Being commercial; being non-profit.

• Author: Hunter, Laird

This column's recent topics, the Broadbent Report and the Supreme Court's decision in Vancouver Society of Minority and Immigrant Women for example, focus on the considerable problems in the law of charities. A recent Tax Court decision is a useful reminder that equally perplexing questions exist for non-profit organizations. The case deals with a central question for non-profit organizations -- whether carrying on a measure of commercial activity makes them for-profit organisations. But before looking at that case, it is useful to review the basic conditions for exemption under the Income Tax Act (ITA).

First, it is important to note that the most commonly considered sub-section of the ITA on income tax exemption is the one dealing with non-profit organizations. This provision is just one of many parts to section 149. All give tax exemption on income to qualified entities. There are subsections dealing with scientific organizations, agricultural associations, and limited dividend housing corporations, for example. But by far the most common section relied on in claiming tax exemption is sub-section 149(1)(l).

The second point is that the claim for tax exemption under sub-section 149(1)(l)) is a question of fact. In contrast, charitable status results from a process of application and registration. While it would be unusual, it could happen that a non-profit organization was tax-exempt this year but not next year, yet again tax-exempt the following year. In contrast, a charity must maintain its charitable status or it may be deregistered.

When sub-section 149(1)(l) is broken down into its essential parts, the following necessary conditions must exist before an organization qualifies for exemption. To claim exemption, an organization

(a) cannot be a charity, in the opinion of the Minister of Revenue;

(b) must be organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit;

(c) must be in fact operated exclusively for the same purpose in (b) for which it was organized or for any of the other purposes mentioned in (b); and

(d) cannot pay any part of its income (or make its income payable or otherwise available) for the personal benefit of any proprietor, member, or shareholder of the organization, except in connection with the promotion of amateur athletics in Canada.

In other words, the organization can't be a charity. It must be set up for a specified purpose or for any other purpose...