Can a nonprofit pass through consulting income to its officers?

I'm the president of a small 501(c)(6) non-profit. Our budget is under $50K, we have never paid our officers or directors.

A Canadian entity wants to hire the non-profit to do some consulting that would be done by a couple of the officers. The work is directly related to our mission, and the entity would for political reasons rather hire the non-profit than hire us directly.

Would it be a problem for the non-profit to pass the money through to the people who did the work and issue us 1099s? Since there's a tax treaty and most of the work would be done in the US I don't think there's international tax issues.

Reply to
John Levine
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The nonprofit would have no problem paying for the services rendered. The potential (though pretty small) problems I see is, first, that the workers would be considered contractors rather than empoyees. If they are paid as contractors, the nonprofit isn't actually doing the work. So there might be an issue of whether the contract with the nonprofit was legitimate, and whether the size of the payments was legitimate.

Another issue is that all the money paid would go to the workers, without the nonprofit retaining any of the money. While the work may be nominally within the exempt purpose of the organizaiton, if the organization gets nothing, it may not be considered within its exempt purpose because that purpose isn't being supported at all.

And then there's the requirement that, "no part of the net earnings of which inures to the benefit of any private shareholder or individual." In other words you would need to show that the compensation paid is reasonable. And if it's 100% of what is received, then why did they bother?

None of these issues is insurmountable. They may not even be at all problematic. But the transaction may look suspicious.

Reply to
Stuart A. Bronstein

Not my area of expertise but.... First you need to look at the corporate bylaws to see what it says about compensation. Typically, directors are not paid. They are usually just reimbursed for expenses and/or paid a fee for meeting. Officers and staff when paid would be employees. In many nonprofits, directors and officers are often the same people. A compensated director can not have anything to do (vote on) how they are compensated.

So... in order to compensate the officers that were going to perform these services, they couldn't be contractors. There are all kinds of issues with compensation enuring to the benefit of a few rather than the whole. The c(6) would have to hire the people doing the work as employees and compensate them accordingly. The board would have to vote on the hiring and the compensation of the officers.

Reply to
Alan

It sounds like the Canadian entity is trying to get out from the withholding requirements of the Canadian Income Tax Regulation 105.

(This Regulation requires withholding - it does not require the foreign entity to pay income tax. The foreign entity must file Canadian Income Taxes to get the withholding back. This means that it is in compliance with the tax treaty.)

Because some of the work will be taking place in Canada, there is a requirement for the Canadian Entity to withhold a portion of the fees and issue a T4A-NR slip to the foreign entity performing the work. This withholding is required if the foreign entity is either an individual or a corporation (such as your non-profit.) It occurs only when the work is performed on Canadian soil. In your information, "Most of the work would be done in the US," means that some will be subject to international tax issues.

The Canadian entity probably thinks that the withholding only applies to individuals; it applies to both.

It will be easier for your staff to file individual non-resident Canadian tax returns than for the corporation to file a corporate non-resident Canadian Tax Return and a non-profit non-resident Canadian Corporate Tax Return (note that there are TWO Corporate returns in this case.)

Perhaps you and the Canadian entity need to discuss the legal framework of the c> I'm the president of a small 501(c)(6) non-profit. Our budget is

Reply to
parrisbraeside

Really? Do you have a citation? When I was on regular commercial boards we signed off on our own compensation all the time. Since we chose the management, we'd be doing it directly or indirectly no matter what.

Reply to
John Levine

The entity is a branch of the federal government, so I'm pretty confident that's not their goal.

When I look at the CRA web site, I see an automatic waiver of reg 105 taxes for residents of treaty countries if the work is less than 180 days, which it certainly will be. Am I missing something?

Reply to
John Levine

Yes, to get the waiver, in the small print, is a promise to file the tax return anyway. Check the wording of the waiver.

You may also wish check if you have an obligation to charge GST/HST.

As a government department, they have to pay gst/HST. Only exception is if they are status Indian or band council.

I will add, as this is a government department, you will not get the contract as individuals. They only hire employees or corporations.

You may wish to find someone familiar with Canadian non-resident tax issues. My skills are only for individuals in your situation. Not corporations.

Reply to
parrisbraeside

Uh, no. I have contracted as an individual with the OPC and Industry Canada in the past. They wanted to pay GST so I got a GST number which was no big deal, and also let me credit the GST I paid on hotels and such.

Reply to
John Levine

You are right when it comes to federal law. It is up to state law as to whether directors can be compensated. However, I have yet to see a nonprofit (that's not to say one doesn't exist) that has not adopted the IRS recommended Conflict of Interest Policy (Appendix of Form 1023 Instructions) or one that was similar. Buried in that policy is that a financial interest such as compensation creates a conflict. Once disclosed you don't get to vote on resolution. Only disinterested directors get to vote.

Reply to
Alan

Oh, OK. We're in New York, where non-profit law section 715 speficially says it's OK, so long as everything is disclosed to the board, which of course it would be.

However, I have yet to see a

You must not see many small non-profits.

Reply to
John Levine

Don't know the definition of many but the small ones ((501)(c)(3)) I have seen (New Mexico) all had by-laws with the conflict of interest clause relating to a financial interest.

Reply to
Alan

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