Maybe it is time some non-profits paid tax like everyone else

Kim Moody: There ought to be brighter strains in an NPO’s actions to find out whether or not a tax exemption is suitable or not

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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 non-public foundations which are 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 reduction of poverty
  • the development of training
  • the development of faith
  • different functions that profit the group

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

In different phrases, you may solely be an NPO or a registered charity, not each. Registered charities can subject helpful tax receipts to donors. NPOs can not. It may be a rigorous train to change into a registered charity (and keep 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 beneath the Earnings Tax Act.

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

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

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There isn’t a doubt that NPOs play a helpful 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:

“Issues have been raised that some organizations claiming the NPO tax exemption could also be incomes income that aren’t incidental to finishing up the group’s non-profit functions, making earnings accessible for the non-public good thing about members or sustaining disproportionately giant reserves. As well as, as a result of reporting necessities for NPOs are restricted, members of the general public is probably not adequately in a position to assess the actions of those organizations, and it might be difficult for the Canada Income Company to guage the entitlement of a company to the tax exemption.

“On this context, Funds 2014 broadcasts the federal government’s intention to overview whether or not the earnings tax exemption for NPOs stays correctly focused and whether or not enough transparency and accountability provisions are in place. This overview won’t prolong to registered charities or registered Canadian beginner athletic associations. As a part of the overview, 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 stunning for a lot of within the non-profit sector, however I assumed such a overview/session was lengthy overdue. A tax exemption is a strong factor. And if it’s not being accurately utilized — maybe by inappropriately competing with for-profit firms that pay tax, funding actions that don’t meet the basic definition of an NPO, making earnings accessible for the non-public good thing about members, and so forth. — then that’s clearly not a correct use of the tax exemption.

The NPO session was quietly and shortly deserted after the 2015 federal election/authorities change. Nothing materials on this house has occurred since and I nonetheless assume a overview of the tax exemption is critical.

For instance, let’s assume NPO ABC is a “group 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, lessons and leagues organized by ABC for separate charges. Different revenues of ABC encompass concessions, t-shirts and different merchandise (branded with ABC’s emblem) offered for a revenue. ABC additionally owns the constructing it operates out of. It pays important quantities to XYZ’s household — each straight and not directly — to function ABC.

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On this easy situation, ought to ABC’s income 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 comparable to this (and lots of much less apparent ones), it’s time for an total overview of the tax exemption for NPOs.

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

NPOs can serve an important societal goal, however there ought to be brighter strains 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 suitable or not.

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Kim Moody, FCPA, FCA, TEP, is the founding father of Moodys Tax/Moodys Personal Consumer, 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 group. He will be reached at [email protected] and his LinkedIn profile is

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