By Terrance S. Carter, Jacqueline M. Demczur and Adriel N. Clayton

The Canada Revenue Agency (“CRA”) released CRA View 2022-0944461E5, dated May 13, 2024 (“View”) , a technical interpretation in which it considered whether a residential housing co-operative (“Co-op”) would continue to qualify for its income tax exemption as a tax-exempt non-profit organization (“NPO”) under paragraph 149(1)(l) of the Income Tax Act (Canada) (“ITA”) if it generated profits by renting its common areas to third parties, such as film companies. Additionally, the CRA considered the Co-op’s tax-exempt status if these profits were instead earned through a wholly-owned taxable subsidiary.

The View provides a useful overview of CRA’s current thinking on the generation and accumulation of profit by NPOs.

On the issue of whether the Co-op can generate income directly by renting out common areas to third parties, the CRA stated that generally, to qualify as an NPO under paragraph 149(1)(l) of the ITA, the organization must satisfy four criteria, namely, (1) it must be a club, society, or association; (2) it must not be a charity; (3) it must be organized and operated exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit; and (4) no income earned by the organization can be available for the personal benefit of its members or shareholders.

The View cited Tax Court of Canada’s decision in Tourbec in stating that the word “exclusively” in criteria (3) above must be given its full effect. It is not sufficient that an organization be organized and operated mainly or primarily or chiefly for any purpose other than profit, it must be organized and operated “exclusively” for a non-profit purpose. Thus, while an organization may have many purposes, none of those purposes can be to earn a profit. The View does however affirm CRA’s current position that an NPO can earn a profit, as long as it is incidental, i.e. the profit is not significant and arises from activities directly connected to the organization’s not-for-profit objectives, without affecting its status as an NPO. In the View, CRA also rejected the “destination of funds argument”, which would allow an organization to be an NPO if it uses its profits to support its non-profit objectives, stating that this argument has been rejected by CRA and the courts many times.

The CRA explained that the modest revenues generated from the Co-op providing laundry machines for use by residents appears to be directly connected to the Co-op’s not-for-profit objectives and would be considered incidental and would not impact its tax-exempt status. However, the View stated that the expected profits from renting the Co-op’s common areas to third parties are anticipated to be considerable and do not appear to be incidental, as they are intended to fund significant expenses, such as major repairs and maintenance and to build a reserve fund. Moreover, the common areas are owned by the Co-op and not by the resident shareholders, and therefore the rental of the common areas indicates a for-profit purpose, which would jeopardize its tax-exempt status.

On the issue of whether the Co-op could generate such revenue through a wholly-owned taxable subsidiary, the CRA clarified that if the Co-op earns profits from renting common areas through a wholly-owned taxable subsidiary, this alone would not automatically disqualify the Co-op from being a tax-exempt NPO. However, the Co-op would be owning shares in the taxable subsidiary in order to earn a profit and the significant income likely to be generated, such as dividends, suggests a for-profit purpose. Since this income is likely to be significant and would not arise through the Co-op’s not-for-profit objectives, it would not be incidental and could jeopardize the Co-op’s tax-exempt status, even if the dividends are used to further the Co-op’s not-for-profit objectives.

Therefore, even if the Co-op was determined to be a tax-exempt NPO before renting (directly or indirectly) its common areas to third parties, it could lose its tax-exempt status afterwards because substantial profits from activities like renting common areas would not be considered incidental and could demonstrate that the Co-op had a profit purpose. Whether the Co-op was a tax-exempt NPO for any particular time period is a question of fact that would only be determined at the end of the fiscal year.

​Read the August 2024 Charity & NFP Law Update