assets at fair market value.
In addition, the organization is considered to have immediately reacquired the assets for the same amount. Also, a new tax year begins each time an entity becomes or stops being an NPO.
Q.11 Would legislative changes be necessary to allow an NPO to earn a certain level of profit?
A.11 Some NPOs were unclear about the purpose of the project and expressed concern about how to interpret the legislation governing issues such as reserves, profit, etc. This feedback has been noted and will be captured in the report that is due at the end of the project.
The CRA’s longstanding position is that it is possible for an NPO to generate a profit, but the profit must be incidental and arise from activities that support the organization’s not-for-profit objectives.
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.