Donations to a Non-Profit
By Arthur Drache, C.M. Q.C.
A recently published letter by the CRA deals with the treatment of “donations” to a non-profit organization.clearly distinct from a donation to a registered charity. The discussion may be of particular interest to non-profits which are of considerable size and which have offices or other physical facilities.
The response was to a letter inquiring whether an organization claiming the exemption from income tax provided by paragraph 149(1)(l) of the Income Tax Act can receive donations from its members and businesses affiliated with its members in order to support a capital project.
The factual background about the organization states:
· An organization, the “Sports Club”, provides athletic facilities and social activities for its members.
· The Sports Club’s operations are funded by annual membership dues, entrance fees paid by new member families and a member-paid annual facility improvement fee.
· To improve and expand its current facilities, the Sports Club is considering a multi-year, multi-million dollar capital improvement project.
· The Sports Club will solicit donations from its members and businesses affiliated with its members through brochures, members’ newsletter, emails and the Sports Club website.
· The Sports Club will develop a “wall of honor” or other system to recognize member donations at specified monetary levels.
· The Sports Club will accept donations from businesses affiliated with members and offer the businesses the opportunity to have naming rights over part of the capital project as agreed upon.
Obviously there are no donation receipt involved but where the donation is by a business, the business may try to claim the payments as a business expense.
The CRA response starts with a fairly mundane statement about the law.
“Paragraph 149(1)(l) provides an exemption from income tax for a “club, society, or association” that is not a charity and that is organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit. In addition, no part of the income of the club, society or association can be payable or be available for the personal benefit of its members unless the member was a club, society or association the primary purpose and function of which was the promotion of amateur athletics in Canada.
As discussed in paragraph 9 of Interpretation Bulletin IT-496R, “Non-Profit Organizations”:
“.accumulating surplus funds in excess of its current needs may affect the association’s status as a tax-exempt NPO. However, in certain cases, when an association requires a time period in excess of the current and prior year to accumulate the funds needed to acquire a capital property that will be used to achieve its declared exempt activities, the association’s tax-exempt status may not be affected.”
The CRA has previously stated that a reasonable capital fund for a special project that furthers the organization’s exempt objectives can be accumulated from capital contributed by members, from gifts and grants, or from accumulated, incidental profits without affecting the organization’s ability to claim the exemption under paragraph 149(1)(l). Generally, developing a “wall of honour” that provides recognition of member contributions should not affect the ability of an organization to claim the exemption under paragraph 149(1)(l). Similarly, to the extent that naming rights over parts of a capital project are in recognition of a gift from a member or a business, the naming rights should not, in and of itself, preclude an organization from claiming the exemption under paragraph 149(1)(l). This would generally be the case where such rights or “honour” has only a nominal value.”
The letter then goes on to discuss the issue of business donations.
“However, amounts received by an organization in exchange for naming rights may be received, either wholly or partially, in relation to advertising or other income (e.g., where the naming rights provide a prospective economic benefit to a business, or if a business is able to deduct from its income the amount as an advertising or other expense). If such income received by the organization is not incidental, the organization may be considered to have a profit purpose and may be considered to have made income available for the personal benefit of its members, particularly when the amounts are received from non-members. (our emphasis.)
It is a question of fact whether an organization is operating exclusively for any purpose other than profit and whether income is being made available for the personal benefit of any member or shareholder. Such a determination can only be made after the end of the period for which the exemption is claimed.
An organization’s accounting records should clearly identify the capital funds accumulated for the capital project and all transactions concerning the capital project. In addition, since the Sports Club’s main purpose appears to be providing sporting and recreational facilities to its members, any property income earned from the investment of the funds that are accumulated for the capital project will be subject to tax under subsection 149(5).”
So it is obviously necessary for those operating such an organization to be attuned to the various nuances involved in getting such “donations”. Many organizations in fact borrow funds for capital projects from member on an interest-free or low interest basis with terms set for when there will be repayment.such as death or resignation from the organization. So a lot of care must be given by a non-profit in structuring financing for capital improvements.