Tax-exempt organizations — who does not pay income tax
Miscellaneous exemptions
Section 149 exempts certain persons from Part I income tax — municipalities, Crown corporations, non-profit organizations, registered charities, and certain other entities.
Plain-language explanation
Section 149 lists the categories of persons who are exempt from paying income tax under Part I. Understanding these exemptions is important for structuring charitable giving, non-profit activities, and public sector dealings.
Key exempt categories:
*s.149(1)(c) — Municipalities and provincial governments:* Canadian municipalities and provincial Crown corporations are exempt from federal income tax.
*s.149(1)(e) — Non-profit organizations:* A corporation, club, or association that is organized and operated exclusively for social welfare, civic improvement, pleasure or recreation, or any other purpose except profit, and no part of its income is payable to or available for personal benefit of members. The key test is "no profit motive" and no distribution to members.
*s.149(1)(l) — Registered charities:* Organizations registered with CRA as charities (foundations and public charities) are exempt from income tax on income used for charitable purposes. However, unrelated business income may be taxable.
*s.149(1)(j) — Agricultural and fishing organizations:* Non-profit agricultural and horticulture societies and fishing associations are exempt.
*Registered Retirement Savings Plans, TFSAs, RRIFs, FHSAs:* Income earned inside these registered plans is exempt (s.146, 146.2, 146.6).
Loss of exemption: An organization loses its s.149(1)(l) exemption if it pursues activities that are not for the exempt purpose — earning unrelated business income, distributing profits to members, or engaging in political activities beyond the permitted limit.
Example
The Westside Community Sport Club is organized for recreation (non-profit s.149(1)(l) entity). Its annual membership fees and small fundraising revenue are tax-exempt. If the club starts selling merchandise commercially (unrelated business income), that portion may lose the exemption.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
CRA intensified compliance activities for non-profit organizations under s.149(1)(l) following a long period of minimal enforcement. NPOs must now demonstrate they meet the "operated exclusively" test through their activities and governance; corporate documents, minutes, and financial statements are reviewed.
Before
Light-touch enforcement; many organizations informally used NPO status without full compliance
After
Increased CRA audits of NPOs; clear evidence of non-profit operations required; revocation where member benefits found
Common questions
What is the difference between a registered charity and a non-profit organization? +
A registered charity is registered with CRA, can issue official donation receipts, and must spend 3.5% of its assets on charitable activities annually. A non-profit organization (NPO) under s.149(1)(l) is exempt from income tax but cannot issue donation receipts to donors, and its membership contributions are not deductible.
Can an NPO earn investment income? +
Generally yes, as long as the income is used for the exempt purpose. If the NPO uses investment income for the benefit of members (as distributions, subsidized services exclusive to members), the organization may lose its NPO status.
Do TFSAs and RRSPs use s.149? +
No — registered plans like TFSAs, RRSPs, RRIFs, and FHSAs have their own income exemptions under ss.146, 146.2, 146.6, and related provisions. S.149 covers entities like charities and NPOs rather than personal registered plans.
Key terms
Related sections
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 149. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.