( Disponible en anglais seulement )
In a recent technical interpretation, the Canada Revenue Agency (CRA) addressed several questions relating to the tax exemption for non-profit organizations (NPOs) under paragraph 149(1)(l) of the Income Tax Act (Canada). Specifically, CRA addressed various circumstances involving loans and other contributions from members, and considered whether any of these circumstances would jeopardize an NPO’s tax exempt status.
CRA’s comments provide additional clarity with respect to when member contributions and loans may place an NPO’s tax exempt status at risk. CRA’s responses also provide additional insight into its position on NPOs engaged in leasing and fundraising activities.
The NPO in question in the technical interpretation leased real property that was owned by two of its founders (which were also members of the NPO). The NPO was in a loss position, with losses having accumulated over an unspecified number of years, and its members wanted to know the following:
- whether a member could make a contribution to the NPO before its fiscal year-end to enable it to pay its outstanding liabilities, without the NPO being regarded as having a profit purpose;
- if a member provides a loan to the NPO to cover its outstanding liabilities, will the repayment of the loan or the payment of interest by the NPO be regarded as making the income of the NPO available to its member? Also, would generating income to repay the loan lead to the conclusion that the NPO had a profit purpose;
- whether the NPO could assume the responsibilities of owning and leasing the property owned by the members and use net rental income to offset losses from other activities, without risking the loss of its tax-exempt status; and
- whether the NPO could be viewed as having a profit purpose if it launched fundraising activities to raise funds to cover current year operating expenses, deficits or to purchase equipment.
The CRA’s Position
CRA confirmed the basic requirements for the NPO tax exemption, which include a requirement that the organization be operated exclusively for purposes other than profit, and a requirement that none of the income of the organization can be made available for the personal benefit of its members. It then turned to address the questions posed.
1. Member Contributions
With respect to member contributions, CRA stated that, in its view, requiring members to make higher contributions in a certain year to reduce losses incurred in prior years does not lead to the conclusion that the NPO is being carried on for a profit purpose. CRA clarified that there is a difference between NPOs requiring higher member contributions in respect of a particular fiscal period to improve a loss position, and NPOs that accumulate amounts in excess of their needs for the purposes of generating investment income. The former is acceptable practice whereas the latter could lead to the conclusion that an NPO has a profit purpose.
2. Member Loans to the NPO
With respect to a member making a loan to the NPO to cover its liabilities and deficits, the CRA stated that such a loan may be repaid by the NPO without being considered to be making its income available to the member. CRA did note however that it is a question of fact whether the repayment is made to the member in his or her capacity as lender or as a member. This implies that loan repayment could be offside if CRA considers the repayment to be a colourable attempt to provide income to a member.
CRA also clarified that an NPO may generate income for the purposes of covering the interest expense on a loan without being considered as having a profit purpose. However, any repayment of principal on the loan, in CRA’s view, should be made from member contributions to the NPO, incidental profits or gift and/or grants. CRA is of the opinion that generating “material” profits, particularly from third parties, to repay a loan, may indicate that the NPO is being operated for a profit purpose.
CRA does not explain what it means by “material” in respect of generating profits. CRA does note that generating profits from a particular activity to cover losses related to that activity would not generally indicate that the NPO is being run for a profit purpose. However, where material profits from one activity are used to cover expenses related to another activity, this could be viewed as operating with a profit purpose.
3. NPOs Engaged in Leasing Activities
With respect to leasing activities, the CRA again commented that whether an NPO will be considered to be running a for-profit business in respect of leasing activities will depend on the individual facts of each case. The CRA reiterated that it will depend on how material the profits actually are and how incidental the related business is to the NPO’s not-for-profit objectives.
This response is consistent with the position that the CRA has taken in the past with respect to this issue. As an example, the CRA referred to a community hockey arena that is operated as an NPO. The operation of an otherwise for-profit canteen within the arena’s premises would be incidental to the arena’s not-for-profit focus and objective and would therefore not bring the NPO outside of the paragraph 149(1)(l) exemption. Similarly, if the NPO in this case were to engage in leasing activities, it may remain within the ambit of the paragraph 149(1)(l) exemption, depending on the circumstances and how material the leasing activities and revenues were to the NPO’s overall operations.
Fundraising Activities to Cover Losses
Consistent with its prior views and existing policies, the CRA stated that an NPO may engage in fundraising activities in order to raise money to fund its operations and to further its not-for-profit objectives. Fundraising activities will not, in and of themselves, jeopardize an NPO’s tax exempt status or bring the NPO outside of the ambit of paragraph 149(1)(l). Nonetheless, as with leasing activities, the CRA also commented that each case will turn on its facts. If the NPO engaged in fundraising activities of a significant nature or scope, it may risk falling offside the paragraph 149(1)(l) exemption such that fundraising could be, or becomes, one of the organization’s purposes.
CRA’s comments in this technical interpretation are helpful in providing at least some clarity on how the NPO rules will apply to member loans and contributions, although CRA frequently notes that each case will turn on its own facts. In cases of uncertainty, NPOs are advised to consult with and seek the opinion of counsel with respect to their proposed activities. We would be pleased to assist and to advise NPOs on any issues related to the maintenance of their tax exempt status.