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CRA Clarifies NPOs Tax Exempt Status

Canada
13 Feb 2013
Canada Revenue Agency (CRA) recently released Document 2012-0455501I7 on whether certain transactions and investments jeopardised a corporation's tax exempt status as a not-for-profit organisation (NPO) under the Income Tax Act.

Taxand Canada investigates the case which prompted the Document release.

In this case, the Corporation was a non-share corporation. The only member of the Corporation was another non-share corporation (the Parent) that filed its returns as a tax exempt NPO. The Corporation also owned common shares in a taxable corporation. When it was first established, the Corporation extended loans to other entities, and found itself holding accumulated funds which were subsequently invested. Furthermore, the Corporation earned income from its primary activity, and interest from its bank accounts. The Parent provided management services to the Corporation and was compensated for such services by the Corporation.

Rulings indicated that there was evidence that the amount of the management fees paid to the Parent was unreasonable in relation to the actual management services provided. Absent the management fees, the Corporation would have earned a profit in the years that were under audit. Finally, in one of the fiscal years examined by CRA, the Corporation derived capital gains from the disposition of property.

Upon reviewing the facts presented, Rulings concluded that the Corporation did not qualify for tax exempt status under paragraph 149(1)(l) as it had a profit motive, and made income available to its sole member.

Discover more: CRA issues document on NPOs tax exempt status


Your Taxand contact for further queries is:
Tim Wach
T. +1 416 369 4645
E. timothy.wach@gowlings.com

 

Taxand's Take

Document 2012-0455501I7 highlights the pitfalls and complexities faced by an NPO in relation to investments in taxable organisations and profit generating activities. Besides CRA's increased scrutiny of NPOs, there are indications that CRA is taking a more restrictive approach to interpreting the requirements for tax exempt status. Therefore, careful planning and organisation is necessary before an NPO undertakes any activity that has the potential to generate a profit. For NPOs that are already engaged in such activities, these NPOs should regularly review their activities and transactions, and take remedial actions where necessary, lest they jeopardise their tax exempt status.

Taxand's Take Author

Tim Wach
Global Managing Director
Global