A non-profit organization (NPO) that is a club, society or association organized and operated exclusively for social welfare, civic improvement, pleasure or for any other purpose except profit, qualifies for an income tax exemption if the NPO meets certain conditions. Over the last few years, it seems that the tax exempt status of a NPO has become an issue with CRA, primarily because the reporting requirements to CRA for NPOs are limited so they really didn’t have a handle on what was going on in the NPO sector. As a result, in 2011 CRA instituted a NPO Risk Identification project. This project was completed in 2013 whereby CRA audited more than 1,400 NPOs in an attempt to develop a better understanding of the issues faced by NPOs, evaluate tax compliance by NPOs and educate NPOs. CRA had previously indicated that a report as to their findings would be released in the fall of 2013. However, the last mention of the report from CRA was in November 2013 at a tax conference where they said the report would be issued soon. We have yet to see the promised report.
Well, it looks like the Department of Finance is now getting involved. The recent 2014 Federal budget papers provided the following commentary:
“Concerns have been raised that some organizations claiming the NPO tax exemption may be earning profits that are not incidental to carrying out the organization’s non-profit purposes, making income available for the personal benefit of members or maintaining disproportionately large reserves. In addition, because, members of the public may not be adequately able to assess the activities of these organizations, and it may be challenging for the Canada Revenue Agency to evaluate the entitlement of an organization to the tax exemption.” As a result, the federal government has announced their intent “to review whether the income tax exemption for NPOs remains properly targeted and whether sufficient transparency and accountability provisions are in place. This review will not extend to registered charities or registered Canadian amateur athletic associations. As part of the review, the Government will release a consultation paper for comment and will further consult with stakeholders as appropriate.”
Does this mean that the report from CRA will be further delayed? The report from CRA will provide possible changes to their administrative practices in dealing with NPOs and at least would provide something for NPOs to rely on in determining whether or not they are “offside”. The involvement by the Department of Finance means possible legislative changes, which can provide more certainty than CRA administrative practices, but it is a much longer process to change the law. What all this means is that the NPO sector is left in a state of flux, concerned that they could be offside and lose tax exempt status, but not knowing how to rectify their affairs until we see what either government department has to say. Hopefully, we will see something concrete sooner than later.Don Scott, FCPA, FCA Tax Partner Ottawa Office>