Nasty Traps for Not For Profit Organizations
This oversight happens all too often.
You are a director of an incorporated not-for-profit organization (NPO), such as a society, chamber of commerce organization, a condominium board or say, the Yellowknife Climbing Club. You think your NPO has no tax filing obligations because it is tax-exempt That isn’t true and you could be in for some nasty tax surprises.
An NPO is a corporation. Every corporation, whether a tax-exempt or normal taxable corporation, must file annual T2 corporate tax returns to the Canada Revenue Agency(CRA).
Why make a tax-exempt NPO file an annual T2 return? There is a good reason for this apparent redundancy.
It starts with the mistaken assumption that being incorporated as an NPO automatically grant the NPO blanket tax-exempt status. That is untrue. An NPO must be operated with a ‘not-for-profit’ motive throughout the year to be tax-exempt for that year. This tax-exempt status is determined on a year-by-year basis. In theory, it is easy to go offside. For example, a condominium corporation (an NPO) may decide to rent excess parking spaces to the public with an anticipation of profit. This ‘for-profit’ endeavor may jeopardized the tax exempt status of the NPO because it is not adhering to its imposed ‘not-for-profit’ objective.
Hence, an NPO has to file a T2 return because it declares to the CRA it was operated as a not-for-profit entity throughout the year and qualifies as a tax-exempt corporation for that year.
Here is the important takeaway again. An NPO must file an annual corporate tax return to the CRA.
An NPO that has neglected to file T2 returns should late-file the returns to get back into the tax system. There is no late-filing penalties because this penalty is based on the tax payable, which is zero for a tax-exempt NPO.
An NPO may also have to file an information return, Form T1044, if any one of three thresholds are met – the NPO (i) has more than $10,000 of property income in a year; (ii) has more than $200,000 in assets; or (iii) has ever met requirements (i) or (ii) in a prior year. If so, the NPO must file Form T1044, and forever thereafter.
A late-filed Form T1044 is a concern because there is a penalty of $25 per day late with a maximum penalty of $2,500 for each late Form T1044. You can do the scary math if there are, say, 5 years of late Form T1044. Fortunately, so far, the CRA has not applied the penalty if it is the first time the NPO has late- filed the Form T1044.
Let’s revisit all this dense information and come up with some practical advice. Say your NPO has not filed T2 tax returns or the Form T1044 (because it met one of the 3 thresholds) for the past 5 years. I would late-file the five years’ of T2 returns and the five Form T1044 under the CRA’s Voluntary Disclosure Program (VDP).
The CRA’s Voluntary Disclosure Program can waive penalties for NPOs that come forward to disclose their tax return filing or reporting deficiencies. For your NPO, a successful VDP filing would mean the penalty for late filed T1044 tax forms will be waived.
Andy Wong, FCPA, FCGA, CFP is a tax accountant in Yellowknife. He can be reached at email@example.com or call/text 867 445 8540.