Income Tax Act

The Income Tax Act: Identifying not-for-profit organizations that provide public benefit and the conditions for tax exemption

 income tax actFour key changes to the Income Tax Act that would enable public benefit nonprofits to more effectively pursue their objectives:

  • The Income Tax Act could be amended to divide nonprofits into two classes: a public benefit class (for nonprofits focused on the public good), and a mutual benefit class (for nonprofits focused on services to members)
  • By creating two classes, the CRA would be in a position to require that nonprofits seeking tax exemption must consent to a “permanent asset lock”. An asset lock is a robust legal clause that requires an organization’s income and assets to be applied solely to further the purposes of that organization (which may not include the pursuit of benefit or gain for its members), and ensures that none of its net earnings is used or applied for private gain by its members
  • Policies in the Income Tax Act defining “not for purpose of profit” could be amended to allow public benefit organizations to earn revenues that remain exempt from tax so long as the revenues are reinvested in the mission (referred to as a “destination test”)
  • The federal government should require all incorporated nonprofits exempt from tax to file and make public their annual financial data and a description of their activities. With increased transparency, public benefit nonprofits can demonstrate that their revenues are supporting the public good, while making it easier to identify those organizations that are not adhering to fair tax regulations

FULL REPORT

Report: The Income Tax Act: Identifying not-for-profit organizations that provide public benefit and the conditions for tax exemption