Keeping Your Non-Profit Status – A Complete Guide by a Montreal CPA Firm Near You

Introduction

Running a non-profit organization (NPO) in Canada comes with important responsibilities. While NPOs benefit from exemption from income tax under paragraph 149(1)(l) of the Income Tax Act, this exemption is not automatic and can be lost if the organization strays from its non-profit purpose. CRA closely monitors NPOs for compliance issues such as profit accumulation, commercial activities, private benefits to members, and poor record-keeping. Losing NPO status can result in unexpected tax bills, penalties, audits, and reputational damage. This guide explains how to maintain your NPO status and avoid CRA problems.

Legal and Regulatory Framework

NPOs must operate exclusively for non-profit purposes such as social welfare, civic improvement, recreation, culture, or community benefit. They must not distribute or otherwise make income available to members. CRA requires NPOs to reinvest all surplus into the organization’s activities, maintain proper books and records, and avoid operating for profit. Incorporated NPOs must often file T2 corporate returns, and those meeting certain thresholds must file the T1044 NPO Information Return. CRA audits NPOs under the Income Tax Act, Excise Tax Act (for GST/HST), and various provincial laws.

Key Court Decisions

In BBM Canada v. Canada, the court held that organizations benefiting members financially do not qualify as NPOs. In Gull Bay Development Corp. v. The Queen, CRA denied NPO status because the organization operated with a profit purpose. In Tourbec Inc. v. Canada, excessive surpluses undermined non-profit status. These cases confirm that CRA evaluates both the purpose and actual operations of an organization—not just what is written in its bylaws.

Top Risks That Can Cost You Your NPO Status

1. Operating for Profit

If the organization regularly earns profits or operates in a commercial manner without a clear non-profit purpose, CRA may revoke tax-exempt status.

2. Distributing Funds to Members

Any direct or indirect personal benefit—payments, loans, gifts, discounted services—can jeopardize NPO status.

3. Holding Excessive Surpluses

CRA expects NPOs to maintain reasonable reserves. Accumulating large surpluses without a specific plan (facility upgrades, emergency funds) raises red flags.

4. Poor Record-Keeping

Missing financial statements, donation tracking, or board minutes can trigger audits and penalties.

5. Improper GST/HST Handling

Even if exempt from income tax, NPOs must comply with GST/HST rules, including registration if taxable activities exceed the $30,000 threshold.

6. Weak Governance

Conflicts of interest, lack of independent directors, and improper bylaws attract CRA scrutiny.

How to Maintain Your NPO Compliance

1. Stay True to Your Purpose

The organization’s operations must reflect its stated non-profit purpose at all times.

2. Reinvest Surpluses

Surpluses must support programming, future projects, or reasonable reserves—not members.

3. Maintain Strong Governance

Adopt clear bylaws, conflict-of-interest policies, and documented board decisions.

4. File All Required Tax Returns

T2 corporate returns and the T1044 Information Return must be filed on time when required.

5. Document Everything

Keep proper financial statements, membership records, receipts, minutes, and policies.

6. Monitor GST/HST

Register if taxable revenue exceeds $30,000 or if running commercial activities.

7. Avoid Personal Benefits

Ensure no member receives improper financial gain.

Common CRA Audit Issues

CRA frequently audits NPOs for: excessive profit, non-compliant fundraising, undocumented spending, membership benefits, related-party transactions, employees receiving disguised benefits, lack of financial documentation, and incomplete T1044 returns. These issues can lead to reassessment, penalties, or loss of NPO exemption.

Mackisen Strategy

At Mackisen CPA Montreal, we help NPOs maintain strong compliance by reviewing governance, analyzing financial statements, preparing T2 and T1044 returns, improving internal controls, advising on allowable revenue activities, and defending organizations during CRA audits. Our team ensures NPOs remain tax-exempt and compliant year after year.

Real Client Experience

A Montreal athletic club facing CRA review for member benefits avoided losing NPO status after we corrected governance structures and documented program purposes. A heritage association with large accumulated reserves justified its surplus with a long-term capital project plan. A community centre incorrectly classified GST/HST activities—we reorganized their reporting and avoided penalties. A neighbourhood group with poor record-keeping passed a CRA audit after we reconstructed proper financial documentation.

Common Questions

Can an NPO earn a profit? Yes, but it must not operate for the purpose of profit. Are NPOs required to file tax returns? Many are—especially incorporated organizations or those with high assets or investment income. Can NPOs pay employees? Yes, if compensation is reasonable and for legitimate work. Are NPOs audited by CRA? Yes—non-profit audits are common.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps NPOs stay compliant, organized, financially sound, and aligned with CRA rules. Whether you're a community group, sports club, social association, or cultural organization, we protect your non-profit status and ensure long-term success.