30 November 1997 Ruling 9727953 - NON-PROFIT ORGANIZATION

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 Department.

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

Principal Issues:

Is XXXXXXXXXX ("X Ltd") organized as a non-profit organization as described in paragraph 149(1)(l) (X Ltd will facilitate research and development initiatives in the XXXXXXXXXX)?

Position:Yes

Reasons:

The documentation presented provide that X Ltd will operate as a cost recoverable independent enterprise. Any fees charged will be used exclusively to further the objectives of the organization. The functions of X Ltd were previously carried out by XXXXXXXXXX.

Article XXXXXXXXXX of X Ltd's Memorandum of Association provides that no portion of the income or property of X Ltd shall be paid or transferred or be made available directly by way of dividend, bonus or otherwise for the benefit of any member or members of the Company.

Article XXXXXXXXXX of X Ltd's Memorandum of Association states that if the Company is dissolved or wound-up, for any reason, after all liabilities of the Company have been paid all remaining property of the Company shall not be distributed to any member of the Company, but shall be transferred to one or more entities having non-profit objects that include objects which are the same as or substantially similar to the objects of the Company, or distribute to one or more registered charities.

XXXXXXXXXX							972795
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX ("X Ltd" or "the Company").

To the best of your knowledge and that of X Ltd, none of the issues involved in the requested ruling is being considered by a Tax Services Office or a Tax Centre in connection with an income tax return already filed and none of the issues is under objection or appeal.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

FACTS

1. X Ltd is newly incorporated as a not for profit company, without share capital pursuant to XXXXXXXXXX.

2. The objects of X Ltd, as stated in Article XXXXXXXXXX of the Memorandum of Association are:

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

3. Article XXXXXXXXXX of X Ltd's Memorandum of Association provides that all income and property of the Company shall be applied toward the furtherance of objects of the Company, and no portion of such income or property shall be paid or transferred or be made available directly by way of dividend, bonus or otherwise for the benefit of any member or members of the Company, provided, however, that nothing herein set forth shall limit or prevent the Company from reasonable payments in good faith to any member of the company for services actually rendered to the Company or for property actually conveyed to the Company.

4. The business plan for X Ltd specifies these specific goals:

XXXXXXXXXX

XXXXXXXXXX

To fulfill its objects, X Ltd has entered into a funding agreement with XXXXXXXXXX. XXXXXXXXXX. This fund is to be used in accordance with very specific conditions. That is, the fund is to be expended only in a manner consistent with the strategic plan and business plan established by X Ltd and as consented to by XXXXXXXXXX. Apart from funds specifically dedicated to offsetting the start-up costs of establishing X Ltd, the fund is to be expended only to “stimulate and enhance the research and development capacity of XXXXXXXXXX. More specifically, the contract XXXXXXXXXX establishes the following goals for X Ltd:

A. Increase the product and technology development capacity by providing funding and support to and by seeking contributions from others for the funding and support to:

(i) projects and applied research that is advancing scientific knowledge useful for XXXXXXXXXX;

(ii) ensure the necessary infrastructure (equipment, technology, etc.) is in place in public research facilities;

(iii) assist individual companies and research partners to obtain key scientific research and technical personnel vital to the development of XXXXXXXXXX.

B. Facilitate the effective utilization of the research and product development capacity by providing funding and support to:

(i) strengthen the existing scientific capacity and build an internationally recognized team(s) of researchers in the XXXXXXXXXX;

(ii) establish cooperative innovative networks to improve the exchange of information and maximize the overall impact of research efforts and resources.

C. Facilitate and coordinate product commercialization and business development programs by providing funding and support to:

(i) technical and market assessments, prototype and final product developments;

(ii) increase the entrepreneurial, research, product and market development skills from the industry; and

(iii) assist in the preparation of business and financial plans.

D. Provide a mechanism to allow joint administration of industry development funds.

A funding agreement with XXXXXXXXXX is being negotiated supporting the same objectives.

XXXXXXXXXX

X Ltd will not operate as:

- A traditional research granting agency - while it will provide grants, most of its funding will be available for development and assistance programs that require up-front contributions and some pay-back or return to X Ltd via fees, royalties, or license agreements.

-
XXXXXXXXXX

- An agency that will undertake business planning and strategy development on behalf of its clients - other entities working in conjunction with X Ltd will be expected to undertake this work.

- A bank - X Ltd will not act to compete with banks or other financial institutions. It will help secure the development of products and services supported directly by X Ltd.

- An educational institution - X Ltd will invest in and resource some educational and learning activities, but it will not compete in the provision of learning services.

5. Article XXXXXXXXXX of X Ltd's Memorandum of Association states that if the Company is dissolved or wound-up, for any reason, after all liabilities of the Company have been paid all remaining property of the Company shall not be distributed to any member of the Company, but shall be transferred to one or more entities having non-profit objects that include objects which are the same as or substantially similar to the objects of the Company, or distribute to one or more registered charities.

PROPOSED TRANSACTIONS

6. X Ltd will use all its income and property (including the funds set out in 4 above) to fulfill the objectives outlined above through knowledge brokering, the facilitation of alliances between the financial sector and the XXXXXXXXXX sector, and through skilled investment use of the financial resources provided by XXXXXXXXXX. X Ltd's program initiatives will be reviewed and changed as necessary to meet emerging industry needs.

Knowledge Brokering

X Ltd intends to meet its knowledge brokering objective by establishing a world class website for XXXXXXXXXX. It is intended that X Ltd contract with an arm’s length third party to develop and maintain the site. It is also intended that there be different levels of access provided to those accessing the sites as follows:

-

XXXXXXXXXX

- Membership in X Ltd is obtained by way of application to the board of directors. Membership is currently limited to XXXXXXXXXX organizations and requires payment of annual membership dues and a one-time non-refundable fee. (If this limited membership proves to be too restrictive, the Board of Directors will consider the possibility of increasing the number of members.) Subscribers will also pay subscription fees. X Ltd is expected to be self-sustaining, therefore, XXXXXXXXXX access will be provided on a for-fee basis. It is anticipated that these fees will be at a level sufficient to meet this expectation.

Education

X Ltd's involvement in XXXXXXXXXX learning and education will be realized in a number of ways. X Ltd will provide a one-time funding of $XXXXXXXXXX to create a revolving fund to sponsor conferences to exchange ideas and knowledge and create networks.

XXXXXXXXXX

There will also be funding allocated to pay up to XXXXXXXXXX% of the costs for members and subscribers to travel to facilitate learning and the investigation of new products and technologies with a potential benefit. A maximum of XXXXXXXXXX awards will be provided (with an upper limit of $XXXXXXXXXX) under this program per year. The recipients of such awards will be required to contribute substantially (such as research findings, articles and other publications) to XXXXXXXXXX.

A scholarship program will also be established. Again, a maximum of XXXXXXXXXX scholarships with a value of $XXXXXXXXXX each will be provided and the recipients will be required to contribute (such contributions as research findings, articles, and other publications) to XXXXXXXXXX.

Facilitating Alliances

X Ltd also intends to facilitate relationships between XXXXXXXXXX and financial organizations. X Ltd will accomplish this through fostering strategic alliances with key financial organizations. The intention is to source early stage funding for those in the XXXXXXXXXX marketplace. X Ltd shall accomplish this task through fee-for-service or similar contractual arrangements. For example, X Ltd will charge a “finder’s fee” to match funding with projects. X Ltd will also arrange for the performance of due diligence investigations of projects for financial organizations. Again, X Ltd will charge a fee for such services.

XXXXXXXXXX

Funding Programs

It is intended that X Ltd will develop funding programs to support an increase in the number of researchers, technicians and analytical or processing equipment to increase the critical mass available for new product and services development, as well as accelerating the rate of development in XXXXXXXXXX.

In particular, X Ltd will provide financial assistance to attract leading edge experts and scientists for approved research positions. Financial assistance would also be provided for specialized equipment and technology. X Ltd would expect a return on this investment through the sharing of intelligence gained and other means to be determined as proposals are considered. This may include royalties on products developed.

X Ltd will also provide financial support for research and development of new and improved XXXXXXXXXX. Again, X Ltd will expect a return from the commercialization of any of the research resulting (example, such as royalties). In order to increase the rate of success of commercialization of new products and services flowing from research and development efforts, X Ltd will develop and deliver funding programs to facilitate completion of various pre-commercialization activities. The pre-commercialization development financial assistance will include:

a) Some of the assistance will be at the “pre-feasibility” stage so as to refine technology and conduct preliminary feasibility studies. The assistance provided would be up to $XXXXXXXXXX.

b) Assistance up to $XXXXXXXXXX would be provided to assist in the completion of feasibility studies and preliminary business plans (example, work on preliminary prototypes, design, proof of concept).

c) Assistance of up to $XXXXXXXXXX may be provided to assist in detailed business plan and strategies in support for pre-commercialization activities such as regulatory requirements, distribution plans, composition analysis.

X Ltd intends to receive a return on its contribution by way of a royalty percentage of sales or profits to a maximum of 2 to 3 times its contribution. A return may not be required or expected in respect of pre-feasibility assistance and in respect of some of the feasibility assistance.

Investments

Until such time as the lump sum contributions made by XXXXXXXXXX are contributed by X Ltd under the above projects, such funds will be invested. X Ltd has sought proposals from a number of investment advisors to manage these amounts.

XXXXXXXXXX

PURPOSE OF PROPOSED TRANSACTIONS

7. The purpose of the proposed transactions is to facilitate research and development initiatives in the XXXXXXXXXX.

RULING

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our ruling is that X Ltd will be considered to be an association organized exclusively for any other purpose except profit with no part of its income payable to or otherwise available for the personal benefit of any member so that in any year in which it in fact operates on that basis, (this being a matter on which we do not rule since it is a question of fact the determination of which can only be made retrospectively for each taxation year) it will qualify for that year as a non-profit organization under paragraph 149(1)(l) of the Act, and will be exempt form Part I tax upon its, otherwise, taxable income.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding provided that the proposed transactions are commenced by XXXXXXXXXX.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch