Principal Issues: See below.
Position: See below.
CTF 2010 November 28, 2010
NPOs Carrying on Business for Profit
Question 11
Can the CRA comment on its views regarding the determination of when a not-for-profit entity (NPO) is carrying on a business for profit for the purposes of the tax exemption in paragraph 149(1)(l)?
Response 11
An NPO may not be taxable if it meets the requirements of paragraph 149(1)(l). This means that the entity cannot be a charity; the entity must be organized and operated exclusively for a purpose other than profit; and none of the entity's income can be available for the benefit of its members.
The recent decision of the Tax Court of Canada (TCC) in BBM Canada (formerly BBM Bureau of Measurement) v. The Queen (note 1) confirmed that an entity can have business activities (or activities related to the business of its members) and still qualify for the tax exemption provided by paragraph 149(1)(l) as long as the entity does not have any profit purpose. Moreover, the CRA accepts that an NPO can earn some profits and remain exempt from tax under paragraph 149(1)(l). However, an NPO cannot carry on a business as "a cloak to avoid payment of taxation on a commercial enterprise."(note 2)
It is always a question of fact whether carrying on a business will result in an entity having a profit purpose. Paragraph 7 of Interpretation Bulletin IT-496R (note 3) provides a list of characteristics that the CRA will consider in making this determination. The court in BBM agreed that these were reasonable considerations for the purposes of applying the tax exemption. The characteristics considered include whether
- there is a trade or business in the ordinary sense,
- goods or services are restricted to members and their guests,
- the business is operated on a profit basis rather than a cost-recovery basis, and
- the business is operated in competition with taxable entities carrying on the same trade or business.
In general, having profits will not preclude an entity from claiming the tax exemption provided by paragraph 149(1)(l) as long as the profits are incidental and arise from activities that are undertaken to meet the organization's not-for-profit objectives. This means that where the amounts are not material and the profits result from activities that the entity carries out to meet its not-for-profit objectives, the entity will remain tax-exempt. In all cases, the profits must be used to further the not-for-profit objectives of the entity and cannot be available for the personal benefit of members.
Neither the CRA nor the courts accept that using profits to finance not-for-profit objectives is sufficient, in and of itself, to negate a profit purpose. This "destination of funds" test has been rejected in the context of both charities and NPOs: see BBM for the court's summary of the relevant jurisprudence. If an entity wishes to carry on a for-profit business for the purpose of providing funds to an NPO, the business should be carried on through a taxable entity and the funds provided to the NPO on an after-tax basis.
The CRA accepts that certain fundraising activities can be carried on directly by an NPO without jeopardizing its tax-exempt status. In particular, where an NPO (usually an NPO organized for social welfare, civic improvement, or pleasure or recreation) raises funds through activities carried out by volunteers, especially activities involving the sale of donated goods or services, or involving games of chance (including lotteries and bingos), carrying out these activities will not generally indicate a profit purpose within the meaning of paragraph 149(1)(l). However, the scope of the fundraising activities, especially by comparison with other activities, should not be so significant that fundraising can be considered a purpose of the entity.
Notes:
(1) 2008 TCC 341.
(2) The Gull Bay Development Corporation v. The Queen, 84 DTC 6040, at 6048 (FCTD).
(3) Interpretation Bulletin IT-496R, "Non-Profit Organizations," August 2, 2001.
Eliza Erskine
2010-038630