Not-For-Profit Tax Audit
Canada Revenue Agency (CRA) is well under way with their NPO Risk Identification Project. The goals of this project are twofold, to gather information to assist CRA in analyzing the compliance risks with respect to the activities in which not-for-profit organizations (NPOs) are engaged, and to gather information to improve various regulatory NPO filing forms.
NPOs must be organized exclusively for social welfare, civic improvement, pleasure, recreation or other purpose except profit as required under paragraph 149(1)(I) of the Income Tax Act (ITA) to maintain tax-free status.
What is CRA looking for?
Excess accumulated net assets
- A "for profit" company masked as an NPO
What will CRA look at?
- Instruments used to establish the organization (letters patent, articles of incorporation, by-laws, etc.): It is important to review these instruments to ensure they are aligned with the purpose of the organization. With the new Canada Not-For-Profit Corporation Act now in effect, this is the perfect time to review these documents.
- The amount of net assets the organization has accumulated over time: Accumulated operating surpluses are allowed but it is important that this balance is reviewed regularly. If the accumulated amount is greater than the reasonable needs of the NPO, it may be considered to be operating for a profit.
- Budgets and organizational plans: Budgeting processes and related documents should be reviewed to ensure they are not profit oriented. Budgeting for operational profits contradicts the criteria listed in the ITA to maintain tax-free status. NPOs should be operated on a cost recovery/ break-even basis.
There are two ways the CRA will gather this information. First, and most common, is a desk audit. The desk audit is usually limited to a request of certain specific documentation and may be conducted via telephone, fax or letter. Second is the field audit. A field audit is performed for the most part at the NPO's office. This type of audit is more comprehensive and will examine the organization's books, records and financial affairs.
Being prepared and organized is a key point in getting though the audit process, which can be quite extensive. Having formal system documentation and standard policies and procedures will assist in ensuring a seamless audit. In addition, assemble the right team, gather and organize the requested documentation, and determine the points of contact and flow of information. While keeping in mind the organization is required under the ITA to provide reasonable assistance to the CRA audit team, only the requested information is required to be disclosed.
We have been seeing a number of "education letters" to organizations that have been audited as part of this project. Although CRA has often stated that "no conclusions have been reached" these letters inform the organization that they are in breach of the ITA and urge them to make adjustments in their activities to become compliant. As many NPOs are governed by volunteer boards of directors, these letters have caused concern within the NPO industry.
Obtaining professional advice from Collins Barrow, when it looks like the audit will be extensive, is an important step that will help alleviate some of the anxieties and minimize interruption of your organization's day to day activities.
Dawn Waisberg, CGA is a Manager in the Toronto office of Collins Barrow.
Information is current to June 27, 2012. The information contained in this release is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.