The Non-Profit Organization Risk Identification Project (NPORIP) Report - finally released

April 11, 2016 | By: .(JavaScript must be enabled to view this email address) Mark Blumberg
Topics: What's New from the Charities Directorate of CRA, Canadian Charity Law, Canadian Charity Statistics, Transparency, Non-Profits that are not registered charities

In June 2014, which is almost 2 years ago, I put in a request to CRA to receive a copy of certain information on the Non-Profit Organization Risk Identification Project (NPORIP).  On April 11, 2016, I received over 220 pages of documents from CRA on the NPORIP.  The NPORIP was a major initiative by the Federal government to look at the approximately 80,000 -100,000 organizations that are non-profits but not registered charities.  As they say better late than never.   

In July 2013 the CRA prepared a "final" 76 page report.("July 2013 Report")  Then in October 2013 there was a further "final" report but only 20 pages long. ("October 2013 Report")  The CRA in February 2014 released some high level information on the NPORIP but neither the July 2013 Report nor the October 2013 Report.  We will start by posting information on the October 2013 Report.  Later we will post more detailed information contained in the July 2013 Report and other documents.  If you would like to receive further updates on the NPORIP and other non-profit and charity law issues you can sign up to our newsletter.

Here are some significant excerpts from the October 2013 Final Report from the CRA:

NON-PROFIT ORGANIZATION RISK IDENTIFICATION PROJECT
FINAL REPORT
October 2013

Table of Contents
1. Foreword ............................................................................................................................. 2
2. Executive Summary ............................................................................................................ 3
3. Background ................................................................................. ......... .. ......................... 4
4. Objectives ....................... ....................................................... ...... .... ............... ............... 4
5. Methodology ...................................................................... ........ ...... .. ........ ... ... ............ 4
6. Findings ............................................................................... ... ........ .. ........ .... ...... ......... 6
6.1 Meets the Definition of a Charity .................... .......... ..... .................. ..... ... .................... 8
6.2 Organized Exclusively for a Purpose Other than Profit.. ...... ............................................ 9
6.3 Operated Exclusively for a Purpose other than Profit.. .... ...... .. ...................................... 9
6.3.1 Professional Associations (type 02) ........... ............... ........... .... ..... ........................... 10
6.3.2 Recreational or Social Organization (type 01) .. ...... .. ... ... ............... ..... .... .............. 11
6.3.3 Residential Condominium Corporation (type 10) ................. ... ........ ... .................... 11
6.3.4 Other (type 30) .............. ........... .. ... ... ............. .... .. .. .. ... ........ ............ ....... ........ . 12
6.4 Income Payable or Made Available for the Personal Benefit of a Proprietor, Member or
Shareholder .............. ....... .... ... ... .. ...... ............ ... ... .. ....... ..... .. ........... .. ........... .. ... .. 12
6.5 Risk Associated with Project Files .. .. .... .. .. .... .... .... ............ ........ .. .. .. .................. ..13
6.5.1 Risks ........... .. ... .... ...... .. .. ......... ....... ...... ............ ... ............. .............. ..... ........... 13
6.5.2 Transparency and Accountability ...... .. ...... .... .... .. .. ............... .. .. .... .... .. .... ......... 16
6.5.3 Information and Education .. .. .. .. .. .......... .... ...... ...... .... ...... .. .. .. ... .. .. ...... ......... 17
7. CONCLUSIONS .......... ............ ....... ................. ......... ... .. ... .. ........ ...... ........ ... .......... 17
8. Recommendations ............... ........... .. ..... ... ...... ...... .... .. ....... ................... .................. 18
9. Next Steps ...................... .. ... ... ... ....... ......... .... .... ........ ............. ........ ........ .............. 19

 

1. FOREWORD

The Non-Profit Organization Risk Identification Project (NPORIP) Report was prepared by the
Specialty Audit Division (SAD) of the Small and Medium Enterprises Directorate (SMED). It
provides the NPORIP results used to evaluate the risk associated with entities claiming an
exemption under paragraph 149(1)(1) of the Income Tax Act (the "Act").

Information contained in this report has been gathered primarily from the NPORIP results
captured and reported in an audit results form. The report also relies on supporting information
from the Income Tax Rulings Directorate (ITRD). The report provides a statistically valid
analysis of 149(1)(1) entities.

The contribution of resources from the participating Tax Services Offices (TSOs) is widely
acknowledged and greatly appreciated. In addition, the technical guidance provided by the ITRD
has been invaluable.

2. EXECUTIVE SUMMARY

The purpose of the Non-Profit Organization Risk Identification Project (NPORIP) was to gather
intelligence and to characterize and quantify compliance associated with entities claiming an
exemption under paragraph 149(1)(1) of the Act (149(1)(1) entities). Certain activities undertaken
by some 149(1)(1) entities have been under review by the Canada Revenue Agency (CRA) for
many years. Generally, the conclusions were that identifying and quantifying these entities was
difficult.

The project focused on four categories of non-compliance with the legislation.
1. An entity claiming tax exemption under paragraph 149(1)(1) that in the opinion of the
Minister was a charity as defined in subsection 149.1(1);
2. A 149(1)(1) entity that was not organized exclusively for a purpose other than profit;
3. A 149(1)(1) entity that was not operated exclusively for a purpose other than profit; and
4. A 149(1)(1) entity whose income or part thereof was payable to or was otherwise made
available for the personal benefit of any proprietor, member or shareholder.

The overall non-compliance rate was estimated at 43.5% ± 2.8%, which is to say that between
40.7% and 46.3% of the entities in the population studied were non-compliant with at least one
of the four above-mentioned legislative requirements. It should be noted that not all categories of
non-compliance represent high risk. The organizations that are of the highest risk are
organizations that would require reassessments and would result in increased tax liability to the
organization; these organizations represented 31.5% of the files reviewed , and between 29.3%
and 34.5% of the population studied. The remaining organizations were considered of low risk as
the majority of these could be corrected through increased education.

In our view, there are several reasons for this high rate of non-compliance:

• The 149(1)(1) entity environment has evolved including more complex and sophisticated
activities and the corresponding case law (FN2) has also evolved;
• Representatives of 149(1)(1) entities believe that the entities must produce a profit for the
programs to thrive and for capital assets to be maintained. In a number of cases, 149(1)(1)
entities wanted to expand;
• The gap between the CRA and the NPO sector's interpretation in respect of paragraph
149(1)(1) makes the administration of this provision difficult; and
• A lack of focused compliance and education actions aimed at 149(1)(1) entity community.

The most prevalent issue identified is the number of 149(1)(1) entities that operate, in whole or in part, for profit, often leading to an accumulation of unreasonable reserves or to personal
expenses of members being subsidized by the entity.

Footnote 2 Until recently, case law in Canada dealt with small, relatively grass-roots types of organizations which were not commercial enterprises in disguise: St Catherine's Flying Club, 53 DTC 1232, Forest Lawn Cemetery Company 52 DTC 84, Moose Jaw Flying Club [1937] A.c. 60 . In the last 20 years, the entities in litigated cases have become more commercialized, and even the judgments mention that many aspects of the entities under scrutiny were highly commercial: Gull Bay, 84 DTC 6040, Canadian Bar Insurance Association 99DTC653, Tourbec (1979) Inc. 88 DTC 1442

3. BACKGROUND

The terms non-profit or not-for-profit organization are widely used by the public, including tax
practitioners, to refer to a number of different types of organizations including charities and
many entities that make claims for tax exemption under other provisions of subsection 149(1) of
the Act. Unless otherwise noted all reference to non-profit organizations in this report refers
specifically to entities claiming exemption from tax under paragraph 149(1 )(1) of the Act.

The exemption from tax under paragraph 149(1)(1) was introduced in the Income War Tax Act,
1917. While no significant changes have been made to the tax exemption for 149(1)(1) entities
since its introduction, the nature of the entities availing themselves of the exemption has evolved
significantly. These 149(1)(1) entities now include a variety of organizations, such as
professional associations, recreational or social organizations, organizations operated for civic
improvement, multicultural organization, and low cost housing organizations. Some of these
entities are significant in size and are involved in considerable commercial activity . In
consideration of today's population of 149(1)(1) entities, it is unclear if the current tax regime
governing these organizations remains appropriate.

While these concerns have been considered in the past, an important missing element to evaluate
the concerns was a statistically valid estimate of the non-compliance rate in this sector.
Therefore, in 2009, SMED initiated the NPORIP focusing on measuring non-compliance in
organizations claiming exemption from tax under paragraph 149(1)(1).

4. OBJECTIVES
The objective of the NPORIP was to enable the CRA to make statistically valid findings.

The goals were to:

• characterize and quantify compliance;
• identify any issues associated with the tax exempt status afforded to 149(1)(1) entities;
and
• recommend courses of action.


5. METHODOLOGY

The objective of the NPORIP was to review whether or not an entity claiming the tax exemption
under paragraph 149(1)(1) of the Act was eligible to make such a claim.

Defining the Population

In a 2003 national study of non-profit and voluntary organizations[FN3], Statistics Canada reported that there were about 161,000 organizations operating across the country on a non-profit basis.
The report stated that just over half of these were registered charities, which left approximately
80,000 other types of non-profit (NPOs) and voluntary organizations. This number does not
include citizens groups that were not formally incorporated or registered with provincial,
territorial or federal governments. Furthermore, Statistics Canada's definition of NPOs included
entities not only found in paragraph 149(1 )(1) of the Act. Consequently, Statistics Canada's
information was neither precise nor appropriate for the purpose of this project.

[FN3 3 Statistics Canada Catalogue no. 61-533-XIE. Ottawa. 79 p. http://www.statcan.gc.calpub/61-533-x/61-533-
x200400 l-eng.pdf]

As the total number of 149(1)(1) entities was not known, SMED identified and determined the
population base in conjunction with the Business Intelligence and Risk Management Division
(BIRMD).

The Compliance Programs Branch (CPB) determined that the average population of identifiable
149(1)(1) entities, over the three-year project period, was approximately 30,000. The population
was based on the entities that had filed T2 Corporate Income Tax Returns, T-1044 Non-Profit
Organization Information returns and a small number of taxpayers that filed T3 Trust returns.

As a result of drawing our population base from these sources, the vast majority of which were
incorporated, it is important to understand that small unincorporated entities have not been
sampled. Therefore, our statistics are representative of the incorporated 149(1)(1) entity
population only.

A total of 1,437 (479 per year) 149(1)(1) entities were randomly selected out of an average base
population of 30,000. The number of files selected was determined to allow for organizations
that may have been recently selected for audit, organizations that may have gone bankrupt or
ceased operations, organizations operating in a Tax Service Office that was not participating in
the project or any other reason that a review could not be performed. Ultimately, 1,337 files were
reviewed and used to formulate the non-compliance rates for 149(1)(1) entities in this report.

Based on the design methodology adopted, only national-level non-compliance rate estimates
(cannot be extrapolated to any other segment of this sector including organization type or region)
are presented in the report. 

Legislation Applied

Paragraph 149(1)(1) of the Act reads:

"149(1) No tax is payable under this Part on the taxable income of a person for a period
when that person was

(1) a club, society or association that, in the opinion of the Minister, was not a charity
within the meaning assigned by subsection 149.1(1) and that was organized and
operated
exclusively for social welfare, civic improvement, pleasure or recreation or for
any other purpose except profit, no part of the income of which was payable to, or was
otherwise available for the personal benefit
of, any proprietor, member or shareholder
thereof unless the proprietor, member or shareholder was a club, society or association
the primary purpose and function of which was the promotion of amateur athletics in
Canada; "

6. FINDINGS

The findings of the project are based on the results of 1,337 reviews performed over the three year
period.

Following the text of paragraph 149(1)(1), the NPORIP identified and measured four categories
of non-compliance:

1. An entity claiming tax exemption under paragraph 149(1)(1) that in the opinion of the
Minister was a charity as defined in subsection 149.1(1);
2. A 149(1)(1) entity that was nm organized exclusively for a purpose other than profit;
3. A 149(1)(1) entity that was not operated for a purpose other than profit; and
4. A 149(1)(1) entity whose income or part thereof was payable to or was otherwise made
available for the personal benefit of any proprietor, member or shareholder.

National non-compliance rate

The overall non-compliance rate was estimated at 43.5% ± 2.8%. This means that between
40.7% and 46.3% of the entire 149(1)(1) population studied meet at least one category of noncompliance,
19 times out of 20. This overall non-compliance rate is composed of different levels
of risk as shown in Error! Reference source not found. and explained in section 6.5.1 Risks
(page 13).

Table 2: National Non-compliance Rate Estimates

The non-compliance rates provided above and in Table 2 are national rates that are estimated
from the findings of the project. Due to the sampling design, the aggregate national level rates
are the only statistically valid rates that can be estimated. All other figures provided within the
report apply only to the organizations reviewed within the project. These figures differ because
of the design of the project.

For example, the results were also analysed by type of 149(1)(1) organization" for additional
insight. However, due to the small sample size for most types of organization, the results by type
cannot be extrapolated to the overall population. As a result, the validity of the results reported in
the sections that follow is limited to the actual files reviewed.

The activities referred to in the following table are the for-profit commercial activities (for
example: rental of commercial space, operation of a restaurant for the public at a private club, or
advertising revenue in a trade publication) as well as non-profit activities undertaken by many
organizations claiming to be 149(1)(1) entities.

The total revenues reviewed are substantial ($6.4 billion) and involve numerous activities as
shown in Table 3. There were three types of organizations: recreational or social (type 01),
residential condominium corporation (type 10) and other (type 30) that accounted for 944 entities
(71 %) of all organizations reviewed and $4.4 billion in revenue (69% of the total revenue).

Many of the 149(1)(1) entities reviewed were found to be profitable and engaged in a number of
profitable activities. These results coincide with what we have been told by various 149(1)(1)
entities and umbrella organizations who claim that 149(1)(1) entities must engage in other
activities to generate the revenues necessary to fund their objectives. Two types of organizations,
arts or cultural organizations (type 08), and low-cost housing organizations (type 09) generally
operate at a loss.

6.1 Meets the Definition of a Charity

In order to qualify as a 149(1)(1) entity, the club, society or association, in the opinion of the Minister, cannot be a charity within the meaning assigned by subsection 149.1(1)4 An organization that is a charity, whether registered or not, is excluded from qualifying as a 149(1)(1) entity.

The NPORIP identified 106 out of 1,337 cases (8%) where the purported 149(1)(1) entity was a charity.

To determine whether a particular entity was in fact a charity, auditors searched the listing of
registered charities on the CRA's charity website to see if the entity was registered. If the entity
was not registered, they were directed to one of the seven regional charity teams selected to
participate in the pilot project within SMED to confirm their status. If it was determined that an
organization was a charity it was considered non-compliant based on this non-compliance
category (meets the definition of a charity) and was not reviewed further. If it was determined
that an organization was not a charity the file received further review based on the remaining
non-compliance categories.

The CRA encountered situations where an organization would in fact be a charity, if not for the
fact that it included provisions in its corporate by-laws that make it ineligible as a charity.

6.2 Organized Exclusively for a Purpose Other than Profit

Governing documents (i.e. articles of incorporation, letters patent, by-laws, etc.) of the
organization were reviewed to determine if it was organized exclusively for a purpose other than
profit.
 


6.3 Operated Exclusively for a Purpose other than Profit

A determination of whether an organization operated exclusively for a purpose other than profit
in a given taxation year must be based on the relevant facts of each case after an examination of
the organization's records. The following considerations were used to evaluate whether an
organization operated exclusively for any purpose other than profit:

• An organization can earn profits, but the profits should be incidental and arise from
activities that are undertaken to meet the organization's non-profit objectives.

• Earning profits to fund non-profit objectives is not considered in itself to be a non-profit
objective.

• An organization should fund capital projects and establish reasonable operating reserves
entirely or almost entirely from capital contributed by members or from accumulated,
incidental profits. Conversely, capital contributions or incidental profits should generally
be accumulated solely to fund specific capital projects or to meet established liabilities.

• Gifts and grants should be used in the operations of the organization (including funding
capital projects or setting up operating reserves) and should not be used to establish long·
term reserves designed primarily to generate investment income.

• Maintaining reasonable operating reserves or bank accounts required for ordinary
operations will generally be considered to be an activity undertaken to meet the not-for-profit
objectives of an organization. Consequently, incidental income arising from these​
reserves or accounts will not affect the tax exemption of a 149(1)(1) entity.

• limited fundraising activities involving games of chance (e.g., lotteries, draws), or sales
of donated or inexpensive goods (e.g., bake sales or plant sales, chocolate bar sales),
generally do not indicate that the organization as a whole is operating for a profit
purpose. However, the scope of the fundraising activities should not be so great that
fundraising is itself a purpose of the organization.

As a general rule, the making of profit will not in itself prevent an organization from qualifying
for the tax exemption under paragraph 149( 1 )(1) if these profits are incidental and arise from
activities that are undertaken to meet the organization's non-profit objective.
It should be noted that 40.5% of the files selected and reviewed (542 organizations) had profits
in at least one of the years reviewed and that the auditors determined these profits were
incidental and related to the non-profit objectives of the organization, and that they did not result
in reserves that were unreasonable. None of these organizations met the definition of a charity,
was organized for a profit purpose, or had income that had been made available for the personal
benefit of any proprietor, member, or shareholder. Therefore, these organizations are compliant
with the Act.
 

Within this non-compliance category there were:

• 187 cases (14%) with profits of $50K or more;
• 86 cases (7%) with profits between $10K and $50K; and
• 128 cases (9%) with profits with less than $10K.

The NPORIP noted a variety of activities that were related to the objectives of purported
149(1)(1) entities with apparent profit motives. Some examples are noted below.

6.3.1 Professional Associations (type 02)

Profits are budgeted for activities, which include:

• Publishing - sale of different text books that the 149(1)(1) entity publishes, sale of
advertisement space in these books and participation fees to promote a company's
services and products;
• Programs - conferences, sponsorships and grants; and
• Services - rental of office space to third parties within the entity's facility.
Additionally, some of these organizations operate taxable businesses in competition with the
private sector, through taxable subsidiaries. However, through various charges like management fees, rent and royalties paid to the 149(1)(1) entity, these organizations attempt to decrease the taxable income of the taxable subsidiaries such that they have little or no taxable income.

6.3.2 Recreational or Social Organization (type 01)

This type of organization generally includes golf, curling, skating/hockey or baseball clubs. The
following issues were observed in such entities.

Golf clubs generated their revenues from a number of sources including; green fees, bar and
restaurant sales, pro shops, and cart rentals, from both members and non-members (public).
Revenues from non-members ranged anywhere from 0% to 100% of total revenues. In addition
to the 149(1)(1) entity operating in competition with taxable organizations and operating with a
profit purpose, the revenues earned from non-members may be considered to be an indirect
source of income otherwise available for the personal benefit of members by reducing
membership fees.

A municipality donated land for a 149(1)(1) entity to build recreational facilities (e.g., an arena, a
field or a golf course). The municipality required that a certain number of hours per year be
reserved for local amateur athletes. However, quite often the facilities are rented to the public or
even professional teams at fair market value and commercial spaces are rented to restaurants and
other taxable entities allowing the entity to earn profits on fees from third parties.
A cottage property was held by a 149(1)(1) entity presumably as a means to multiply the
principle residence exemption and defer capital gains on the property. If the property is sold and
the corporation is wound up, any distribution to the members would be considered a payment on
account of capital and a capital gain may result for each of the members. However, the deferral
on this gain could be quite excessive.

Sponsorships in minor athletic leagues are common. Some of these are to purchase equipment
Jerseys etc.) while others are for advertising. It is the CRA's opinion that the receipt of free or
subsidized equipment will generally not jeopardize the exemption of a 149(1)(1) entity. However,
there are cases where some 149(1)(1) entities have received large sums of money as sponsorships
revenue and the sponsoring organization is claiming the amount as an advertising expense. The
149(1)(1) entity pays no tax on the profits earned but the taxable organization reduces its taxable
income as an expense.

6.3.3 Residential Condominium Corporation (type 10)

Many condominium corporations participate in the operation of taxable activities while claiming
the tax exemption under paragraph 149(1)(1). [REDACTED] 24(1 )
Some condominium corporations are setting up profit-generating rental arrangements, leasing
roof space for solar panel programs and property for cell phone towers. The CRA has taken the
position that cell phone tower income may belong to the members of the condominium
corporation as individuals, and not the corporation itself, and that the members will be taxed on
the income generated from the cell phone towers. Income generated from solar panels may be connected to the non-profit objectives of the organization and therefore might not jeopardize the tax exemption if it is incidental income.


6.3.4 Other (type 30)

Organizations are building up reserves and surpluses for possible future capital expenditures and
for operational purposes without identifying specific capital expenditures. These reserves should
be funded by member contributions or profits that are incidental and related to the non-profit
objectives of the organization; often this is not the case.

In addition, reserves that are not earmarked for specific purposes should be utilized for
operations so the reserves of these organizations are not kept to earn tax-exempt interest that may
indicate a profit purpose. There are organizations that use 149(1)(1) entities as a mechanism to
flow income through tax free to taxable entities. Substantial untaxed property and investment
income are sometimes left to accumulate on a tax-free basis in the entity.

The issues detailed above (sections 6.3.1 to 6.3.4) related to the different organizational types.
are considered non-compliance with the legislation, and would result in an increased tax liability
to the organization and possibly the loss of its paragraph 149(1)(1) exemption.


6.4 Income Payable or Made Available for the Personal Benefit of a Proprietor, Member or
Shareholder

The legislation indicates that no part of the income of a 149(1)(1) entity can be payable to, or
otherwise available for the personal benefit of, any proprietor, member or shareholder unless the
proprietor, member or shareholder was a club, society or association the primary purpose and
function of which was the promotion of amateur athletics in Canada. Income otherwise available
refers to amounts, although not made directly available, that result in a benefit to the proprietor,
member or shareholder. This includes items such as shareholder loans, the ability to pay
dividends or the guaranteeing of personal loans for any proprietor, member or shareholder of the
149(1)(1) entity.

Although an organization may not immediately lose its paragraph 149(1 )(1) exemption if its
governing documents do not prohibit the payment of income to members on windup; once the
decision is made to distribute income to members, the organization will no longer qualify for the
exemption under paragraph 149(1)(1).
 


There are many professional and trade groups that belong to large associations. In most of these
cases, there is a membership fee which the members pay in order to receive services from the
association. These organizations generally reduce their membership fees or provide free or below
cost services (free courses, reduced insurance premiums, trips, etc.) to its members, while
providing the same services at a higher cost to non-members. It is a question of fact as to
whether these reduced fees for members for services could be indirectly making income
available to the members.

Golf clubs often have large real estate assets in prime locations. If they used the property
exclusively for and directly in the course of providing dining, recreational or sporting facilities
for their members and dispose of these assets they are able to realize tax exempt gains that may
be paid out to current members or can be utilized to acquire replacement facilities for the use of
their members at other locations. Additionally, where the course is open to non-members, the
golf course may be making income available for the personal benefit of members by offsetting
member fees by fees generated from the public.

6.5 Risk Associated with Project Files

6.5.1 Risks

The overall non-compliance rate was 42.2%. These cases were non-compliant in at least one of
the four categories. However, the risks inherent in these non-compliant cases vary and their
impact on tax revenues within any of the non-compliance categories may be classified from low
to high risk depending on the issue.

6.5.1.1 Low risk

Low risk files (Table 9) are primarily made up of files that are not 149(1)(1) entities. but may be exempt from tax
under other provisions of the Act. Therefore, there would be no risk to tax revenue.

This risk category can be corrected through educational outreach. This includes organizations
that are charities, many of which were registered. Charities were generally picked up within the
149(1)(1) population because these groups either made an error in identifying themselves on the
T2 corporate return or they filed the T1044 NPO Information Return in error. In such cases. the
organization was informed of the error in filing and advised of the correct procedures for future
filings. No further action was generally required. [REDACTED] 21 (1 )(a) and 21 (1 )(b)
Similarly, there were a small number of organizations that were exempt under another provision
of subsection 149(1) and were likewise educated about future filings (including municipal corporations exempt under paragraph 149(1)(d.5) of the Act and labour organizations exempt under paragraph 149(l)(k) of the Act).

We also found organizations whose governing documents insufficiently specify their non-profit
objectives. In these cases the organizations had failed to include declarations within their
governing documents stating their objectives or include statements that were contrary to the
legislation. The governing documents are expected to contain declarations that the organization
will operate with an objective other than for profit. They should also state that income cannot be
payable to or made available for the personal benefit of a proprietor, member or shareholder. If
either of these statements was missing or statements to the contrary were made, the organizations
were considered non-compliant for purposes of the project. These organizations were informed
of the requirements for including or excluding certain statements from these documents. Only
organizations that had this non-compliance issue, and no other non-compliance issues, were
considered low risk. (as shown in the third low risk category in Table 9)


The non-compliance rate for the low risk cases by type of organization was determined to be
10.7% (Table 10) of the population studied.

6.5.1.2 High Risk

The non-compliance rate for this risk by type of organization was determined to be 31.5% (Table
11) of the population studied. These are 149(1 )(1) entities with profits that were not incidental or income not related to non-profit objectives, or had unreasonable reserves, surpluses or retained earnings, or 149(1)(1) entities with income payable or made available for the personal benefit of any proprietor, member or shareholder.

Within this risk category the profit ranges were:
• 192 cases (14%) with profits of $50K or more;
• 88 cases (7%) with profits between $10K and $50K; and
• 141 cases (10%) with profits with less than $l0K;

6.5.2 Transparency and Accountability


As noted in Section 5 - Methodology, the random sample of 149(1)(1) entities (1,437 entities)
was drawn from known 149(1) (1) entities that have either filed the T-1044 NPO Information
Return, the T2 Corporation Income Tax Return or the T3 Trust Income Tax and Information
Return with the CRA. Together, these represent an average population of about 30,000 entities.
However, because there are many organizations that do not file any return with the CRA, an
accurate number of 149(1)(1) entities in Canada is unknown.

While charities are required to register and file annual information returns, the 149(1)(1) sector,
because it is not required to register with the CRA and publicly report its financial information,
is not as transparent and accountable.

However, 149(1)(1) entities that are incorporated in Canada are required to file a T2 Corporation
Income Tax Return. Where a 149(1)(1) entity's main purpose is to provide dining, recreational or
sporting facilities for its members, property of the club may be deemed to be property of a trust
and a T3 Trust Income Tax and Information Return may be also required. Unlike the charities
sector none of this information is publicly disclosed.

In addition, a 149(1)(1) entity will be required to file a T1044 information return if:

• It received or was entitled to receive taxable dividends, interest, rentals or royalties
totaling in excess of $10,000 in its fiscal period;
• The total assets of the organization exceeds $200,000 at the end of its preceding fiscal
period; or
• It was required to file the T1044 information return for its preceding fiscal period.

6.5.3 Information and Education

Many 149(1)(1) entities do not identify themselves properly when filing their income tax rectum
or T1044 Non Profit Organization (NPO) Information Return. For example, 26% of the
organizations that were reviewed listed themselves as an "Other" type. Some cases reviewed
were organizations, such as housing corporations, Boards of Trade, and Chambers of Commerce,
that likely qualify for tax exemption under other paragraphs of subsection 149(1).

As noted previously, it appears that there is some confusion in the charitable sector as well. That
is, there appear to be a number of charities (some registered , some not) that are incorrectly filing
as 149(1)(1) entities.

7. CONCLUSIONS

Canada's tax system is based on voluntary compliance coupled with fair and responsible
enforcement. The CRA promotes voluntary compliance in its operations; however voluntary
compliance is enhanced when the public agrees with the CRA's interpretation of the law. During
the project, it was observed that many 149(1 )(1) entities do not agree with the CRA's
interpretation of the law; in fact, there is a significant gap in interpretation between the CRA and
the 149(1)(1) entity 21 (1 )(a) and 21 (1 )(b) Paragraph 149(1)(1) is an inclusive provision, which means that almost any type of organization can qualify as a 149(1 )(1) entity. The terms "social welfare", "civic improvement", or "pleasure or recreation" are not defined in the Act. Similarly, the phrase "or for any other purpose except profit" allows almost any type of organization to potentially qualify for the exemption without restriction as to the activities and objectives that the organization may have (other than profit). This is evidenced not only in the many types of 149(1)(1) organizations categorized but also that 26% of the organizations reviewed fell into the "Other" category. [REDACTED] 21 (1 )(a) and 21 (1 )(b)

Non-compliance was found to be composed of various degrees of risk, and not all risks are
significant. Once the less serious components of risk are removed, the highest risk associated
with non-compliance is determined to be 31.5%. This was comprised of entities:

• with profits that were not incidental or income that was not related to its non-profitobjectives;
• that had unreasonable reserves, surpluses or retained earnings; or 
• with income payable or made available for the personal benefit of any proprietor, member or shareholder.

Representatives of 149(1)(1) entities believe that the entities must produce a profit for the
programs to thrive and for capital assets to be maintained. A number of 149(1)(1) entities are
being used to shelter business income and subsidize their operations by earning income from
non-members and then offering services at significantly reduced costs to members. Many
149(1)(1) entities feel that they cannot carry out their non-profit objectives without profitable
activities. [REDACTED]  21 (1 )(a) and 21 (1 )(b)

Comments from the 149(1)(1) communality during the audit indicate that the community needs
more education about the CRA's interpretation of paragraph 149(1)(1) and the related
requirements.

8. RECOMMENDATIONS

As a result of the findings of the project, clarity and, administration of paragraph 149(1)(1) of the
Act may be improved by the following recommendations:

[REDACTED]

3. Education


Where necessary, develop publications to inform stakeholders of policy direction and
administrative positions. Education is required to ensure that stakeholders know their
responsibilities. This increases the clarity that is being sought by many 149(1)(1) entities. In
addition, the CRA will have to develop training manuals to ensure that auditors review this
sector to not only administer the Act, but also to educate.

These recommendations attempt to strike a balance between the needs of the CRA to properly
administer the Act and the 149(1)(l) sector to meet their non-profit objectives while also meeting
their requirements under the Act.

9. NEXT STEPS
These recommendations provide CPB's views concerning the requirements necessary to be able
to administer the Act with respect to the 149(1)(1) sector. [REDACTED]

The next steps are as follows:


• Share the report with stakeholders in the CRA,
• Share the report with the Department of Finance,
• Share the report with external stakeholders.

[REDACTED]

Do you require legal advice with respect to Canadian or Ontario non-profits or charities?

Contact

Charity Lawyer Mark Blumberg

Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.

mark@blumbergs.ca
416.361.1982
Download vCard

Connect

Locate

Blumberg Segal LLP
Barristers & Solicitors
#1202 - 390 Bay Street
Toronto, Ontario
M5H 2Y2 Canada

Charity Law List

Join Blumbergs' non-profit and charities newsletter
View recent issue: February 2017