Exemption from Income Tax
In general, non-profit organizations (NPOs) are exempt from income tax provided they are established and administered exclusively for non-profit purposes.
Determining NPO status
To determine if an organization has NPO status, that is, if it was established exclusively for non-profit purposes, you can refer to:
- the letters patent;
- the articles of incorporation;
- the partnership agreement; or
- similar documents.
Maintaining NPO status
At the end of each taxation year, an NPO must determine if it was administered for non-profit purposes based on all its activities for the year. An NPO 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.
Loss of exemption
An NPO is not exempted from income tax if any part of its income (assuming it has no taxable capital gains or deductible capital losses) is payable to any proprietor, member or shareholder, whether while carrying out activities or as a result of its dissolution, liquidation or merger. The same holds true if part of its income is otherwise made available to its proprietors, members or shareholders for their personal benefit.
Even if an NPO pays, directly or indirectly, certain amounts to its proprietors, members or shareholders for their benefit, it may still qualify for an exemption if the following conditions are met:
- the salaries, wages, remuneration and fees paid are reasonable and in line with those that would be paid for similar services to persons dealing at arm's length with the NPO;
- the amounts paid to proprietors, members or shareholders to cover expenses incurred for their attendance at conferences and meetings intended to further the NPO's objectives are justified.
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. However, 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, an NPO must use its surplus amounts for non-profit activities within a reasonable time.
An NPO must file an Information Return for Tax-Exempt Entities (form TP-997.1-V) if any one of the following situations applies:
- Its income from taxable dividends, rentals, interest or royalties exceeds $10,000 for the fiscal period in question.
- Its total assets exceeded $200,000 for the previous fiscal period.
- The entity was required to file form TP-997.1-V for a previous fiscal period.