Discussion paper: "Destination of Profits Test" proposed for non-profits
Should non-profits be taxed for generating 'intentional profit'?
It can be argued that non-profits face greater financial challenges than their charity cousins.
Unlike registered charities, non-profits are not 'qualified donees' under the Income Tax Act definition. This means that they are not permitted to receive grants and donations from registered charities and foundations. Therefore, their access to grants is notably limited, as compared to charities.
Likewise, non-profits are not allowed to issue tax deductible donation receipts. As the vast majority of donors expect a tax break for their generosity, non-profits are also at a dramatic disadvantage when it comes to soliciting donations from individuals.
In the face of shrinking government resources and increasingly challenging community issues, non-profits are turning to social enterprise as a more attractive way to build organizational strength, while doing more good.
Beginning in late 2009, the Canada Revenue Agency began to issue guidance suggesting that non-profits are, for the most part, only allowed to generate profit by mistake, and that regardless of whether the profits are returned back to the organization, those generating intentional profits would be stripped of the income tax exemption of the entire organization, likely retroactively.
In the face of these increasing restrictions on non-profits' ability to generate revenues, we would like to gauge your level of support for requesting that the federal government enact the destination of profits test.
The destination of profits test (or 'destination test' for short) is simply this: if the profits generated by a non-profit are redirected towards the organization to support it or to unleash more impacts based on its core community purposes, then the profits are tax-free.
Please click here to read our more expansive position paper on the topic. We have positioned this newest paper as the first one on our homepage.
Thanks go to Richard Bridge, Lynn Eakin, and Natalie McFarlane for reviewing the draft version of this paper.