Is the tax status of your non profit association protected?

January 07, 2013 at 2:19 PM

In a March 30, 2012 Technical Interpretation, CRA notes that the taxable income of an Organization that is a Club, Society or Association is exempt from tax for a period throughout which the Organization meets all of the following conditions:

•    it is not a charity;

•    it is organized and operated exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit; and

•    it does not distribute, or otherwise make available for the personal benefit of a member or shareholder, any of its income, unless...

                        In this case, CRA was advised that the Association earned income from a variety of sources including sponsorships and advertising rights, both throughout the year and previously.  The Association had a large increase in income which resulted in a significant increase in Members’ equity.  The increase in Members’ equity has remained steady since that time.  In each year under review, the Association recorded a surplus which was distributed evenly to the Members’ accounts.

CRA noted that Paragraph 149(1)(l) does not mean that an Organization cannot earn a profit; it can, but the profit must be incidental and must result from activities undertaken to support the Organization’s not-for-profit objectives.  The earning of profit cannot be, or become, a purpose of the Organization.

In this case, the Organization provided financial assistance to its Members out of surplus derived from third parties.  CRA noted that these amounts do not appear to be incidental in relation to the overall income and scope of operations, particularly when it appears that the Association is generating a surplus on a regular basis.  Additionally, all of this income was received from third parties and was actively pursued through the use of an agency.

CRA concluded that the Association was likely operating for a profit purpose (together with its not-for-profit purposes) and its NPO status is in jeopardy[S1] .

 [S1]Is the tax status of your non profit association protected?