CRA recently released a letter which discussed whether the lottery income received by a non-profit organization (the 'Association') is subject to taxation in the hands of the Association. The Association provided funding for physical and recreational activities.

The Association obtained its funding from the sale of Lotto 6/49, Lotto Max, Pro-line and Scratch n Win tickets and the proceeds of the lottery products were returned to the Association, which generated a net profit for the Association.  

CRA determined that the lottery income would be taxable because it did not appear that the income was incidental or arose from activities directly connected to the Association's not-for-profit objectives. 

Another question within the CRA letter dealt with whether the Association could maintain its eligibility as a non-profit organization if none of the profits from the lottery sales were retained by the Association. CRA provided the following comments:   

With respect to your second question, an organization will not be exempt from tax pursuant to paragraph 149(1)(l) of the Act if earning profits is a purpose of the organization, even if the profits are destined to support the not-for-profit purposes of the organization or another organization. This “destination of funds” argument has been rejected by the CRA and the courts on numerous occasions for 149(1)(l) organizations. For purposes of paragraph 149(1)(l) exemption, the destination of the profits does not remediate the disqualifying pursuit of a profit purpose. In your particular situation, even if none of the profits from the lottery sales is retained by the Association, it is our view that the Association may still have a profit purpose and, as such, would not qualify for the exemption under paragraph 149(1)(l) of the Act. Also, in such a situation, the income earned by the Association, for example administration fees or commission income, can still be an issue if it is not incidental and is unrelated to the Association’s not-for-profit objectives

Here is a copy of the CRA letter.