CRA issues helpful clarification on NPO reserves

October 28, 2021 | Robert B. Hayhoe

A non-charitable, non-profit organization is required by the Income Tax Act of Canada to be “operated for a purpose other than profit.”  In the past, the CRA has suggested that any accumulation of surplus by an NPO beyond its immediate need for cash would by itself cause the organization to fail this requirement.  However, the CRA has just issued a helpful technical interpretation that confirms accumulation of surplus may not be fatal to tax exemption.

In CRA Document 2019-0825751E5 issued in February of 2021 but only just released, the CRA commented on a technical interpretation request made on behalf of an NPO that wished to use its surplus to establish a business that would generate funds to support its non-profit purpose.  Unsurprisingly, the CRA confirmed that the establishment and operation of such a business would disqualify the organization as it would involve a profit purpose, even where the profits were used for the organization’s purposes.  However, the CRA went on to comment on the accumulation of surplus:

It is our view that a reserve that is able to fund a secondary business suggests that the organization has retained earnings larger than is necessary to meet its not-for-profit objectives and therefore the organization may not be operating exclusively for a purpose other than profit. However, a review of all of the circumstances, including (but not limited to) how and why the surplus was accumulated and the length of time the surplus has been accumulated may indicate that the organization does not have a profit purpose, notwithstanding the surplus. In addition, generally surpluses may not be viewed as reflecting a for-profit motive if the entity is taking reasonable business steps to reduce the surpluses e.g., by adjusting the costing of its products or services.

This is consistent with the case law and with how we have long advised our clients.  The accumulation of surplus is merely a piece of evidence of a profit purpose.  In our view, the cause of the surplus and the degree of planning for it (as shown in internal business planning documentation and board records) is more important.

If an NPO has the right motivation for its surplus accumulation, we have usually been able to confirm that it remains tax exempt.  However, it is good to have more direct confirmation that CRA agrees.


This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice.

Miller Thomson LLP uses your contact information to send you information electronically on legal topics, seminars, and firm events that may be of interest to you. If you have any questions about our information practices or obligations under Canada’s anti-spam laws, please contact us at

© Miller Thomson LLP. This publication may be reproduced and distributed in its entirety provided no alterations are made to the form or content. Any other form of reproduction or distribution requires the prior written consent of Miller Thomson LLP which may be requested by contacting