Taxation for Non-Profit Organizations: Canadian Tax Lawyer’s Guide

What is a Non-Profit Organization

What constitutes a non-profit organization for tax purposes is defined in paragraph 149(1)(l) of the Income Tax Act. While the terms not-for-profit and non-profit are used interchangeably in other areas, for tax law purposes only the term non-profit is used. To qualify as a non-profit for tax purposes, the organization must be a club, society, or association which meets the following requirements:

1. It is not a charity
2. Organized exclusively for the purpose of social welfare, civic improvement, pleasure or recreation or another purpose except profit
3. Operates exclusively for the purpose of social welfare, civic improvement, pleasure or recreation or another purpose except profit
4. No income from the organization is payable to or available for the personal benefit of proprietor(s), member(s) or shareholder(s) of the organization. Non-profit organizations whose primary purpose and operation is related to the promotion of amateur athletics in Canada is exempted from this rule.

There is no requirement provincially, federally or within tax law that non-profit organizations have a particular legal form, meaning they may be corporations, trusts or unincorporated associations.

Whether a particular organization qualifies as a non-profit organization for tax purposes is a factual determination unique to the circumstances of each organization.

Non-Profit Organizations are not Charities

Non-profit organizations and charities often share many similarities in terms of goals and the purpose of the organizations, but for tax purposes there is an important distinction between the two types of organizations. A non-profit organization for tax purposes cannot be a charity.

Charities must register with the Canada Revenue Agency (the “CRA”) in order to access the tax advantages of being a charity. There is no requirement that a non-profit organization register with the CRA to access the tax advantages of being a non-profit organization. Once a charity’s registration is approved, the charity is tax-exempt and able to issue charitable donation receipts to its donors to allow them to claim related tax credits. A non-profit organization cannot issue charitable donation receipts.

Do Non-Profit Organizations Pay Tax?

Non-profit organizations are exempt from tax under Part 1 of the Income Tax Act for the portion of their fiscal period where they meet the requirements to qualify as a non-profit organization.  This exemption applies only to income tax. Instead of filing a tax return under the Income Tax Act, non-profit organizations must file the Form T1044, Non-Profit Organization (NPO) Information Return.

The Excise Tax Act, which governs the collection and remittance of GST/HST sales tax, has the same definition of “non-profit organization” as the Income Tax Act but does not provide the same blanket tax exemption. Instead, non-profit organizations are given exemptions with respect to collecting and remitting GST/HST based on the type of goods or services they are providing. For example, if the non-profit organization provides 90% or more of its property or services free of charge, there is no requirement to collect or remit GST/HST on these free supplies. This free supply exemption does not apply to blood or blood derivates, or commercial parking.  Non-profit organizations are also not exempted under the Canada Pension Plan or Employment Insurance Act.

Pro Tax Tips: Incorporation for Non-Profit Organizations

As mentioned above, there is no requirement that non-profit organizations be incorporated. However, a non-profit organization may choose to incorporate to access the benefits of incorporation. These benefits include limiting liability for individuals related to the corporation, continuity of the organization even with changes in control, and establishing a legal person who is capable of holding its own property and entering its own legal arrangements. For the purposes of incorporation, both the terms not-for-profit and non-profit are used. Our experienced Certified Specialist in Taxation Canadian tax lawyer always recommends that a non-profit organization be incorporated, and we can set up this corporation on behalf of your non-profit organization.

Non-profit organizations can choose to incorporate federally or provincially. If they incorporate provincially, they will incorporate per the relevant Corporations Act or Not-for-Profit Corporations Act of the province. If they incorporate federally, they must do so under the Canada Not-For-Profit Corporations Act.

Incorporation as a non-profit or not-for-profit organization does not grant the organization non-profit status for tax purposes. The corporation must still meet the requirements under paragraph 149(1)(l) of the Income Tax Act to qualify as a non-profit organization for tax purposes and to take advantage of the special tax rules for non-profit organizations. An organization which is classified as a non-profit or not-for-profit for corporate law purposes may be considered a charity for tax purposes. Our experienced Canadian tax and corporate lawyers handle determinations of whether an organization qualifies as a non-profit for tax purposes, dispute non-profit status determinations with the CRA and incorporate non-profit organizations.

About the Author

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David J. Rotfleisch

David J. Rotfleisch, a leading Canadian tax lawyer, is not only a certified specialist in taxation but also a chartered professional accountant. Most recently, David is a pioneer in Canadian crypto taxation.

As of April 2020, he was one of 12 Ontario Certified Specialists In Taxation™.

Learn more about David J. Rotfleisch