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Perhaps it’s time some non-profits paid tax like everybody else


Kim Moody: There should be brighter lines in an NPO’s activities to determine whether a tax exemption is appropriate or not

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Ever wonder what the difference is between a non-profit organization and a registered charity? The Canada Revenue Agency sums up the differences as follows:

Registered charities are charitable organizations, public foundations, or private foundations that are created and resident in Canada. They must use their resources for charitable activities and have charitable purposes that fall into one or more of the following categories:

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  • the relief of poverty
  • the advancement of education
  • the advancement of religion
  • other purposes that benefit the community

“Non-profit organizations are associations, clubs, or societies that are not charities and are organized and operated exclusively for social welfare, civic improvement, pleasure, recreation, or any other purpose except profit.”

In other words, you can only be an NPO or a registered charity, not both. Registered charities can issue valuable tax receipts to donors. NPOs cannot. It can be a rigorous exercise to become a registered charity (and maintain such status). Not so for NPOs.

What the two have in common is that both organizations do not pay income tax on their receipts since they are exempt from taxation under the Income Tax Act.

Such an exemption for NPOs has been around since the introduction of the income tax statute in 1917. Very little review of that exemption has been done since that time.

There were about 134,000 active NPOs in Canada in 2020, according to Statistics Canada data released last year, representing about 8.9 per cent of the country’s gross domestic product. That is a material number.

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There is no doubt that NPOs play a valuable role in Canadian society. But is the tax exemption from all its receipts still appropriate? In 2014, then finance minister Jim Flaherty announced in the federal budget that a consultation on the tax exemption for NPOs was going to be commenced. He stated the following in the budget documents:

“Concerns have been raised that some organizations claiming the NPO tax exemption may be earning profits that are not incidental to carrying out the organization’s non-profit purposes, making income available for the personal benefit of members or maintaining disproportionately large reserves. In addition, because reporting requirements for NPOs are limited, members of the public may not be adequately able to assess the activities of these organizations, and it may be challenging for the Canada Revenue Agency to evaluate the entitlement of an organization to the tax exemption.

“In this context, Budget 2014 announces the government’s intention to review whether the income tax exemption for NPOs remains properly targeted and whether sufficient transparency and accountability provisions are in place. This review will not extend to registered charities or registered Canadian amateur athletic associations. As part of the review, the government will release a consultation paper for comment and will further consult with stakeholders as appropriate.”

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The announcement was a bit surprising for many in the non-profit sector, but I thought such a review/consultation was long overdue. A tax exemption is a powerful thing. And if it is not being correctly utilized — perhaps by inappropriately competing with for-profit companies that pay tax, funding activities that do not meet the classic definition of an NPO, making income available for the personal benefit of members, etc. — then that is obviously not a proper use of the tax exemption.

The NPO consultation was quietly and quickly abandoned after the 2015 federal election/government change. Nothing material in this space has happened since and I still think a review of the tax exemption is necessary.

For example, let’s assume NPO ABC is a “community organization” and sells memberships. It was started by XYZ in 1995 and is controlled by his family. Members are entitled to participate in sporting events, classes and leagues organized by ABC for separate fees. Other revenues of ABC consist of concessions, t-shirts and other merchandise (branded with ABC’s logo) sold for a profit. ABC also owns the building it operates out of. It pays significant amounts to XYZ’s family — both directly and indirectly — to operate ABC.

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In this simple scenario, should ABC’s profits be subject to tax? If not, why not? Is it competing with for-profit organizations that pay tax, thus putting such for-profit organizations at a competitive disadvantage? Obviously, the personal amounts paid to XYZ and his family are a problem.

In situations such as this (and many less obvious ones), it’s time for an overall review of the tax exemption for NPOs.

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Unions are another large group of organizations whose receipts are subject to a blanket tax exemption. These organizations are also long overdue for a review to determine whether a tax exemption is still appropriate, especially considering how politically active many unions are.

NPOs can serve a very important societal purpose, but there should be brighter lines in an NPO’s activities — and better transparency to assess the appropriateness of the NPO’s activities — to determine whether a tax exemption is appropriate or not.

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Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is www.linkedin.com/in/kimmoody.


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