Non-Profit Organizations and Taxation

REVENU QUÉBECwww.revenu.gouv.qc.ca

This publication is provided for information pur-poses only. It does not constitute a legal interpreta-tion of the Taxation Act, the Excise Tax Act, the Actrespecting the Québec sales tax or any other legislation.

ISBN 2-550-43640-7

Legal deposit — Bibliothèque nationale du Québec, 2005Legal deposit — Library and Archives Canada, 2005

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . 5What is a non-profit organization? . . . . . . . . . 5What is meant by “non-profit purposes”? . 6

Advantages . . . . . . . . . . . . . . . . . . . . . . . . 7Exemption from income tax and the tax on capital . . . . . . . . . . . . . . . . . . . . . 7

Obligations as a taxpayer . . . . . . . . . . . . 10Filing the corporation return . . . . . . . . . . . 10Filing the trust return . . . . . . . . . . . . . . . . . 10Filing the information return for tax-exempt entities . . . . . . . . . . . . . . . . . . . 11Filing the partnership return . . . . . . . . . . . 12

Obligations as an agent of Revenu Québec . . . . . . . . . . . . . . . . . . 13Registration for the GST and the QST . . . . 13Remittance of the GST and the QST . . . . . 15

Obligations as an employer . . . . . . . . . . 17Filing RL-1 slips and the Summary of SourceDeductions and Employer Contributions . . . . . . 17Contribution to the health services fund . 18Contribution to the Fonds national de la formation de la main-d’œuvre . . . . . . . . 18Contribution to the financing of the Commission des normes du travail (CNT) 19Québec Pension Plan (QPP) contributions 19Collection of support payments . . . . . . . . 19

Keeping registers . . . . . . . . . . . . . . . . . . . 21

Directors’ liability . . . . . . . . . . . . . . . . . . . 22

Principal information documents . . . . . 23

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IntroductionThere are over 50,000 non-profit organizationsin Québec. These organizations operate in anumber of fields, and play an important rolein Québec society. Their special status isreflected in certain tax laws administered byRevenu Québec. This brochure briefly describesthe obligations and advantages of non-profitorganizations under the Québec tax system.

What is a non-profit organization?A non-profit organization (NPO) is an entityestablished and operated exclusively for non-profit purposes. The income of an NPO mustnot be distributed to its proprietors, share-holders or members, or otherwise madeavailable to them for their personal benefit.1Individuals, successions (estates) and charitiesare not considered NPOs.

Example

A recreational club is set up in your city.The club derives most of it income frommembership dues, and spends all oralmost all of its income on recreationalactivities for its members. It can thereforebe considered an NPO.

1. Unless these persons are clubs or associations whoseprimary purpose is the promotion of amateur athleticsin Canada.

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What is meant by “non-profitpurposes”?This term can be used where the purpose ofthe activity does not consist in realizing earn-ings or profits. Examples include

• he lp ing d is advantaged persons orcontributing to the general welfare of thecommunity;

• enhancing the quality of community orcivic life;

• developing the recreational and cultural lifeof the community.

An organization whose principal activityconsists in carrying on a business is notgenerally considered to be an NPO.

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AdvantagesExemption from income tax andthe tax on capitalNPOs are exempt from income tax, providedthey are established and operated exclu-sively for non-profit purposes. NPOs thatare corporations are also exempt from the taxon capital.

To determine whether an organization wasestablished exclusively for non-profit purposes,refer to the letters patent, the articles of incor-poration, the partnership agreement or similardocuments.

At the end of each taxation year, an NPO mustreview all of its activities to ensure that theyare consistent with non-profit purposes. Ifobjectives change or activities are not carriedout in accordance with the original objectives,an NPO that qualified for the exemption oneyear may not qualify the following year.

An NPO is not exempted from income tax orthe tax on capital if any part of its income ispaid to its proprietors, members or sharehold-ers, or otherwise made available for their per-sonal benefit. This is the case regardless ofwhether the payment is made while theorganization is being operated or further toits dissolution, liquidation or amalgamation.

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Certain amounts paid to proprietors, mem-bers or shareholders (or made available fortheir benefit) do not disqualify an organi-zation from the tax exemption. The fol-lowing are examples of such payments:

• salaries, wages, remuneration or fees forservices, provided the amounts are rea-sonable and are in line with those thatwould be paid for similar services topersons dealing at arm’s length with theNPO;

• amounts paid to proprietors, membersor shareholders to cover expensesincurred for their attendance at a con-vention or meeting intended to furtherthe objectives of the NPO.

An NPO whose income exceeds its expensesdoes not necessarily lose its right to a taxexemption. (The surplus may, in fact, resultfrom the activity for which the NPO wasestablished.) However, where a substantial por-tion of the surplus amount is capitalized eachyear and the balance is eventually greater thanthe amount the NPO reasonably requires inorder to carry out its non-profit activities,profit can be considered one of the objectivesof the organization. In this case, the organiza-tion is no longer exempt from income tax orthe tax on capital. Similarly, the NPO loses itsright to the exemption if the assets represent-ing the balance of its surpluses are used forpurposes unrelated to the objectives for whichthe organization was founded, such as mak-ing long-term investments or expanding facil-ities for ordinary commercial activities.

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Consequently, to continue to be entitled to thetax exemption, NPOs must use their surplusamounts for non-profit activities within a rea-sonable time.

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Obligations as a taxpayerFiling the corporation returnMost NPOs are corporations. They musttherefore file a corporation return (form CO-17,Déclaration de revenus des sociétés) with RevenuQuébec no later than six months after the endof their taxation year. The return must be filedeven by NPOs that are exempt from payingincome tax for the year. However, an NPO thatis not claiming any tax credits may instead fileform CO-17.SP, Déclaration de revenus et derenseignements des sociétés sans but lucratif.

Filing the trust returnWhere the main purpose of an NPO is to pro-vide dining, recreational or sporting facili-ties for its members, an inter vivos trust isdeemed to have been created, and the NPOmust file a trust return (form TP-646) within 90days after the end of its taxation year. On thereturn, it must report taxable capital gains andproperty income such as interest, rents, royaltiesand dividends. Such trusts may claim an addi-tional deduction of $2,000 in the calculation oftaxable income. They must file the trust returneven if they have no taxable capital gains orproperty income to report; in this case, therewill be no income tax payable.

If the NPO required to file the trust return is acorporation, it must also file form CO-17 orform CO-17.SP.

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Example

A recreation club (such as a golf, curlingor fishing club) that makes facilities avail-able to its members has property incomeand capital gains. The club must file thetrust return to report the income. Theincome is taxable if it exceeds $2,000.

Filing the information return fortax-exempt entitiesRegardless of whether it is a corporation, anNPO must file an information return for tax-exempt entities (form TP-997.1, or Part IV ofform CO-17.SP) if it meets one of the follow-ing conditions:

• The total of the NPO’s taxable dividends, orof the amounts received and receivable bythe NPO as interest, rents or royalties,exceeded $10,000 for the fiscal periodconcerned.

• The total value of the NPO’s assets at the endof the fiscal period preceding the periodconcerned was over $200,000.

• The NPO was required to file form TP-997.1or complete Part IV of form CO-17.SP for afiscal period preceding the period concerned.

If the NPO normally files form CO-17.SP, itmust complete Part IV of that form. If the NPOfiles form CO-17, it must use form TP-997.1.Regardless of the form used, the informationreturn for tax-exempt entities must be filedwithin six months after the end of the NPO’sfiscal period.

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Example

ABC Inc. is an NPO. The value of ABC’sassets at the end of its 2002 fiscal periodwas $215,000, and its rental income was$5,000. At the end of the following fiscalperiod, the value of its assets was $160,000and its rental income was $2,500. SinceABC’s assets for 2002 were over $200,000, itmust file an information return for tax-exempt entities for 2003 and all subse-quent years.

Filing the partnership returnIf the NPO is a partnership with six or moremembers, it is required to file a partnershipreturn (form TP-600). This obligation alsoapplies to partnerships with fewer than sixmembers if one of the members is itself apartnership.

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Obligations as an agentof Revenu QuébecNPOs must collect the GST1 and the QST andremit these taxes to Revenu Québec if theymake taxable sales2 and are registered for theGST and the QST.

Registration for the GST and the QSTNPOs are required to register for the GST andthe QST if their total taxable sales exceed$50,000 in the four calendar quarters thatimmediately precede a given quarter. Forexample, an NPO whose taxable sales exceedthe $50,000 threshold in the first quarter of2004 must be registered by May 1, 2004. Toregister, an NPO must complete an applicationfor registration (form LM-1).

NPOs whose taxable sales do not exceed thisthreshold are considered small suppliers andare not required to register for the GST and theQST. However, they may choose to register sothat they can claim input tax credits (ITCs) andinput tax refunds (ITRs) for the expenses theyincur in order to make taxable sales. If theychoose to register, these NPOs must collectGST and QST on taxable sales and remit thetaxes to Revenu Québec.

1. We use “GST” to mean “GST/HST” since most personsregistered for the GST/HST are not required to collectthe HST. The HST is the harmonized sales tax, whichapplies in New Brunswick, Nova Scotia, andNewfoundland and Labrador. The basic rulesapplicable to the GST also apply to the HST.

2. We have used the term “sale” because sales are themost usual form of supply. The term “taxable sales”includes sales that are zero-rated (that is, taxable at 0%).

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If an NPO’s taxable sales exceed $50,000 dur-ing a calendar quarter, the NPO loses its small-supplier status immediately.

An NPO that has more than one branch ordivision may elect to have its branches anddivisions considered to be separate for GST/QSTpurposes. In this case, each branch or divisioncan make taxable sales of up to $50,000 with-out having to collect and remit the taxes(except for sales of immovables). If a branchor division exceeds the $50,000 threshold, theNPO will be required to register for the GSTand the QST. It will also be required to collectand remit the taxes with regard to that branchor division.

Registrant NPOs must report and remit theGST and QST on a monthly, quarterly orannual basis, depending on their total taxablesales. They must file one of the followingreturns (as applicable): form FPZ-500(GST/QST); form FPZ-34 (GST); or form FPZ-471 (QST).

For further information, consult the brochuresGeneral Information Concerning the QST and theGST/HST (IN-203-V) and The QST and theGST/HST: How They Apply to Non-Profit Organi-zations (IN-229-V).

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Remittance of the GST and the QSTSupplies made by a registrant NPO are gener-ally subject to 7% GST and to 7.5% QST. How-ever, some supplies are tax-exempt. Theseinclude

• sales of certain immovables (such as resi-dential complexes that are not new) andsupplies of certain health, education andchild-care services;

• supplies of certain housing and recreationalservices for disabled or disadvantagedpersons.

GST and QST rebates

An NPO (registrant or non-registrant) thatreceives at least 40% of its funding from apublic body1 during a given fiscal periodmay claim a rebate of 50% of the GST andthe QST paid on certain property andservices2 that do not give entitlement toITCs or ITRs3 and are not prescribed.

NPOs that operate non-profit health-careestablishments are entitled to the 50%rebate regardless of the percentage of pub-lic funding they receive.

Registrant NPOs must file their rebateapplications according to their reporting

1. A government, a municipality, a corporation controlledby a government or municipality, an Indian band, etc.

2. Property and services acquired in order to provide amunicipal service (for example, the service of collect-ing recyclable materials) do not give entitlement to arebate under the QST system.

3. The property or services do not give entitlement toITCs or ITRs because they were acquired to make anexempt sale (a sale on which the taxes are not payableor collectible) or because the NPO is not a registrant.

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period. For example, an NPO that has aquarterly reporting period must file itsrebate applications quarterly. Non-registrant NPOs must file their rebateapplications every six months. Both regis-trant and non-registrant NPOs file rebateapplications on form FPZ-66 for GSTpurposes and on form VD-387 for QSTpurposes. They may consult the Guide to theRebate Application for Public Service Bodies(FP-66.G-V) for GST purposes, or use workchart VD-387.G for QST purposes.

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Obligations as anemployerFiling RL-1 slips and the Summary of Source Deductionsand Employer ContributionsNPOs that pay salaries, wages or other remu-neration must deduct income tax at sourcefrom the remuneration and remit the amountsto Revenu Québec, in accordance with theprovisions of the Taxation Act. Each year, theymust prepare RL-1 slips for their employeesand file the RL-slips with Revenu Québec,along with a summary of source deductionsand employer contributions (form RLZ-1.S).

NPOs that operate establishments at whichemployees receive tips (for example, bars orrestaurants) must fulfil the obligations pro-vided for by the Taxation Act with respect totips.

Employee or self-employed person?

It is important for NPOs to determinewhether the persons who perform workfor them are employees or self-employedpersons. Source deductions must be madewith respect to salaries or wages, but arenot required with respect to fees paid toself-employed persons.

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An employee is a person who undertakesfor a limited period to do work for remu-neration, under the direction or control ofan employer. A self-employed person, onthe other hand, is free to choose the meansof carrying out the services required; norelationship of subordination existsbetween a self-employed person and theperson who pays for the services. For fur-ther information, consult the folder Are YouSelf-Employed? (IN-300-V).

Contribution to the health services fund NPOs are required to contribute to the healthservices fund. The amount of the contributionis based on the total wages paid to employees.To find out the contribution rate applicable toyour organization, consult the Guide for Employers(TP-1015.G-V).

Contribution to the Fondsnational de la formation de lamain-d’œuvreNPOs with a total payroll of over $1 millionmust spend an amount equal to at least 1% oftheir payroll on worker training. Where eligibletraining expenditures are lower than the min-imum amount required under the Act to fosterthe development of manpower training, the NPOmust pay Revenu Québec a contribution equalto the difference between the minimumamount and the eligible training expenditures.

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Contribution to the financing ofthe Commission des normes dutravail (CNT)NPOs are required to contribute to the financ-ing of the CNT. The contribution is equal to0.08% of the remuneration subject to thecontribution under the Act respecting labour stan-dards. However, certain entities are not requiredto pay this contribution, including

• fabriques;

• corporations of trustees for the erection ofchurches;

• religious institutions;

• educational institutions;

• day-care centres;

• institutions and charities that provide assis-tance free of charge to persons in need.

Québec Pension Plan (QPP) contributionsUnder the Act respecting the Québec Pension Plan,NPOs are required to deduct QPP contribu-tions at source from their employees’ remu-neration. They must also pay an equivalentamount as an employer QPP contribution.

Collection of support paymentsAn NPO that pays amounts (such as a salary)on a regular basis to a person subject to theAct to facilitate the payment of support must col-lect support payments by means of sourcedeductions. Revenu Québec notifies the NPOof its obligation in this regard.

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The principal amounts subject to sourcedeductions are the following:

• salary, wages or any other form of remu-neration;

• benefits paid under a pension plan;

• disability benefits paid under a healthinsurance or accident insurance plan.

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Keeping registersNPOs are required to keep detailed registers sothat the amounts indicated on their returns canbe verified if Revenu Québec carries out anaudit. All registers must be retained for sixyears after the end of the last year to whichthey relate.

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Directors’ liabilityIf you are a member of the board of directorsof an NPO that is a corporation, it is importantto ensure that your NPO meets it fiscal obli-gations. The NPO must

• make source deductions and remit theamounts to Revenu Québec;

• file the required returns;

• collect and remit the QST and GST, whereapplicable. (The NPO must also pay GSTand QST on the property or services it pur-chases.)

If the NPO does not meet these obligations,you (as a director) are liable for any dutiespayable by the NPO, as well as for the appli-cable interest and penalties, unless

• you acted with reasonable care, diligenceand skill under the circumstances;

• you could not, under the circumstances,have been aware of the NPO’s failure tomeet these obligations; or

• you ceased to be a director at least twoyears before the NPO’s failure to meet itsobligations.

The Act respecting the Ministère du Revenu makesno distinction between types of directors. Fur-thermore, the fact that a director reduces hisor her involvement in the corporation's affairsdoes not necessarily relieve the director of anyliability with regard to the corporation.

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Principal informationdocumentsThe following documents contain informationthat may be useful:

• Should I Register with the Ministère du Revenu?(IN-202-V)

• General Information Concerning the QST and theGST/HST (IN-203-V)

• The QST and the GST/HST: How They Apply toNon-Profit Organizations (IN-229-V)

• Guide for Employers (TP-1015.G-V)

• Guide to Filing the RL-1 Slip (RL-1.G-V)

• Guide to Filing the Corporation Income TaxReturn (CO-17.G-V)

• Guide to Filing the Partnership InformationReturn (TP-600.G-V)

• Guide to Filing the Trust Income Tax Return(TP-646.G-V)

• Are You Self-Employed? (IN-300-V)

• Tax Measures Respecting Tips (IN-250-V)

• The Ministère du Revenu du Québec and theApplication of the Act to Foster the Developmentof Manpower Training (IN-234-V)

• The Collection of Support Payments (IN-901-V)

• Directors' Liability (IN-107-V)

IN-305-V (2005-03)

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Inquiries from outside Canada should be directed to the Sainte-Foy office.We invite you to visit our Web site at www.revenu.gouv.qc.ca.

Vous pouvez vous procurer la version française de cette publication en demandant le documentLes organismes sans but lucratif et la fiscalité (IN-305).

2004

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