5 February 2013 External T.I. 2012-0441801E5 - 149(1)(l) - Funds Payable to Members

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.

Principal Issues: 1. Whether an organization would lose its 149(1)(l) status if profits from the sale of auction items are shared with the contributing members.

Position: Maybe

Reasons: Depends on whether items are owned by members or by NPO.

XXXXXXXXXX
2012-044180
Lori Merrigan
(613) 957-9229

February 5, 2013

Dear XXXXXXXXXX

Re: Paragraph 149(1)(l) – Funds Payable to Members

We are writing in response to your correspondence of March 28, 2012, regarding the tax implications to an entity described in paragraph 149(1)(l) of the Income Tax Act (the "Act") with respect to the distribution of revenue to its members from the sale of auction items. In particular, you have described a situation in which a 149(1)(l) entity holds an auction and items are contributed by members. Proceeds from the auction of an item are then split between the 149(1)(l) entity and the contributing member.

In this letter, unless otherwise expressly stated, all statutory references are to the provisions of the Act.

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings". This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Although we cannot comment on your specific situation, we are able to provide the following general comments, which may be of assistance.

The CRA's general views regarding 149(1)(l) entities are contained in Interpretation Bulletins IT-496R, which may be viewed at http://www.cra-arc.gc.ca. To qualify as a tax exempt entity described in paragraph 149(1)(l) of the Act, an organization must be both organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit.

One of the requirements that must be met in order for an organization to be considered to be a 149(1)(l) entity is that its income is not available for the personal benefit of a member or shareholder. With respect to the sale of auction items, it is not clear to us whether the items to be sold continue to be owned by the contributing members or whether the items are donated to the 149(1)(l) entity and then some profits from the sale of such items are distributed to the contributing members. If the contributing members retain ownership of the items then, in our view, the income of the 149(1)(l) entity is not available for the personal benefit of a member and the tax-exempt status of the organization is not jeopardized for this reason. However, if the items are owned by the 149(1)(l) entity and the revenue of such items, and therefore the revenue of the 149(1)(l) entity, is distributed to its members then the organization could lose its status as a tax-exempt organization pursuant to paragraph 149(1)(l).

Further, regardless of the ownership of the items, where a 149(1)(l) entity receives proceeds from the sale of these items, whether those proceeds will affect the 149(1)(l) entity's tax status will depend on whether this is incidental income of the 149(1)(l) entity and whether it is connected to the not-for-profit objectives of the organization.

An organization claiming a paragraph 149(1)(l) tax exemption can earn a profit, as long as the profit is incidental and arises from activities directly connected to its not-for-profit objectives. Examples of profitable activities that might be undertaken through a 149(1)(l) organization include running a canteen at a rink used for amateur hockey or a cafeteria at a not-for-profit youth hostel, or charging admission above direct cost for a children's concert (where the not-for-profit purpose of the organization was to organize and promote youth participation in music).

In our view, if the members retain ownership of the auction items, as long as the auction is related to its objectives, and the profits are not material, the income would likely be considered to be incidental income of the organization and would not jeopardize the tax-exempt status of the organization. Whether or not income from a particular activity is incidental is a question of fact.

We trust that these comments will be of assistance.

Yours truly,

R. A. Albert, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch