Lori A. McMillan (Washburn) presents The Canadian Taxation of Noncharitable Nonprofits, and the IKEA Connection at Stetson today as part of its Faculty Speaker Series.  Here is the abstract:

There are three sectors to the economy, and as one of these three the nonprofit sector divides into charitable and noncharitable entities. In Canada, the entire nonprofit sector, noncharitable nonprofits included, is exempt from federal income taxation, as long as a nondistribution constraint is in place, and entities properly structure their affairs such that profit is a secondary purpose. Caselaw has broadly construed the purpose test so that commercial entities may qualify for exemption. For example, the Canadian Bar Association Insurance Corporation provides home, auto, and life insurance for lawyers, and the Tax Court has ruled that since the entity’s purpose was to provide affordable insurance to lawyers and their families, the entity was able to qualify as having a non-profit motivated purpose, and therefore was tax exempt. Serious issues of fairness and distortion arise from this tax exemption, as little real difference exists between many for-profit entities and some commercial nonprofits. To illustrate the problems, an international example is uesd: the IKEA chain is an example of a commercial organization that is ultimately organized under the ownership of a tax exempt entitiy. An exemption for commercial nonprofits that does not require some sort of program delivery, or socially desired provision of goods and services, in return for tax subsidy is inefficient and wasteful, and is in serious need of rethinking. No government would openly subsidize lawyers’ purchase of personal life insurance, and there is no good reason why it should do so indirectly. To this end, a test is proposed, which would limit qualification for noncharitable nonprofits with regard to exemption to those which provide a public benefit, akin to the public benefit currently required of charities. This would rationalize the common exemption for the entire sector, while allowing a continuing distinction between charities and noncharitable nonprofits. Charities would still need to have a charitable purpose, and in return, they are given the ability to issue tax receipts for donation. Making public benefit a common requirement does not conflate charitable and nonchartiable entities, but rather establishes the baseline nature of the entities in the sector seeking public support.