CRA concluded that BBM did not meet
the requirements of a non-profit organization after conducting
an audit of BBM’s 1996 taxation year and CRA’s reassement
was appealed by BBM to the Tax Court of Canada.
While the parties agreed that none of
BBM’s income was available for distribution to its members,
it was CRA’s position that BBM was not operated “for any
other purpose except profit.” In advancing CRA’s position,
it was the Crown’s submission that “an organization cannot
be considered to be organized and operated exclusively for
a purpose other than profit if the establishment or operations
of the entity are related to the commercial or business
activity of its members or of others.” Based on this interpretation
of “profit”, BBM could not be a non-profit organization
because the data provided by BBM was used for the commercial
activities of some of its members.
C.
THE DECISION
In its decision, the Court considered
the meaning of the term “profit” in a variety of contexts.
The Court examined its ordinary commercial meaning according
to various dictionaries and found that those definitions
do not make express reference to an activity related to
commerce or business. Moreover, the Court considered ”profit”
as used in subsection 9(1) of the ITA, which states that
“a taxpayer’s income for a taxation year from a business
or property is the taxpayer’s profit from that business
or property for the year.” Although the term is not defined
within the statute, the Court explains that the term has
been “consistently interpreted by the courts to mean the
difference between the receipts in a period and the expenditures
laid out to earn those receipts,”
and that the commercial and accounting definition of “profit”
is to the same effect.
The Court also considered the legal precedent
established in two similar cases
which involved “no suggestion that in order for the ‘any
other purpose except profit’ requirement to be met, the
entity cannot be engaged in an activity that is for the
purpose that is related to a commercial or business activity
of its members.”
In one case, the organization was engaged in providing insurance
products to its members at cost, and it was expressly stated
in that case that a high level of commercial activity alone
did not prove that the organization operated for profit.
Two other textual considerations supplemented
the Court’s finding that the Crown’s interpretation of the
non-profit requirement was untenable. Firstly, the acceptance
of the Crown’s assertion that only non-commercial or non-business
purposes can be acceptable for a non-profit organization
would run contrary to the meaning of “business” as clearly
defined in the ITA as including “a profession, calling,
trade, manufacture or undertaking of any kind whatever.”
Given this broad statutory definition of ”business”, the
Court stressed that many tax-exempt organizations would
be engaged in a business.
Secondly, the Court addressed the Crown’s
argument that previously-decided cases could be reconciled
with its current interpretation because those cases all
involved organizations whose activities had some public
benefit. As cited above, the ITA requires that a non-profit
organization must be organized and operated exclusively
for social welfare, civic improvement, pleasure or recreation
or for any other purpose except profit. Despite agreeing
that the requirement of being “for any other purpose except
profit” was to be read disjunctively from the preceding
requirements (i.e. it was not to be limited by the enumerated
purposes), the Crown made the submission that the BBM circumstances
could be distinguished from previously-decided cases on
the basis of its position that BBM did not provide any public
benefit. The Court rejected this argument, stating that
this “would require an odd interpretation of the word ‘exclusively’…
which clearly qualifies the purpose for which the entity
is established and operated.”
The Court affirmed that a public benefit or purpose is not
a prerequisite to non-profit status.
In reaching the conclusion that non-profit
organizations can engage in commercial or business activity,
the Court underscored existing principles of statutory interpretation
regarding the ITA. The Court explained that “[t]he Supreme
Court of Canada consistently cautions against courts, under
the guise of statutory interpretation, relying on or developing
unexpressed notions of policy or principle when called upon
to apply provisions of the Income Tax Act. To do
so would lead to intolerable uncertainty in the application
of the Act and should be left to Parliament.”
There was no ambiguity in the wording of paragraph 149(1)(l)
defining the requirements of a non-profit organization and
the Court held that it could not create a non existent public
purpose requirement. In sum, the Court stated that “[t]he
words used in the provision, especially ‘profit’, are clear,
have well-accepted meanings and the Courts have been able
to apply them in similar cases.”
D.
COMMENTARY
The decision in the
BBM Case suggests that the Court was sensitive to the importance
of non-profit organizations, recognizing that a reinterpretation
of the legal requirements for non-profit status would have
significant repercussions on the non-profit sector at large.
On this matter, the Court stated very clearly its opinion
that from the perspective of public policy, any revision
“should be left to a possible legislative change which would
only be done after a review of the need for such a change
was done by persons responsible for tax policy, aware of
the depth and breadth of the sector beyond just a snapshot
of [BBM Canada’s] 1996 taxation year, aware of all of the
fiscal impacts beyond the application of paragraph 149(1)(l)
of the Income Tax Act, and which would allow for
the possibility of consultation. Canadians, Canadian society,
the provinces and the non-profit sector deserve as much.”
Furthermore, in applying
the relevant law to the specific facts of BBM’s activities,
the Court made several statements of general application
to non-profit organizations. Firstly, if an organization’s
reserves are reasonable and it operates on a cost-recovery
basis, it would be hard to say that the organization realizes
significant profits. Secondly, it would be difficult
to impute a profit purpose to an organization that only
sells to its members on a cost-recovery basis.
Thirdly, whether or not an organization operates in a normal
commercial or business-like manner is not necessarily relevant
to deciding whether or not the organization has a for-profit
purpose.
The Crown had argued that BBM’s internal documents stressed
the need to create a business environment within the organization,
and that this was indicia of an unstated profit purpose.
The Court dismissed this argument, explaining that this
type of language is not unique to business or commerce,
and if anything, it is the public and non-profit sector,
rather than the private sector, that needs to be reminded
to be more business-like in their operations.
In obiter, the
Court also made statements that are generally applicable
to the practice and procedure of the CRA. Justice Boyle
noted that the CRA continued to unfavourably reassess a
number of BBM’s taxation years after the 1996 reassessment.
BBM had objected to those reassessments and, although there
was no evidence to suggest anything had subsequently changed
about BBM’s operations, the CRA allowed those objections
and continued to recognize BBM’s non-profit status. The
Court indicated that “at least as a practical matter, this
can significantly shift the burden of persuasion of explanation
on the Crown.”
E.
CONCLUDING COMMENTS
The BBM Case reaffirms the fact that
non-profit organizations may engage in business or commercial
activity and that such activity alone does not indicate
that the organization has a for-profit purpose. The decision
also provides some general principles guidelines that might
be helpful to non-profit organizations when examining whether
or not their operations are acceptable. Finally, the BBM
Case also provides both substantive and procedural guidance
to the CRA in its administration of the income tax system.
