In a recent Canada Revenue Agency document (CRA #2011-0394251I7), CRA was of the view that an association that engages in a retail operation unrelated to its nonprofit objectives was in fact operating with a profit purpose, and therefore does not qualify as a nonprofit organization under paragraph 149(1)(1) of the Income Tax Act.

Precedents for decision

Relying on the Supreme Court of Canada decision in Woodward's Pension Society v. HMQ 62 DTC 1002 and Tourbec (1979) Inc. v. The Minister of National Revenue, 88 DTC 1442, CRA was of the view that the association was operating in a manner similar to the organizations described in those two decisions. That is, it is operating for a profit purpose rather than earning incidental profits in the course of operating exclusively for a purpose other than profit.

"Incidental" profit OK

Based on the decision of the federal court in Gull Bay Development Corporation v. HMQ, 84 DTC 6040, CRA acknowledged that it is possible for an organization to earn a profit in the course of meeting its not-for-profit objectives, and to use that profit in support of those objectives. But the profit should be incidental and cannot constitute a purpose of the organization. However, CRA was of the view that the association in question was a for-profit enterprise, operating in direct competition with taxable businesses, "within the guise" of a not-for-profit organization.

CRA further indicated that the "destination of funds" test has been rejected by courts for both charities and not-for-profit organizations. It matters not that profit earning by a corporation is for a very valid and legitimate cause. It only matters what the purpose of the existence of the association is.

Lastly, CRA was asked to comment on the application of The Canadian Bar Insurance Association v. The Queen, 99 DTC 653 (TCC) decision to the association in question. In this regard, CRA responded that the court accepted that CBIA did not have a profit purpose on the basis that its involvement in commercial and investment activities was directly connected to its not-for-profit objective of providing insurance at cost to members (the nature of the organization as an insurer was relevant).

However, CRA was of the view that the organization in question was earning significant profits from activities that are not directly connected to its not-for-profit objectives.

For a more detailed explanation, this technical interpretation is available through commercial subscription services or a direct request to CRA.

Theresa L.M. Man  is a partner of Carters Professional Corporation and practices charity and not-for-profit law in Carters' Orangeville office. This article is reprinted with permission from Carters' Charity Law Update, June 2011, http://www.carters.ca/charity/index.php