Non-Profit Organization: Maintaining its Status

Posted on July 3rd, 2024 in Domestic Tax, Not-for-Profit

Picture of multiple red hand prints on a white wall.

An August 30, 2023, Technical Interpretation discussed whether an entity could maintain its status as a non-taxable non-profit organization when investing in a subsidiary. NPOs need to maintain their status, as NPOs are exempt from tax on their income.

CRA stated that to maintain NPO status, the organization must be operated exclusively for purposes other than to earn profit. While an organization can have many purposes, none of them can be to earn a profit.

Incorporating and holding shares of a taxable subsidiary will not in and of itself cause the organization to lose its status. Earning incidental profit from activities directly connected to the non-profit objectives does not constitute a profit purpose. However, where the profit is not incidental or does not arise from non-profit objectivities, the entity will be considered to have a profit purpose even if the income is used to further the non-profit activities. This could be the case where long-term investments in shares of a corporation are held as the purpose would be to derive income from property.

CRA noted that, in general, an organization’s investment in a taxable corporation will indicate a profit purpose where the following conditions are met:

the taxable corporation’s activities are not connected to the organization’s objectives;
the organization does not have control of the corporation;
the organization holds fixed value preferred shares of the corporation; or
other shareholders have invested in the corporation to earn a profit.

If involved in an NPO, ensure that the organization’s assets and activities do not taint their NPO status.

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Article originally published in: Tax Tips & Traps 2024 Second Quarter – Issue 146.