Many of us sit on the boards of various not-for-profit (“NPO”) organizations, from sports associations to charities.
Few, however, are aware of the responsibilities that may arise from this involvement, often carried out on a voluntary basis.
Sections 323 of the Excise Tax Act and 24.0.1 of the Tax Administration Act provide that where a corporation has failed to remit to the tax authorities an amount or to deduct, withhold or collect an amount that it was required to deduct, withhold or collect under a tax law, or to pay an amount that it was required to pay as an employer[1], its directors in office on the date of the omission become jointly and severally liable with it for that amount as well as any interest and penalties relating thereto in the following cases:
- when a notice of execution for seizure of movable property against the company is reported unsatisfied in whole or in part;
- when the company is the subject of a winding-up order or becomes bankrupt;
- when the company is in the process of liquidation or dissolution, or has been dissolved.
In short, the directors of any type of corporation who were in office during the periods in question are jointly and severally liable for any amounts owed by it to the tax authorities in respect of sales taxes or source deductions[2]. It should be noted that directors are also liable for the repayment of overclaimed amounts that the organization is unable to repay to the tax authorities.
In the event of bankruptcy or liquidation of the corporation, GST notices of assessment for directors must be issued within 6 months. However, provincial legislation does not specify a deadline for this, so it is possible that notices of assessment could be issued several years later.
That’s why it’s important to make sure that the organization on which you agree to sit as a director is tax-compliant. Sales tax rules applicable to NPOs are often misunderstood and incorrectly applied, which can lead to assessments by tax authorities.
Did you know that a nonprofit is required to register for GST and QST once it earns more than $50,000 in taxable income, and that all income generated by a nonprofit is taxable, with certain exceptions? 3] For example, the following supplies made by a nonprofit are subject to taxes and must therefore be taken into account when calculating the $50,000 threshold:
- The sale of tickets for an event (e.g. gala, dinner, golf tournament, symposium, show, etc.), when the price of admission exceeds $1;
- Sporadic fundraising sales of moveable goods where the sale price exceeds $5 (e.g. sale of goods at a silent auction);
- The sale of movable goods on a regular basis when the sale price exceeds the direct cost of the good (e.g. sale of uniforms, equipment or other merchandise by a sports association);
- Registration costs for sports, cultural and recreational programs when offered primarily to people aged 15 and over.
It is therefore not uncommon for a nonprofit to be legally required to register for taxes.
In view of the foregoing, it is important to be vigilant when agreeing to sit on the board of directors of a nonprofit, since you could be liable for the payment of its tax debts. In addition, we would like to draw your attention to the fact that insurance coverage is available specifically for directors of companies and NPOs, covering this type of risk.
If you have any doubts about the tax compliance of the organization for which you act as administrator, it may be a good idea to have your sales tax expert analyze the situation.
References
[1] Under the Act respecting the Québec Pension Plan (chapter R-9), the Act respecting parental insurance (chapter A-29.011), the Act respecting labour standards (chapter N-1.1), the Act to promote workforce skills development and recognition (chapter D-8.3) or the Act respecting the Régie de l’assurance maladie du Québec (chapter R-5).
[2] Different rules apply to income tax.
[3] This applies to a nonprofit that does not have charitable status (issuing donation receipts for income tax purposes).
