Taxation law

Non-Taxable Entities: Recent Developments

Apr 26th, 2013

By Daniel Frajman

The two most common types of entities in Canada that do not pay income tax are probably non-profit organizations (“NPOs”), and registered charities. In addition, a charity also has the right to issue tax receipts to its donors. The charity gets this status after fitting essentially a “public benefit” definition that is vetted by the tax department.

Both NPOs and charities are often incorporated.624339_hands

(i) The tax department (the “CRA”) has been carrying out an audit project, principally to assure NPOs are not budgeting to earn profits, and are not accumulating monetary reserves without linking them to a particular purpose. More details on this are found at the CRA’s August 27, 2012 notice, “Non-Profit Organization Risk Identification Project". See also Paragraph 149(1)(l) of the Income Tax Act (Canada).The main recent developments in this area are:

(ii) It can therefore often be advantageous for an NPO to instead try to qualify as a charity. Registered charities are not subject to the same kind of CRA scrutiny referred to above, and a charity can carry on a business, essentially as long as the only thing that the business does is help the charity carry out its charitable objects, or so long as the business is volunteer-run (see Section 149.1 of the Income Tax Act (Canada));

(iii) NPOs and charities (if they incorporated federally under the old Canada Corporations Act) have to redo their paperwork (enact new by-laws, and turn their letters patent into articles of continuance) by October 17, 2014, or else they risk being dissolved. This is in virtue of the new Canada Not-for-profit Corporations Act.

For additional details, see my recent article published in 2013 by Carswell in The Canadian Taxpayer and the Canadian Not-For-Profit News.

Daniel Frajman practices corporate and commercial law with a particular emphasis on trusts and charities.