21 August 2019 GST/HST Interpretation 195314 - Member-funded societies

Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.

Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 11th floor
320 Queen Street
Ottawa ON K1A 0L5

[Addressee]

Case Number: 195314

Dear [Client]:

Subject: GST/HST INTERPRETATION
Member-funded societies

Thank you for your fax of November 21, 2018, concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to member-funded societies. We apologize for the delay in providing this response.

The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.

All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.

We understand the facts as follows:

1. The Government of British Columbia enacted a new Societies Act (Footnote 1) in 2015. Under the new Act, two new types of societies were created: member-funded societies and occupational title societies.

2. The Government of British Columbia published Preparing for B.C.’s New Societies Act: A Guide to the Transition Process on its website to explain the transition to the new Act. The Guide explains member-funded societies as follows:

On transition, each pre-existing society will be asked whether it wishes to designate itself as a “member-funded society” by including a statement to that effect in its constitution. A member-funded society is a society that is funded primarily by its members to carry on activities for the benefit of its members. Common examples might include some sports clubs, golf courses and professional associations.

Member-funded societies are allowed to distribute assets to their members if the society winds up. As well, the Societies Act makes them subject to fewer accountability measures than other societies. For example, they need only have one director and are not required to make their financial information publicly available. The following chart summarizes the different rules applicable to member-funded societies as compared to other societies:

Distribution of assets on winding up:

• Member-funded societies:
• No restrictions – assets could go to members
• Other societies:
• Assets can only be distributed to certain entities (e.g. non-member-funded societies, registered charities or community service cooperatives)

Number of directors:

• Member-funded societies:
• One director is sufficient – no residency requirements
• Other societies:
• At least three, one of whom is ordinarily resident in B.C.

Composition of board of directors:

• Member-funded societies:
• No restrictions on number of board members who are employed by or under contract with the society
• Other societies:
• Majority of board must not be employed by or be under contract with the society

Financial statements:

• Member-funded societies:
• No public right to copies
• Other societies:
• Public has right to obtain copies

Disclosure of remuneration:

• Member-funded societies:
• No disclosure of remuneration required
• Other societies:
• Financial statements must set out remuneration paid to directors and to highly paid employees/contractors

Conversion to company:

• Member-funded societies:
• Can convert
• Other societies:
• Not possible

3. The Societies Act includes the following provisions:

1. In this Act:

[…]

“bylaws” means the bylaws described in section 11 [bylaws];

[…]

“constitution” means the constitution described in section 10 [constitution];

[…]

“member”, in relation to a society, means
(a) an applicant for the incorporation of the society who remains a member of the society, and
(b) a person who becomes, in accordance with the bylaws, a member of the society and who remains a member of the society;

[…]

“qualified recipient” means

(a) a society, other than a member-funded society as defined in section 190 [definitions],

(b) a community service cooperative as defined in section 1(1) [definitions and interpretation] of the Cooperative Association Act,

(c) a registered charity as defined in section 248(1) of the Income Tax Act (Canada) or another qualified donee as defined in section 149.1(1) of that Act,

(d) trustees on trust for a charitable purpose, or

(e) a person or other entity that is included in this definition by regulation;

[…]

2. (1) Subject to subsection (2), a society may be formed under this Act for one or more lawful purposes, including, without limitation, agricultural, artistic, benevolent, charitable, educational, environmental, patriotic, philanthropic, political, professional, recreational, religious, scientific, social or sporting purposes.

(2) A society must not have, as one of its purposes, the carrying on of a business for profit or gain, but carrying on a business to advance or support the purposes of a society is not prohibited by this subsection.

(3) The registrar may, in writing and giving reasons, order a society to alter its purposes if the registrar considers one or more of those purposes to be contrary to this Act or otherwise unlawful.

3. A society must not have capital divided into shares.

4. A society must not distribute any of its money or other property other than

(a) for full and valuable consideration,

(b) in furtherance of the purposes of the society,

(c) to a qualified recipient,

(d) for a distribution required or authorized by this Act, including, without limitation, a distribution made in accordance with this Act on the society’s dissolution, or liquidation and dissolution, or for a distribution otherwise required by law, or

(e) for a distribution that is

(i) of a type authorized by the regulations, and

(ii) made in accordance with the regulations.

14. (1) A society is incorporated when the incorporation application is filed with the registrar under section 13. […]

41. A majority of the directors of a society must not receive or be entitled to receive remuneration from the society under contracts of employment or contracts for services, other than remuneration for being a director.

124. (1) Before the dissolution of a society under section 126 [dissolution by request] or on the liquidation of a society under this Part [Part 10 — Liquidation, Dissolution and Restoration],

(a) all of the society’s liabilities must be paid or adequate provision for payment of the liabilities must be made, and

(b) subject to subsection (2) of this section, after payment or adequate provision for payment of all of the society’s liabilities is made, the remaining money or other property of the society may be distributed.

(2) A distribution of money or other property under subsection (1)(b) must be made only

(a) to a qualified recipient specified in the bylaws of the society, or

(b) if the bylaws do not specify a qualified recipient for such a distribution, to a qualified recipient specified in an ordinary resolution of the society or, if passing an ordinary resolution is not feasible, specified in a directors’ resolution.

190. In this Division [Division 1 – Member-Funded Societies (sections 190 to 200) of Part 12 – Special Societies]:

“donations” includes bequests and gifts;

“government funding” means funding by way of a grant, a loan without interest or with interest substantially below the market rate or similar funding, provided by

(a) the government of Canada, British Columbia or another province of Canada,

(b) a municipality in British Columbia or in another province of Canada,

(c) the governing body of a first nation in Canada, including the governing body of a band as defined in section 2(1) of the Indian Act (Canada),

(d) an organization that is owned or controlled by, or is an agent of, any of the governments or bodies referred to in paragraphs (a) to (c), or

(e) a government, body or other organization that is included in this definition by regulation,
but does not include funding excluded from this definition by regulation;

“member-funded society” means a society whose constitution contains a statement referred to in section 191(1);

“public donations” means donations made to a society other than donations made by

(a) a voting member, director, senior manager or employee of the society,

(b) the spouse of a person referred to in paragraph (a), or

(c) a relative of a person referred to in paragraph (a) or (b),
but does not include donations excluded from this definition by regulation.

191. (1) Despite section 10(2) [constitution] but subject to subsection (2) of this section, the constitution of a society may contain, in addition to the society’s name and purposes, the following statement:

This society is a member-funded society. It is funded primarily by its members to carry on activities for the benefit of its members. On its liquidation or dissolution, this society may distribute its money and other property to its members.

(2) A society must not have a constitution that contains the statement referred to in subsection (1) if the society

(a) except as provided in the regulations, has received during the period prescribed by regulation

(i) public donations having a total value greater than the amount specified in, or calculated in accordance with, the regulations,
(ii) government funding having a total value greater than the amount specified in, or calculated in accordance with, the regulations, or
(iii) a combination of public donations and government funding having a total value greater than the amount specified in, or calculated in accordance with, the regulations,

(b) is a registered charity as defined in section 248(1) of the Income Tax Act (Canada) or is another qualified donee as defined in section 149.1(1) of that Act,

(c) is a designated recipient as defined in section 1 [definitions] of the Provincial Sales Tax Act or is otherwise entitled to receive taxes, fees or other revenue received by the government as agent of the society,

(d) is a student society as defined in section 1 [definitions] of the College and Institute Act or section 1 [definitions] of the University Act,

(e) is a hospital society as defined in section 42.1 [definitions for sections 42.1 to 42.4] of the Hospital Act or a society that owns, manages or operates a licensed community care facility, as defined in section 1 [definitions] of that Act, that is designated as a hospital society under section 42.4(1) [further application of sections 42.2 and 42.3] of that Act, or

(f) is in a class of societies that is prohibited under the regulations from having the statement in its constitution.

192. (1) A member-funded society

(a) must immediately alter its constitution to remove the statement referred to in section 191(1) if the member-funded society is or becomes a society described in any of paragraphs (a) to (f) of section 191(2), and

(b) may, in any other case, alter its constitution to remove the statement.

(2) Section 15 [alterations to constitution] applies to an alteration referred to in subsection (1) of this section except that an alteration required by subsection (1)(a) of this section may be made without the authorization of a special resolution referred to in section 15(2)(a).

195. Section 28 [copies of financial statements] does not apply in relation to a member-funded society.

196. Section 36 [reporting on remuneration of directors, employees and contractors] does not apply in relation to a member-funded society.

197. (1) Despite section 40 [number and residency of directors], a member-funded society need have only one director and none of the directors need be ordinarily resident in British Columbia.

(2) Section 41 [employment of directors] does not apply in relation to a member-funded society.

198. A member-funded society may, under section 267.2 [conversion of member-funded societies] of the Business Corporations Act, be converted to a company as defined in section 1(1) [definitions] of that Act.

199. (1) Section 124(2) [distribution of property before dissolution or on liquidation] does not apply in relation to a member-funded society, and a distribution of money or other property under section 124(1)(b) in respect of a member-funded society may be made

(a) to any person specified in the bylaws of the society, or

(b) if the bylaws do not specify a recipient for such a distribution, to any person specified in an ordinary resolution of the society or, if passing an ordinary resolution is not feasible, specified in a directors’ resolution.

(2) Despite section 126 [dissolution by request], in the case of a dissolution under that section of a member-funded society, the affidavit referred to in section 126(3)(b) must set out that

(a) the society has no liabilities or has made adequate provision for the payment of all of the society’s liabilities in accordance with section 124(1)(a), and

(b) the remaining money or other property of the society, if any, has been distributed in accordance with section 124(1)(b) and subsection (1) of this section.

200. Despite section 154(2) [effect of dissolution], on the dissolution of a member-funded society, any property held, immediately before the dissolution, by the society as a joint tenant devolves on the other joint tenants.

4. The Societies Regulation (Footnote 2), made under section 228 of the Societies Act, includes the following provisions:

1. In this regulation, “Act” means the Societies Act.

12. (1) The period prescribed for a society for the purposes of section 191(2)(a) [statement in constitution that member-funded society exists primarily for members] of the Act is the period consisting of the 2 financial years of the society immediately preceding the current financial year of the society.
(2) The amount referred to in section 191(2)(a)(i), (ii) and (iii) of the Act in relation to a period prescribed under subsection (1) of this section is the greater of

(a) $20 000, and

(b) 10% of the society’s gross income for that period.

13. For the purposes of section 191(2)(f) [statement in constitution that member-funded society exists primarily for members] of the Act, a society in any of the following classes of societies is prohibited from having in its constitution the statement referred to in section 191(1) of the Act:

(a) societies that receive or have received loans or grants of money from the British Columbia Housing Management Commission continued under section 10(1)(b) [corporations] of the Ministry of Lands, Parks and Housing Act;

(b) societies that are or have been service providers as defined in section 1 [definitions] of the Community Living Authority Act;

(c) societies that are authorities, as defined in section 1(1) [definitions] of the Independent School Act, and that have received under that Act a grant for the previous school year as defined in section 1(1) of that Act.

5. We have not been provided any facts about an actual member-funded society.

INTERPRETATION REQUESTED

You would like to know

1. Does a society with the statement set out in subsection 191(1) of the Societies Act in its constitution, in other words a member-funded society, qualify as a non-profit organization as defined in subsection 123(1)?

2. Would the supply of a membership in a member-funded society be excluded from the exemption in section 17 of Part VI of Schedule V, where the members receive no additional benefits other than those permitted under section 17?

INTERPRETATION GIVEN

Non-profit organization (NPO)

When determining whether a person meets the requirements of the definition of NPO in subsection 123(1) for the purposes of the ETA, the person must meet all of the following conditions:

(a) it is organized solely for a purpose other than profit;

(b) it is operated solely for a purpose other than profit;

(c) no part of the person’s income is payable to, or otherwise available for the personal benefit of, any proprietor, member or shareholder thereof unless the proprietor, member or shareholder is a club, a society or an association the primary purpose and function of which is the promotion of amateur athletics in Canada.

In addition, the person cannot be an individual, an estate, a trust, a charity, a public institution, a municipality or a government.

To determine whether an entity meets the above conditions, we refer you to Policy Statement P-215, Determining whether an Entity is a “Non-Profit Organization” for the purposes of the Excise Tax Act (ETA).

(a) It is organized solely for a purpose other than profit

Subsection 2(1) of the Societies Act requires that a society be formed for one or more lawful purposes which may include artistic, charitable, educational, social, or sporting purposes. Subsection 2(2) prohibits a society from “carrying on of a business for profit or gain” as one of its purposes. It does not, however, exclude the carrying on of a business that advances or supports the society’s purposes.

The inclusion of the statement from subsection 191(1) of the Societies Act in the member-funded society’s constitution would not itself affect whether or not a society is organized for a purpose other than profit as section 2 limits its purpose to a purpose other than profit.

Based on the requirements of the Societies Act only, this condition would be met.

(b) It is operated solely for a purpose other than profit

The determination of whether the member-funded society is operated solely for a purpose other than profit cannot be made in advance. It is a question of fact that must be determined on an ongoing basis based on past and current activities.

We do not have any financial statements to examine. It is therefore difficult to comment on whether or not a member-funded society would meet this condition.

We do note that while profit cannot be its purpose, there is nothing in the Societies Act that prevents a member-funded society from making a profit or accumulating a reserve. Subsection 2(2) of the Societies Act allows the “carrying on [of] a business to advance or support the purpose of a society”. Per Policy Statement P-215, an “entity may carry on an income-generating activity and still qualify as a non-profit [organization]. To qualify, the income-generating activity must be carried on, and the resulting income must be used by the entity, to achieve its declared non-profit objectives.” A society would need to ensure that the business is not its purpose, but a means to an end, and is not carried on for profit.

(c) No part of the person’s income is payable to, or otherwise available for the personal benefit of, any proprietor, member or shareholder thereof unless the proprietor, member or shareholder is a club, a society or an association the primary purpose and function of which is the promotion of amateur athletics in Canada

Distributions

Paragraph 4(b) of the Societies Act allows distribution of money or other property “in furtherance of the purposes of the society”. Per the clause added to its constitution under subsection 191(1) of the Societies Act, a member-funded society exists “for the benefit of its members”. It follows that paragraph 4(b) may permit a distribution of income to members “in furtherance of the purposes of the society”. The combination of the clause in subsection 191(1) and paragraph 4(b) makes the income of the member-funded society payable or otherwise available to its members.

A member-funded society could make a distribution that may be direct or indirect, such as subsidizing the members’ membership fees, which would be in furtherance of its purposes. For example, if the facility of a member-funded society is used by non-members and the income resulting from the non-members’ fees is used to subsidize the members’ fees, this could be a distribution in furtherance of its purposes. In these circumstances, income of the entity is considered to be payable to, or otherwise available for the personal benefit of, its members and the entity would not qualify as a non-profit organization under subsection 123(1).

A member-funded society may avoid possible difficulties in this regard by prohibiting distributions to its members in its bylaws.

Dissolution or liquidation

You noted in your fax that “Policy P-215 states that an entity would not qualify if it has the power to distribute income or property to members on dissolution.”

Per section 199 of the Societies Act, a member-funded society may choose to distribute its remainder on dissolution or liquidation to whomever it chooses, including its members. Where the member-funded society chooses to distribute its remainder to its members, it would breach the third condition when the decision to dissolve or to be liquidated is made. The possibility to distribute to its members upon dissolution or liquidation does not affect a determination that an entity may be an NPO prior to the decision to dissolve or liquidate. (Footnote 3)

Possible difficulties in this regard may be avoided if the member-funded society’s bylaws provide that, upon dissolution or liquidation, its remainder is to be transferred to an organization with similar objects.

Memberships

Section 17 of Part VI of Schedule V exempts a supply of a membership in a non-profit organization (other than a membership in a club the main purpose of which is to provide dining, recreational or sporting facilities or in a registered party) where each member does not receive a benefit by reason of the membership, other than the allowable benefits listed in paragraphs (a) to (f) of that section. These benefits are described in Guide RC4081, GST/HST Information for Non-profit Organizations, which is available on our website.

A “benefit” is the right to any property or service of value regardless of the extent to which the right is actually exercised by individual members. All possible benefits accruing to members must be taken into consideration in determining the tax status of the membership. As we have not been provided any facts about a membership in a member-funded society, we are providing the following comments.

Based on Preparing for B.C.’s New Societies Act: A Guide to the Transition Process, common examples of member-funded societies, as envisioned by the Government of British Columbia, include sports clubs, golf courses, and professional associations.

Where the main purpose of the membership is to provide access to dining, recreation or sporting facilities (like a membership in a sports club or golf course), these memberships would be excluded from exemption under section 17 of Part VI of Schedule V.

Memberships in professional associations that give the right to practice a profession or to use a title would also be excluded from exemption under section 17 of Part VI of Schedule V as these benefits exceed the allowable benefits listed in paragraphs (a) to (f).

Other than the memberships noted above, a membership in a member-funded society that is an NPO as defined in subsection 123(1) would generally be exempt under section 17 of Part VI of Schedule V where no other benefits are provided. The rights conferred to members under the Societies Act do not exceed those benefits allowed. Whether a membership’s benefits exceed those allowed in paragraphs 17(a) to (f) is always a question of fact.

In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretations given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretations or the additional information provided herein.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-670-7943. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.

Yours truly,

Desneiges Arbour
Charities and Non-profit Organizations Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate

FOOTNOTES

1 S.B.C. 2015 chapter 18.

2 B.C. Reg. 216/2015.

3 See the Tax Court of Canada’s judgment in L.I.U.N.A. Local 527 Members’ Training Trust Fund v. The Queen, [1992] 2 CTC 2410. The Tax Court noted that this would only affect an NPO’s status when it is dissolved or liquidated. While this is a case dealing with the Income Tax Act (R.S.C. 1985, c. 1 (5th Supp.), as amended), we are of the opinion that the same logic applies to the definition of NPO in subsection 123(1) of the ETA.