1 March 2001 External T.I. 2000-0047455 - Non-profit Organizations

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: Whether converting a society registered under the B.C. Society Act to a company under the B.C. Company Act would, in any way, change its non-profit status pursuant to paragraph 149(1)(l)?

Position: Depends on particular facts

Reasons: Wording of paragraph 149(1)(l) of the Act.

XXXXXXXXXX 2000-004745
N. L. Storry
March 1, 2001

Dear XXXXXXXXXX:

Re: Non-Profit Status

We are writing in response to your correspondence of August 17, 2000, wherein you requested our view regarding the conversion of a society registered under the B.C. Society Act to a company under the B.C. Company Act and whether this conversion would, in any way, change its non-profit status pursuant to paragraph 149(1)(l) of the Income Tax Act (the "Act") or result in any adverse tax consequences to the members of the society.

You have described a situation involving a non-profit organization (the "Society") that owns a building and provides its members with the facilities XXXXXXXXXX. When the members are not using the building, it is available for rent to other organizations. Income derived from such rentals is applied against expenses relating to the property. The acquisition of the land and building owned by the Society was financed by interest-bearing loans from members and government grants. The Society is now contemplating the conversion of the Society to a company registered under the B.C. Company Act as a means of reorganizing the debt of the Society with equity of the company.

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 of the Canada Customs & Revenue Agency (the "CCRA"). Since the review of such transactions falls within their responsibility, 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. The procedures for requesting an advance income tax ruling are outlined in Information Circular IC-70-6R4 dated January 29, 2001, issued by the CCRA. In particular, we refer to paragraph 15(j) thereof concerning requests for a determination of fact. However, we can offer the following general comments.

149(1)(l) - Non-profit Organizations

While you have not specifically so stated, it is assumed that you consider the Society to be a non-profit organization exempt from Part I tax under paragraph 149(1)(l) of the Act. However, the information you have provided is not sufficient to make such a determination. The CCRA's view on some of the factors to consider when determining whether a club, society or association would qualify as a non-profit organization are contained in Interpretation Bulletin IT-496 entitled "Non-profit Organizations." In general terms, the conditions set out in paragraph 149(1)(l) of the Act with which a club, society or association must comply in order to qualify for exemption as a non-profit organization are as follows:

(a) it must not, in the opinion of the Minister, be a charity;

(b) it must be organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit;

(c) it must in fact be operated exclusively for the same purpose in (b) for which it was organized or for any of the other purposes mentioned in (b); and

(d) no part of its income may be paid, payable or otherwise made available for the personal benefit of any proprietor, member or shareholder, except in connection with the promotion of amateur athletics in Canada.

The CCRA considers the expression "club, society or association," used in paragraph 149(1)(l) of the Act (hereinafter referred to as an association) to be wide enough to include an incorporated company. To qualify for exemption, an association must not only be organized exclusively for non-profit purposes, but it must, in fact, be operated in accordance with these purposes in each year for which it seeks exemption under paragraph 149(1)(l) of the Act.

To establish the purpose for which a corporation was organized, the CCRA will normally look to the instruments by which it was created, e.g. letters patent, by-laws, memorandum of agreement, or articles of incorporation. Accordingly, in our view, the by-laws of the Society should specifically prevent the distribution of income during the year, either directly or indirectly, to or for the personal benefit of any director or shareholder. Furthermore, subsequent to the conversion of the Society into a corporation under the B.C. Company Act, the corporation should be specifically prevented from having the power, at any time in future years, to declare and pay dividends out of income and the possibility of dissolution, winding-up or amalgamation should also be dealt with.

A determination of whether an association was operated exclusively for and in accordance with its non-profit purposes in a particular taxation year must be based on the facts of each case which can be obtained only by reviewing all of its activities for that year. Such a determination cannot be made in advance of or during a particular year but only after the end of the year. An association that qualifies for exemption in a particular year may cease to qualify in a subsequent year by failing to operate in accordance with one of the purposes specified in paragraph 149(1)(l) of the Act, by revising its objectives so that it is no longer organized in accordance with that provision or by otherwise failing to meet the requirements of that paragraph. A review of this nature would be conducted by officials of the Vancouver Island Tax Services Office, who would be in a better position to appreciate all the circumstances of the case.

149(5) - Exception re: Investment Income of Certain Clubs

You have stated that the property owned by the Society is available for rent to other organizations when members are not using the facilities. Generally, a non-profit organization is exempt from Part I tax by virtue of paragraph 149(1)(l) of the Act. Subsection 149(5) of the Act overrides this exemption and results in the taxation of the income from property and the taxable capital gains of a non-profit organization that has as its main purpose the provision of dining, recreational or sporting facilities for its members. However, any business income that such a non-profit organization may realize from carrying on its various activities is not included in computing its income for purposes of subsection 149(5). Furthermore, subparagraph 149(5)(e)(ii) of the Act provides an exception from the inclusion in income of the taxable capital gain of a non-profit organization for a property that was used exclusively for, and directly in the course of, providing the dining, recreational or sporting facilities for its members. It is a question of fact whether a particular property is used in such a manner. We have enclosed for your information a copy of Interpretation Bulletin IT-83R3, Non-profit Organizations - Taxation of Income from Property.

Conversion of Society into a Company Under the B.C. Company Act

You have requested our view as to whether a conversion from a society registered under the Society Act of British Columbia to a company under the B.C. Company Act would result in any tax consequences. Although we cannot provide assurance as to the tax consequences other than in the form of an advance income tax ruling, we can offer the following general comments. A society registered under the Society Act of B.C. is a corporation for purposes of the Act. Article 245 of the B.C. Company Act permits a corporation incorporated by an Act of the B.C. Legislature to convert to a corporation incorporated under the B.C. Company Act. Such a conversion requires a special resolution by the corporation, which may alter the constitution of the company, but continues to treat the company in the same manner as if the conversion had not taken place. Therefore, such a conversion would not generally result in the Society ceasing to exist and the creation of a new corporation. As a result, the conversion would not necessarily result in a disposition of property by the Society.

It would appear that the members of the Society to whom the Society is indebted could be issued shares of the corporation without adversely affecting the status of the corporation under paragraph 149(1)(l) as a non-profit organization. However, as previously indicated, it would be necessary to ensure that from an examination of the characteristics of the shares and the articles of incorporation of the company that shareholders would not personally benefit from the income of the corporation. In this respect, it is observed that while the members, in their capacity as lenders, would be entitled to receive a reasonable rate of interest on money advanced to the Society without adversely affecting the status of the Society as a non-profit organization under paragraph 149(1)(l) of the Act, the Society would clearly not qualify as a non-profit organization thereunder if its members, in their capacity as shareholders, were entitled to receive dividends on their shares.

We trust these comments will be of assistance.

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