NPO Tax Returns – Late Filing

January 11, 2017 | Robert B. Hayhoe

Incorporated non-charitable not-for-profit organizations (“NPOs”) must file a T2 tax return with the Canada Revenue Agency (“CRA”) just like a taxable for-profit corporation. Additionally, each NPO, regardless of organizational form, that meets certain financial thresholds must file a T1044 Non-Profit Organization (NPO) Information Return. It is very common to see NPOs that have never filed a single tax return since establishment. Unlike the case for registered charities, since CRA does not maintain a registry of NPOs, it has little ability to monitor filing.  NPOs are, however, able to take advantage of CRA’s Voluntary Disclosures Program (“VDP”), which permits taxpayers to file outstanding tax returns.  Although the taxpayer will still be liable for any unpaid taxes plus interest, a taxpayer that files outstanding returns through the VDP will not be subject to penalty or prosecution.  Recently, CRA was asked in a technical interpretation letter how many years of back returns an NPO must file in the context of a voluntary disclosure.  Unfortunately, CRA’s answer provides little direct guidance.

Generally, a corporation that does not file its T2 corporation return must pay a penalty. However, since the penalty is calculated as a percentage of the tax payable and since NPOs are tax exempt, there is effectively no penalty for an incorporated NPO that does not file its T2 return.

Each NPO that: (i) has more than $10,000 of property income in a year; (ii) has more than $200,000 in assets; or (iii) has ever met one of those requirements in a prior year must file a T1044 and continue to file one in each subsequent year.  An NPO that fails to file its T1044, where required to do so, is subject to a late penalty of $25 per day up to a maximum of $2,500 per year for each missed filing. Notwithstanding the foregoing, CRA has confirmed that its administrative policy is not to apply the penalty when the T1044 is late-filed for the first time.

The questioner in the present technical interpretation sought to know how far back an NPO that had not filed returns for many years would need to file as part of a voluntary disclosure. CRA’s response was non-committal but confirmed that its general policy on voluntary disclosures only commits CRA to grant relief for ten years. This response either does not answer the question, implies that only ten years of returns would need to be filed, or arguably implies that an NPO with more than ten years of unfiled returns could still face a penalty for the unfiled returns that are more than ten years old.

Our experience is that, in general, CRA does not penalize NPOs that begin to file T2s and T1044s. An NPO that wishes more certainty than to simply start filing (which could in theory expose the NPO to penalties for the earlier years) can certainly do a voluntary disclosure.  This voluntary disclosure could be done by delivering ten years of returns to CRA. It would also be possible for an NPO working through its lawyers to approach the VDP without identifying itself (assuming that there is no CRA audit in progress) and seek to obtain the agreement of the voluntary disclosure officer to accept fewer years of returns than ten.

NPOs that have not been filing their T2 or T1044 returns when required should begin to do so. We would be pleased to assist in negotiating with CRA to seek permission to file a limited number of returns.

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