NPO Tax Exempt Status – Affordable Housing Providers

On May 27, 2015, Canada Revenue Agency (“CRA”) released a CRA View (#2014-054279) that addressed the potential tax implications for a non-profit organization, as described in paragraph 149(1)(l) of the Income Tax Act (“ITA”), that derives income from the long-term lease of parking spots to a business owned by one of its board members. In this case, the non-profit organization is an affordable housing provider. The comments provided by CRA considered whether the profit earned was incidental and whether it arose from activities that were connected to the organization’s non-profit objectives.
CRA stated that both of these considerations were questions of fact. In this context, CRA concluded that income from the long-term rental of parking spots to a third-party by an affordable housing provider “will generally not be considered to be directly connected to the objective of providing affordable housing.” That said, CRA also stated that a review of all circumstances could lead to the conclusion that the housing provider “does not have a profit purpose, notwithstanding the lease.” CRA then briefly considered whether the income would be made available for the personal benefit of any member. CRA emphasized that, in general, income cannot be made available, either directly or indirectly, for the personal benefit of any member. However, in this particular circumstance, it could not determine whether the board member in question was also a member of the housing provider.
As an alternative to proceeding under the requirements of paragraph 149(1)(l), this interpretation also highlighting that affordable housing providers can potentially be exempt from tax under a number of less restrictive sections of the ITA including: municipal corporations (paragraph 149(1)(d.5)), limited divided housing companies (paragraph 149(1)(n)), and corporations “constituted exclusively for the purpose of providing low-cost housing accommodation for the aged” (paragraph 149(1)(i)). Many not-for-profits may file their annual corporate returns (T2) with CRA on the basis that they are a non-profit organization under paragraph 149(1)(l), when in fact there may be a tax-exempt category under the ITA that better describes their organization and purpose. Recent CRA Views over the last several years have had the effect of further tightening the types of revenue generating activities non-profit organizations can undertake while being reasonably confident that they are complying with the definition in paragraph 149(1)(l). As such, many not-for-profits that currently file as non-profit organizations under paragraph 149(1)(l) may want to review whether they are better suited as a tax-exempt entity under another paragraph in the ITA.