Surplus Earned by Non-Profit Organizations on Lottery Sales Could Impact Tax-Exempt Status: CRA Technical Interpretation

August 13, 2015 | Brendan Burns

In a technical interpretation published on November 18, 2014, the Canada Revenue Agency (“CRA”) commented on whether revenue earned by a non-profit organization (the “Association”) in respect of the sale of lottery tickets should be subject to tax in the hands of the Association.  The Association in question provided “funding and support to imbed physical activity as a way of life” and obtained its funding through the sale of Lotto 6/49, Lotto Max, Pro-Line, and Scratch ‘n Win tickets.  After deducting the expenses that it incurred to sell the lottery tickets, the Association was generating a surplus on the ticket sales.

CRA used this technical interpretation as an opportunity to confirm its already published position on whether non-profit organizations can earn profits from a business activity and still maintain their tax-exempt status.  CRA confirmed that a non-profit organization will not be exempt from tax under paragraph 149(1)(l) of the Income Tax Act if earning profits is a purpose of the organization.  CRA takes this position even if, as in the case of the Association, the profits are being used to support the not-for-profit purposes of the particular organization.  However, CRA has accepted that a non-profit organization can earn profits, provided that those profits are incidental and arise from activities directly connected to the organization’s not-for-profit objectives.  According to CRA, this means that in order for an organization to maintain tax-exempt status, any profits from a business activity must: (1) not be in amounts that are significant or material; (2) be generated by the activities that the organization carries on in order to meet its not-for-profit objectives; (3) be used to further the organization’s not-for-profit objectives; and (4) not be made available for the personal benefit of the organization’s members.

CRA recognizes that non-profit organizations often rely on fundraising, which by its very nature can be said to be an activity that is meant to earn a “profit”.  CRA accepts that certain fundraising activities can be carried on by a non-profit organization without risking the organization’s tax-exempt status. As a general rule, provided the scope of fundraising activities (including fundraising activities that involve games of chance) by a non-profit organization, in comparison to the organization’s other activities, is not so significant that fundraising can be considered a purpose of the organization, the organization will remain tax-exempt.

In the Association’s case, CRA took the position that the profits generated by the sale of the lottery tickets could affect the Association’s tax-exempt status since it did not appear that the profits were incidental or arose from activities directly connected to the Association’s not-for-profit objectives.  The question of whether fundraised amounts are incidental in relation to the needs of a non-profit organization to carry on its activities is a question of fact to be determined with regard to an organization’s particular circumstances.  Unfortunately, the technical interpretation does not contain a description of the facts that CRA considered in this instance in order to determine that the profits did not appear to be incidental or arising from activities directly connected to the Association’s not-for-profit objectives. 

If a non-profit organization wishes to carry on a for-profit business for the purpose of funding its not-for-profit purposes, CRA has recommended that the business be carried on through a taxable entity and that the funds be provided to the non-profit organization on an after-tax basis.

Miller Thomson’s not-for-profit lawyers can advise on issues related to maintaining status as a non-profit and on structural options related to revenue generating activities.


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