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Ever marvel what the distinction is between a non-profit group and a registered charity? The Canada Income Company sums up the variations as follows:

“Registered charities are charitable organizations, public foundations, or personal foundations which can be created and resident in Canada. They have to use their sources for charitable actions and have charitable functions that fall into a number of of the next classes:

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• the aid of poverty
• the development of schooling
• the development of faith
• different functions that profit the neighborhood

“Non-profit organizations are associations, golf equipment, or societies that aren’t charities and are organized and operated solely for social welfare, civic enchancment, pleasure, recreation, or some other objective besides revenue.”

In different phrases, you possibly can solely be an NPO or a registered charity, not each. Registered charities can situation beneficial tax receipts to donors. NPOs can not. It may be a rigorous train to turn out to be a registered charity (and preserve such standing). Not so for NPOs.

What the 2 have in widespread is that each organizations don’t pay earnings tax on their receipts since they’re exempt from taxation below the Earnings Tax Act.

Such an exemption for NPOs has been round for the reason that introduction of the earnings tax statute in 1917. Little or no assessment of that exemption has been completed since that point.

There have been about 134,000 energetic NPOs in Canada in 2020, in line with Statistics Canada knowledge launched final 12 months, representing about 8.9 per cent of the nation’s gross home product. That may be a materials quantity.

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There isn’t any doubt that NPOs play a beneficial function in Canadian society. However is the tax exemption from all its receipts nonetheless applicable? In 2014, then finance minister Jim Flaherty introduced within the federal price range {that a} session on the tax exemption for NPOs was going to be commenced. He said the next within the price range paperwork:

“Considerations have been raised that some organizations claiming the NPO tax exemption could also be incomes earnings that aren’t incidental to finishing up the group’s non-profit functions, making earnings obtainable for the non-public advantage of members or sustaining disproportionately massive reserves. As well as, as a result of reporting necessities for NPOs are restricted, members of the general public is probably not adequately capable of assess the actions of those organizations, and it might be difficult for the Canada Income Company to judge the entitlement of a corporation to the tax exemption.

“On this context, Funds 2014 pronounces the federal government’s intention to assessment whether or not the earnings tax exemption for NPOs stays correctly focused and whether or not ample transparency and accountability provisions are in place. This assessment won’t prolong to registered charities or registered Canadian newbie athletic associations. As a part of the assessment, the federal government will launch a session paper for remark and can additional seek the advice of with stakeholders as applicable.”

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The announcement was a bit shocking for a lot of within the non-profit sector, however I believed such a assessment/session was lengthy overdue. A tax exemption is a robust factor. And if it’s not being appropriately utilized — maybe by inappropriately competing with for-profit firms that pay tax, funding actions that don’t meet the traditional definition of an NPO, making earnings obtainable for the non-public advantage of members, and many others. — then that’s clearly not a correct use of the tax exemption.

The NPO session was quietly and rapidly deserted after the 2015 federal election/authorities change. Nothing materials on this area has occurred since and I nonetheless suppose a assessment of the tax exemption is important.

For instance, let’s assume NPO ABC is a “neighborhood group” and sells memberships. It was began by XYZ in 1995 and is managed by his household. Members are entitled to take part in sporting occasions, courses and leagues organized by ABC for separate charges. Different revenues of ABC include concessions, t-shirts and different merchandise (branded with ABC’s brand) offered for a revenue. ABC additionally owns the constructing it operates out of. It pays important quantities to XYZ’s household — each immediately and not directly — to function ABC.

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On this easy state of affairs, ought to ABC’s earnings be topic to tax? If not, why not? Is it competing with for-profit organizations that pay tax, thus placing such for-profit organizations at a aggressive drawback? Clearly, the non-public quantities paid to XYZ and his household are an issue.

In conditions akin to this (and plenty of much less apparent ones), it’s time for an general assessment of the tax exemption for NPOs.

Unions are one other massive group of organizations whose receipts are topic to a blanket tax exemption. These organizations are additionally lengthy overdue for a assessment to find out whether or not a tax exemption continues to be applicable, particularly contemplating how politically energetic many unions are.

NPOs can serve an important societal objective, however there must be brighter traces in an NPO’s actions — and higher transparency to evaluate the appropriateness of the NPO’s actions — to find out whether or not a tax exemption is acceptable or not.

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Kim Moody, FCPA, FCA, TEP, is the founding father of Moodys Tax/Moodys Non-public Shopper, a former chair of the Canadian Tax Basis, former chair of the Society of Property Practitioners (Canada) and has held many different management positions within the Canadian tax neighborhood. He could be reached at kgcm@kimgcmoody.com and his LinkedIn profile is www.linkedin.com/in/kimmoody.

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