Two recent CRA technical interpretations offer guidance into the CRA’s views on issues affecting sports clubs and associations operating as non-profit organizations (“NPOs”). As part of an ongoing audit project, the CRA is reviewing the operations of a wide range of NPOs to assess compliance issues under the Income Tax Act. While this project has been ongoing, the CRA has released numerous technical interpretations setting out its views on various aspects of NPO tax exemption.
In order to qualify as a tax exempt NPO under paragraph 149(1)(l) of the Income Tax Act, an organization must be organized and operated exclusively for purposes other than profit, and must not make any income of the organization available to its members.
The first technical interpretation, released on March 30, 2012, addressed sports organizations that receive free or subsidized equipment from local businesses, such as team jerseys, that display the name or logo of the sponsoring business. This issue arises for many NPO community sports clubs, such as minor league hockey, baseball or soccer teams, or speed or figure skating clubs. While not explicitly stated, it appears that the CRA is concerned with the receipt of equipment from local businesses in exchange for advertising, which could be argued to constitute a commercial transaction and is indicative of a profit purpose on the part of the NPO.
The CRA stated, however, that the receipt of free or subsidized equipment by a community sports organization or team generally will not jeopardize the organization’s tax exempt status. It stated that, in general, this type of sponsorship arrangement is intended primarily to support the organization, is closely connected to and furthers the objectives and purpose of the organization, and represents only incidental income to the organization.
The second technical interpretation, also released on March 30, 2012, addressed an NPO sports association the membership of which consisted of other NPO sports organizations. The association’s purpose, it appears, was to provide financial assistance to its members through the sale of sponsorship and advertising rights. The association earned income from a variety of sources and had for at least some years seen a steady increase in members’ equity (as described in the financial statements). For each of the years reviewed by the CRA, the association recorded a surplus that was distributed evenly to its members.
The CRA confirmed the requirements for NPO status, including the requirement not to have a profit purpose. While it is acceptable for an NPO to earn incidental profits from activities undertaken to support the organization’s non-profit purposes, earning profit cannot be a purpose of the organization. The CRA observed that the profits earned by the association were more than incidental and were actively pursued through the use of a professional agency. It also noted that the income was earned almost entirely from third parties.
The CRA concluded that the organization was likely operating for a profit purpose and for the purpose of making income available to its members. It stated that an organization generally cannot plan to provide financial assistance to its members out of surplus derived from third parties without having a profit purpose.
While this result is perhaps unsurprising, the CRA did make two noteworthy comments. It commented first on the possibility that the association is acting as agent of its members. The CRA stated that if the association were in fact acting as agent – noting in particular that this would require that the members owned the advertising rights being exploited – then it is possible that the income would be viewed as that of the members. It stated that any such arrangement must be properly documented, and noted that no such documentation was evident in the situation it reviewed.
The CRA also noted that an exception to the general prohibition against making income available to the members applies if the member of the NPO is an organization the primary purpose and function of which is to promote amateur athletics in Canada. In others words, an NPO the members of which are all registered Canadian amateur athletic associations (RCAAAs) may make its income available for the personal benefit of these members. This exception is built into the tax exemption in the Income Tax Act.
NPO sports organizations should take note of both these technical interpretations. Community sports teams and organizations can take some comfort that the use of donated or subsidized equipment from local businesses will not jeopardize their tax exempt status. Umbrella sports associations that provide financial support to their members should review their operations to determine whether they face a compliance risk. In particular, they should review the status of their members and the extent to which the organization earns outside income. It may be necessary to implement structural changes to bring the association into compliance.