9 January 2002 External T.I. 2001-0104825 - PROPERTY INCOME CAPITAL GAINS OF NPO

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1. Is interest income from GIC's and term deposits taxable income of a non-profit organization.

2. Is a capital gain realized on the disposition of vacant property by a non-profit organization taxable.

Position:

1. No
2. No

Reasons:

1. Non-profit organization is operated in accordance with its established not-for-profit purpose.

2. No tax payable on the taxable income of the NPO. Income of the NPO includes capital gains.

XXXXXXXXXX 		2001-010482
N. L. Storry

January 9, 2002

Dear XXXXXXXXXX:

Re: Non-profit Organization

We are writing in response to your correspondence of October 24, 2000, wherein you requested our view regarding how a Non-profit Organization (the "Club") should treat a capital gain realized on the disposition of capital property for purposes of the Income Tax Act (the "Act") and whether interest income earned on GIC's and term deposits is taxable.

Our Comments

The situation outlined in your letter involves an actual fact situation. To the extent that it relates to a past transaction you should contact the appropriate Tax Services Office ("TSO") of the Canada Customs & Revenue Agency (the "CCRA"). Since the review of such transactions falls within the responsibility of the TSO, it is the practice of the Income Tax Rulings Directorate not to comment on such transactions. In the case of a proposed transaction, assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. However, we can offer the following general comments.

Disposition of Vacant Property

Paragraph 149(1)(l) exempts from income tax a club, society or association (other than a charitable organization or foundation as defined in subsection 149.1(l)) organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, if no part of its income is payable to, or available for the personal benefit of any proprietor, member or shareholder. However, the provisions of subsection 149(5) override this exemption and tax the income from property, in excess of $2,000, of those clubs, societies and associations that have as their main purpose the provision of dining, recreational or sporting facilities for their members except for income from property used exclusively for and directly in the course of providing the dining, recreational or sporting facilities for its members.

A non-profit organization ("NPO") that does not have as its main purpose the provision of dining, recreational or sporting facilities for its members would not be subject to the provisions of subsection 149(5). Therefore, a gain realized by such an NPO on the disposition of property would not be taxable. The CCRA's views on the taxation of income from property of a non-profit organization are contained in IT-83R3, Non-profit Organizations - Taxation of income from property. For your information, we have attached a copy of this Interpretation Bulletin.

Interest Income

You have asked whether interest earned on GIC's and term deposits would be taxable income of the Club.

As noted above, an NPO is exempt from income tax. Thus, as long as the organization maintains its status as an NPO, income will be taxable only under the circumstances described in subsection 149(5), referred to above.

The CCRA recognizes that many organizations will undertake activities, including the purchase of investments (i.e., term deposits), which are undertaken specifically to generate a profit and that this will not necessarily cause the entity to cease to be exempt under paragraph 149(1)(l). What is critical is the organization and operation of the entity for its non-profit purposes. An entity's status as an NPO will generally not be jeopardized where it generates income from excess cash that is invested in term deposits and such income is expended in accordance with the entity's non-profit purposes.

We hope these comments will be of assistance to you.

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch