Exemption from income tax and tax on capital

Non-profit organizations (NPOs) enjoy significant privileges. They are exempt from income tax, provided they are established and operated exclusively for non-profit purposes. Those that are corporations are also exempt from the tax on capital.

At the end of each taxation year, an NPO must review its activities for the year to ensure that they are consistent with non-profit purposes. This means that an organization that qualified for the exemption one year may not qualify the following year

• if its objectives change;
• if its activities are not carried out in accordance with the original objectives.

An NPO is not exempted from income tax or the tax on capital

• if any part of its income is paid to proprietors, members or shareholders, regardless of whether the payment is made while the organization is being operated or further to its dissolution, liquidation or amalgamation;
• if any part of its income is otherwise made available for the personal benefit of proprietors, members or shareholders.

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

• 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.

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, the organization is no longer exempt from income tax or the tax on capital

• if a substantial portion of the surplus amount is capitalized each year and the balance is eventually greater than the amount the NPO reasonably requires in order to carry out its non-profit activities;
• if the assets representing the balance of its surpluses are used for purposes unrelated to the objectives for which the organization was established, such as making long-term investments or expanding facilities for ordinary commercial activities.

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