Non-Profit Organization Risk Identification Project - Questions and answers

1. What are the main findings of the Non-Profit Organization Risk Identification Project (NPORIP)? Will the community be involved in the next steps?
2. What is a non-profit organization (NPO) as described in paragraph 149(1)(l) of the Income Tax Act?
3. How many NPOs are registered in Canada?
4. What type of returns should NPOs file?
5. Why did the CRA start the NPORIP?
6. Has the CRA audited the non-profit sector in the past?
7. What happens if an organization no longer qualifies for NPO status? What is the CRA’s position on compliance?
8. How many NPOs were reviewed as part of the NPORIP?
9. How did the CRA select the NPOs that were reviewed?
10. What will happen to organizations that were found to not comply with the Act?
11. Would legislative changes be necessary to allow an NPO to earn a certain level of profit?
12. Will there be legislative changes that will affect organizations claiming a tax exemption as an NPO?

1. What are the main findings of the Non-Profit Organization Risk Identification Project (NPORIP)? Will the community be involved in the next steps?

The NPORIP identified a variety of situations among the sample organizations that did not comply with the Income Tax Act, particularly where the organization was not operated exclusively for a purpose other than profit. The results showed that a significant number of the incorporated organizations that were reviewed would fail to meet at least one of the requirements of the Act.

Research has shown that the current legislative framework allows a wide variety of organizations with a variety of purposes and activities to claim the exemption.

The Canada Revenue Agency (CRA) recognizes that organizations benefit from education products that help them comply with the tax laws, and it is committed to engaging and consulting with stakeholders to help them understand and comply with the tax laws that affect them.

As the legislation falls under the purview of the Minister of Finance, we have shared a copy of the report with the Department of Finance Canada.

2. What is a non-profit organization (NPO) as described in paragraph 149(1)(l) of the Income Tax Act?

NPOs are not defined in the Act. However, an organization that claims a tax exemption under paragraph 149(1)(l) of the Act is described as a club, society, or association that is organized and operated exclusively for social welfare, civic improvement, pleasure or recreation, or any other purpose except profit. No income earned by the organization can be available for the benefit of its members. Furthermore, the organization cannot be a charity. For more information on NPOs, go to Non-Profit Organization Risk Identification Project.

3. How many NPOs are registered in Canada?

For the purposes of the NPORIP, the CRA identified about 30,000 organizations claiming a tax exemption as an NPO that filed a T2 corporation tax return, a T3 trust return, or a T1044 non-profit organization information return. However, the Act does not require all NPOs to file a return, and an organization seeking the benefits of NPO status under the Act is not required to register with the CRA. Therefore, estimates on the size of the non-profit sector vary widely and it's difficult to get accurate data.

4. What type of returns should NPOs file?

Some NPOs are not required to file a return. The type of return that an NPO has to file depends on whether the organization is incorporated. NPOs that are incorporated in Canada have to file a T2 corporation tax return.

In addition, an NPO may have to file a T1044 information return if:

• it received or was entitled to receive taxable dividends, interest, rentals, or royalties totaling $10,000 or more;
• its total assets are more than $200,000; or
• it had to file a T1044 return previously.

If an NPO's main purpose is to provide dining, recreational, or sporting facilities for its members, the NPO's property may be considered to be property of a trust, so the organization may have to file a T3 trust return.

5. Why did the CRA start the NPORIP?

Each year, the CRA carries out a number of review activities to promote compliance with the laws it administers. In 2009, the CRA launched the NPORIP to gather information about the way organizations claiming a tax exemption as an NPO operate under the rules of that exemption, allowing the CRA to get a better understanding of the issues these organizations face in complying with the tax rules and to evaluate their level of compliance with these rules.

6. Has the CRA audited the non-profit sector in the past?

To date, there hasn't been a specialized program that focused on auditing NPOs from an income tax perspective. However, some NPOs have been audited in the past. These audits were undertaken to confirm whether the organization claiming NPO status qualified or continued to qualify for a tax exemption as an NPO. A number of organizations that file T2s (corporation tax returns) or T3s (trust tax returns) have been selected for audit in the past through regular T2 or T3 screening processes.

7. What happens if an organization no longer qualifies for NPO status? What is the CRA's position on compliance?

An organization must meet all the requirements under paragraph 149(1)(l) of the Act to qualify as an NPO and therefore as tax-exempt. When an organization's status changes (when it becomes or stops being an NPO), it is considered to have disposed of its assets at fair market value. In addition, the organization is considered to have immediately reacquired the assets for the same amount. Also, a new tax year begins each time an entity becomes or stops being an NPO. Any profits earned are taxed at the applicable tax rates.

8. How many NPOs were reviewed as part of the NPORIP?

The CRA identified about 30,000 organizations claiming a tax exemption as an NPO that filed a T2 corporation tax return, a T3 trust return, or a T1044 non-profit organization information return. The CRA reviewed 1,337 files over three years.

9. How did the CRA select the NPOs that were reviewed?

To make sure the findings are statistically valid, the CRA randomly selected files from the identified population of 30,000 organizations.

10. What will happen to organizations that were found to not comply with the Act?

The CRA is working with these organizations to improve their understanding of their income tax obligations.

11. Would legislative changes be necessary to allow an NPO to earn a certain level of profit?

The CRA's longstanding position is that an NPO can generate a profit, but the profit must be incidental and arise from activities that support the organization's not-for-profit objectives.

12. Will there be legislative changes that will affect organizations claiming a tax exemption as an NPO?

The Department of Finance Canada is responsible for tax policy and for introducing legislative amendments related to the Act. We have provided a copy of the report to the Department of Finance Canada. The Government recently announced a consultation on NPOs as part of Economic Action Plan 2014. The Government will provide further details on this consultation in the coming months.

Date modified:

2014-02-17