NPO Risk Identification Project – CRA Report Released on NPO Tax Exemption

NPO Risk Identification Project - CRA Report Released on NPO Tax Exemption

A few weeks ago I blogged about the Federal budget proposal for the Department of Finance to look into the tax exemption allowed for Non-Profit Organizations (or NPOs). In that blog I mentioned that we were still waiting for CRA to issue a report stemming from their 2011 – 2013 NPO Risk Identification Project (NPORIP). Well, said report has now been released. It seems that CRA has concluded that many NPOs are currently “offside” when it comes to meeting the requirements for the tax exemption, as provided in the report:

“The results from the review of the randomly-selected organizations suggest that a significant portion of incorporated organizations would fail to meet at least one of the requirements set out in paragraph 149(1)(l) of the Act. Of these:

  • A significant portion would fall into a higher category of risk, which includes organizations earning profits that were not incidental or not related to their non-profit objectives; organizations with disproportionately large reserves, surpluses, or retained earnings; and organizations where income is payable or made available for the personal benefit of a proprietor, member, or shareholder. Many of the organizations that fall within this higher-risk category would not actually qualify for the tax exemption under paragraph 149(1)(l) of the Act and would need to be reassessed if they were audited outside the purview of the NPORIP, which would in most cases result in an increased tax liability to the organization.
  • A small portion would fall into a lower category of risk, which includes readily correctable issues, such as making filing errors or not providing enough information to substantiate a not‑for-profit purpose in the organization’s governing documents.”

It was hoped that the report would include revised CRA administrative policies that would help provide a little more certainty as to how NPOs can stay “onside”, which is what NPOs want to do. However, no solutions or suggestions were offered up by CRA with regard to fixing the perceived problems. It looks like CRA may be leaving that up to the Department of Finance and its review of the NPO sector. In fact, CRA indicated that it would provide a copy of its report to the Department of Finance. In the meantime, CRA has offered up that “it will work with representatives of the non-profit sector to determine how the sector’s knowledge of the income tax rules can be improved. The CRA will also look to improve NPOs’ understanding of their income tax obligations through targeted outreach activities, client service, and education.”

Don Scott, FCPA, FCA
Tax Partner
Ottawa Office