Exemption from Income Tax

Exempt NPOs

Non-profit organizations (NPOs) are exempt from income tax provided they are established and administered exclusively for non-profit purposes.

To determine whether they are exempt from income tax, NPOs must review their activities at the end of each taxation year to ensure they were consistent with non-profit purposes.

Note

An organization that qualified for the exemption one year may not qualify the following year if:

  • its objectives change;
  • its activities are not administered in accordance with its original objectives.

Non-exempt NPOs

An NPO is not exempted from income tax if any part of its income is paid to its proprietors, members or shareholders, or is otherwise made available for their personal benefit. This is the case regardless of whether the payment is made while the NPO is carrying out activities or further to its dissolution, liquidation or amalgamation.

Note

Certain amounts paid directly or indirectly to proprietors, members or shareholders (or made available for their benefit) do not disqualify an NPO from the tax exemption. The following are examples of such amounts:

  • salaries, wages, remuneration or fees for services, provided the amounts are reasonable and are in line with those that would be paid for similar services to persons dealing at arm's length with the NPO;
  • amounts paid to proprietors, members or shareholders to cover expenses incurred for their attendance at a convention or meeting intended to further the objectives of the NPO.

Income exceeding expenses

An NPO whose income exceeds its expenses does not necessarily lose its right to a tax exemption. The surplus may, in fact, result from the activity for which the NPO was established.

An NPO is no longer exempt from income tax where:

  • a substantial portion of the surplus is capitalized each year and the balance is eventually greater than the amount the NPO reasonably requires in order to administer its non-profit activities;
  • the surplus is used to acquire property for purposes unrelated to the objectives for which the organization was established, for example:
    • long-term investments,
    • facilities for ordinary commercial activities.

To continue to be entitled to the tax exemption, NPOs must use their surplus amounts for non-profit activities within a reasonable time.

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