CRA's view vs. statutory language: Interpreting not-for-profit qualification
The Canada Revenue Agency (CRA) explains that for an entity to qualify as a non-profit organization under Section 149 (l) of the Income Tax Act (ITA), it must be organized and operated exclusively for social welfare, civic improvement, pleasure, recreation, or any other purpose except for profit'.
The CRA rightly observes that 'the language of this provision is very broad and effectively permits a non-profit organization to pursue any non-profit purpose'. A non-profit organization's purpose may be set out in its constating documents, such as its articles of incorporation, bylaws, or memoranda of agreement. The CRA then concludes that 'any entity organized and operated for reasons other than commercial or financial reasons will meet this condition'.
While this article agrees with the CRA's conclusion, its primary focus is on the broad language of the statute, which states that an entity qualifies as a non-profit organization if it is organized and operated exclusively for any purpose other than profit — provided it meets the additional statutory requirements, which will also be discussed in this article.
In this article, the terms 'Non-Profit Organizations' and 'Not-For-Profits' (NFPs) will be used interchangeably.
What is a Non-profit Organization?
Section 149 (l) of the Income Tax Act defines a non-profit organization as:
"a club, society or association that, in the opinion of the Minister, was not a charity within the meaning assigned by subsection 149.1(1) and that was organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, no part of the income of which was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof unless the proprietor, member or shareholder was a club, society or association the primary purpose and function of which was the promotion of amateur athletics in Canada" (Italics supplied for emphasis)
149(1) goes further to provide that no tax is payable under this Part on the taxable income of a person for a period when that person was a Non-profit Organization.
From the foregoing definition, in order to qualify as an NFP, 3 criteria must be fulfilled.
- The organization is not a charity.
- It must be organized and operated exclusively for any purpose except profit.
- No part of its income is payable to or available for the personal benefit of any proprietor, member or shareholder, unless it is an entity whose primary goal and function is the promotion of amateur athletics in Canada.
We shall now deal with the foregoing criteria.
An NFP is not a charitable organization
A charitable organization is an organization, whether or not incorporated, that is constituted and operated exclusively for charitable purposes. See subsection 149.1(1) of the ITA. There are other sub-conditions to ascertain if an organization is charitable, as contained in the subsection; however, they seem focused on ensuring that the organization is operated exclusively for charitable purposes.
These charitable purposes include: relief of poverty; advancement of education or religion; and benefit of the community. Examples of entities that could fall under these purposes include food banks, research institutes, church missions, volunteer firefighters, animal shelters, etc.
However, if a charitable organization desires certain advantages, such as issuing official donation receipts and tax exemptions, then it has to be registered with the CRA. See Section 149 (f) of the ITA. A charity must also ensure that its resources are spent towards charitable activities.
Although an NFP operates on a non-profit basis like a charity, an NFP is not a charity. While an NFP may choose to register and transform into a registered charity with the CRA, such registration is not a requirement for it to qualify for NFP tax exemptions.
An NFP must be organized and operated exclusively for a purpose other than profit
Determining whether an organization is 'organized and operated exclusively for a purpose except profit' is a question of fact. This does not mean that a non-profit organization cannot engage in business. An NFP can engage in business, as long as such business is incidental to or directly attributable to the NFP's legitimate purpose or activities. See Tourbec V. MNR, [1988] 2 CTC 2071, See also Canadian Bar Insurance Association v. The Queen 99 DTC 653.
Entities such as sports clubs, parades, and similar organizations can fall into this category, provided they are organized and operated exclusively for social welfare, civic improvement, pleasure, recreation, or any other non-profit purpose.
Income usage of an NFP
NFPs have to reinvest their income to further their objectives. No part of an NFP's income is payable to or available for the personal benefit of any proprietor, member or shareholder of the NFP, unless such proprietor, member or shareholder was a club, society or association whose primary purpose and function was the promotion of amateur athletics in Canada. Charities also have to restrict the usage of their income.
Beyond CRA guidance: What really defines a Not-for-Profit Organization?
Ultimately, the determination of non-profit status rests on meeting the statutory requirements set out in section 149(1) of the Income Tax Act. While the CRA's interpretation offers helpful context—particularly its recognition of the broad, inclusive nature of "any other purpose except profit"—it is the language of the statute that carries legal authority.
Organizations seeking NFP status must ensure they are organized and operated in a manner consistent with these legislative criteria to qualify under Canadian tax law.
PRO TAX TIPS: Are you unsure whether to set up a Not-for-profit Organization or register a Charity?
If you are looking to decide whether to set up a Registered Charity or an NFP for your non-profit pursuits, here are some tips for you.
A registered Charity may be the ideal vehicle for you, where:
- You wish to issue official donation receipts, enabling your donors to deduct their donations in order to reduce their taxable income, and
- Your purpose for setting up the organization falls within a charitable purpose, i.e. poverty relief, education, religion or the benefit of the community.
However, where your purpose is not charitable, and the organization is for a purpose other than profit, then an NFP is the ideal vehicle. NFPs do not issue official donation receipts for tax purposes.
If you need any help making the above choices or setting up your NFPs or registered charities, you should consult our top Canadian tax lawyers today.
Frequently Asked Questions (FAQs):
What qualifies an organization as a non-profit under Canadian law?
An organization qualifies as a non-profit under Section 149(1) of the Income Tax Act if it is organized and operated exclusively for purposes other than profit, such as social welfare, civic improvement, recreation, or any other non-profit purpose. Additionally, it must not be a charity, and no part of its income can be distributed to its proprietors, members or shareholders, except for certain amateur athletic organizations.
How does a non-profit organization differ from a charitable organization?
A charitable organization operates exclusively for charitable purposes such as poverty relief, education, or religion and typically must register with the CRA to issue donation receipts and gain tax advantages. In contrast, an NFP operates on a non-profit basis, which may not be a charitable purpose and does not have to be registered to gain tax advantages.
Can an NFP engage in business activities?
Yes, an NFP can engage in business activities as long as those activities are incidental to or directly attributable to the NFP's legitimate purpose or activities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
