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

Article content material

Ever marvel what the distinction is between a non-profit group and a registered charity? The Canada Revenue Agency sums up the differences 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 assets for charitable actions and have charitable functions that fall into a number of of the next classes:

Article content material

Article content material

• the reduction of poverty
• the development of schooling
• 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 some other objective besides revenue.”

In different phrases, you’ll be able to solely be an NPO or a registered charity, not each. Registered charities can situation beneficial tax receipts to donors. NPOs can’t. It may be a rigorous train to turn into a registered charity (and preserve such standing). Not so for NPOs.

What the 2 have in frequent is that each organizations don’t pay revenue tax on their receipts since they’re exempt from taxation underneath the Revenue Tax Act.

Such an exemption for NPOs has been round because the introduction of the revenue tax statute in 1917. Little or no evaluation of that exemption has been achieved since that point.

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

Article content material

Article content material

There isn’t a doubt that NPOs play a beneficial position in Canadian society. However is the tax exemption from all its receipts nonetheless acceptable? In 2014, then finance minister Jim Flaherty announced within the federal funds {that a} session on the tax exemption for NPOs was going to be commenced. He acknowledged the next within the funds paperwork:

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

“On this context, Funds 2014 publicizes the federal government’s intention to evaluation whether or not the revenue tax exemption for NPOs stays correctly focused and whether or not adequate transparency and accountability provisions are in place. This evaluation won’t lengthen to registered charities or registered Canadian beginner athletic associations. As a part of the evaluation, the federal government will launch a session paper for remark and can additional seek the advice of with stakeholders as acceptable.”

Article content material

The announcement was a bit shocking for a lot of within the non-profit sector, however I believed such a evaluation/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 corporations that pay tax, funding actions that don’t meet the basic definition of an NPO, making revenue out there for the private good thing about members, and many others. — 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 area has occurred since and I nonetheless assume a evaluation 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 include concessions, t-shirts and different merchandise (branded with ABC’s brand) bought for a revenue. ABC additionally owns the constructing it operates out of. It pays important quantities to XYZ’s household — each immediately and not directly — to function ABC.

Article content material

On this easy situation, ought to ABC’s earnings 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 private quantities paid to XYZ and his household are an issue.

In conditions reminiscent of this (and plenty of much less apparent ones), it’s time for an total evaluation of the tax exemption for NPOs.

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

NPOs can serve an important societal objective, however there must be brighter traces 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 acceptable or not.

Article content material

Kim Moody, FCPA, FCA, TEP, is the founding father of Moodys Tax/Moodys Non-public 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 might be reached at kgcm@kimgcmoody.com and his LinkedIn profile is www.linkedin.com/in/kimmoody.

In case you preferred this story, join extra within the FP Investor e-newsletter.

Bookmark our web site and help our journalism: Don’t miss the enterprise information it’s good to know — add financialpost.com to your bookmarks and join our newsletters here.

Article content material