Do not-for-profits pay tax in Canada?

The income tax exemption is conditional, not automatic

Paragraph 149(1)(l) exempts an organization from income tax, but only under specific conditions. It must be organized and operated exclusively for social welfare, civic improvement, pleasure, recreation, or any purpose other than profit. And no part of its income is payable to, or available for, the personal benefit of a member. Earning a surplus in a given year is not itself disqualifying, since organizations need some cushion to operate. But consistently accumulating far more than the organization's activities require can lead the CRA to question whether it is genuinely operating without a profit purpose. See our page on the difference between a not-for-profit and a registered charity for how this exemption compares to charitable status.

You still have to file a T2 return

The income tax exemption does not remove the filing obligation. An incorporated not-for-profit generally has to file a corporate T2 return every year, the same as any other Ontario or federal corporation. This applies even in years where no tax is ultimately owed. Skipping this filing because "we don't pay tax anyway" is a common misunderstanding. It can lead to late-filing penalties once the CRA notices the gap, and interest can accrue on those penalties the longer the gap goes unaddressed.

The T1044 Non-Profit Organization Information Return

Beyond the T2, a not-for-profit has to file a separate T1044 return under two conditions. The first is a fiscal period where its total assets exceeded $200,000 at the end of the prior year. The second is a year where it received more than $10,000 in investment, rental, or dividend income. Once that threshold has been triggered, the organization must keep filing the T1044 in following years. This is an information return rather than a tax return. But the penalty for missing it when required applies regardless of whether any tax was actually payable. Treasurers who track only the corporate T2 deadline sometimes miss this second filing entirely.

When property income becomes taxable anyway: section 149(5)

A separate rule, subsection 149(5), can tax certain property income earned by specific not-for-profits. This includes rental or investment income, and it applies to organizations whose main purpose is providing dining, recreational, or sporting facilities to their members. The classic example is a golf or social club. This rule exists specifically because these clubs often hold significant investment assets or rental property alongside their recreational purpose. Parliament did not want that investment income to escape tax entirely, just because the club as a whole qualifies as a not-for-profit. When 149(5) applies, the club is generally taxed on that property income at rates comparable to those a private corporation would face. Even so, its membership fees and other core activities remain sheltered by the ordinary 149(1)(l) exemption. Most service-oriented or community-purpose not-for-profits, such as a community association, a hobby club, or a professional association, never encounter this rule. It targets a fairly specific category of dining, recreational, or sporting club, rather than not-for-profits generally.

Payroll taxes do not care whether you are a not-for-profit

The income tax exemption has nothing to do with payroll. A not-for-profit that employs staff has to register for payroll, and withhold and remit CPP, EI, and income tax the same as any other employer. It also has to pay the Ontario Employer Health Tax on its payroll once it applies. Certain exemption thresholds, though, can reduce or eliminate EHT for smaller employers. There is no not-for-profit carve-out anywhere in the payroll rules. Directors of an incorporated not-for-profit can be held personally liable for unremitted source deductions, in the same way directors of an ordinary business corporation can. This is worth knowing before treating payroll as a lower priority than the organization's programs.

GST/HST works differently for a public service body

A not-for-profit that qualifies as a public service body gets a higher small-supplier threshold of $50,000 in taxable supplies. HST registration becomes mandatory once that threshold is crossed, rather than the standard $30,000 threshold that applies to most businesses. Once registered, or if registering voluntarily below that threshold, many qualifying not-for-profits can also claim a partial rebate of the HST they pay on their own purchases. Our page on the difference between a not-for-profit and a registered charity covers how that rebate compares to the higher rebate available to registered charities.

Why owner-managers of a not-for-profit get this wrong so often

The confusion usually starts with the word "exempt" itself. Directors hear that the organization does not pay income tax, and reasonably assume that means no filings at all. In fact, the exemption only removes the tax bill, not the paperwork. We regularly meet not-for-profits that have never filed a T2 in years of operation. This is simply because nobody realized the requirement existed, once the organization stopped expecting to owe anything. The CRA can assess late-filing penalties on a T2 or a T1044 going back several years once it does notice a gap like this. Catching up sooner rather than later matters, even though no tax is ultimately at stake.

How we handle this

We set up a filing calendar for each not-for-profit client, covering the T2, the T1044 where it applies, payroll remittances, and GST/HST. Missing any single one of these filings is a far more common source of penalties than the income tax exemption itself ever is. For organizations that have fallen behind on any of these, we also help catch up the missed years quietly, before the CRA raises it first. This is part of our nonprofit and charity tax services.