23 July 2001 External T.I. 2001-0069195 - NPO - DISPOSITION OF PROPERTY

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 a certain association qualifies as a non-profit organization and if it does not, whether the taxable capital gain realized by the association is taxable in the association or in the hands of the members.

Position: Depends on the particular facts.

Reasons:

The constitution of the Association permits the distribution of income for the personal benefit of members. Therefore, it would appear that the Association is not and never was a non-profit organization for the purposes of paragraph 149(1)(l) of the Act. However, this determination can only be made after the end of the particular taxation year, having regard to all the facts and as such falls within the purview of the TSO. It appears that Association may be a bare trust in which the individual members will be taxable on any capital gains realized on the disposition of the property.

XXXXXXXXXX 2001-006919
N. L. Storry
July 23, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX (the "Association")

We are writing in response to your correspondence of February 7, 2001, wherein you requested our view regarding how the Association should treat a capital gain realized on the disposition of capital property for purposes of the Income Tax Act (the "Act"). Furthermore, you have asked us to confirm your view that the Association is not a non-profit organization pursuant to paragraph 149(1)(l) of the Act.

You have described a situation in which the founding members of the Association purchased a XXXXXXXXXX lot and subsequently, built a XXXXXXXXXX club facility, a gazebo and a shed on the property. The property was held by certain members in trust for the benefit of the Association. Pursuant to the Trust Agreement (a copy of which you have provided) members agreed to dispose of the property in accordance with the wishes of the Association and acknowledge that the property was held by them in trust for the Association. The Association's members used the property to conduct meetings. The construction of the building was financed using lottery grants and personal donations. The constitution of the Association states "XXXXXXXXXX".

On XXXXXXXXXX, the Association disposed of the property. Due to declining enrolment in the Association and lack of interest in the property, the members decided to dissolve the Association.

You have asked whether the gain realized on the disposition of the property should be taxed in the trust created by the original founding members or whether the Association's members who receive the net proceeds will be liable.

Our Comments

The situation outlined in your letter relates to a past transaction. 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. Where the particular transaction is completed, the inquiry should be addressed to the relevant Tax Services Office. For this reason, we are not in a position to provide a binding ruling whether, based on the current constitution and activities, the Association qualifies as a non-profit organization under paragraph 149(1)(l) of the Act. This question can only be addressed by your Tax Services Office.

However, we can offer the following general comments regarding the application of the Act to non-profit organizations and trusts:

The Canada Customs & Revenue Agency's ("CCRA") 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.

As stated in paragraph 11 of IT-496, it is the view of the CCRA that the requirement of paragraph 149(1)(l), discussed in paragraph (d) above, would not be satisfied in a case where the association, in the case of a winding-up, dissolution or amalgamation has the power to distribute income to a member. Therefore, based on the information provided by you, it would appear that the Association is not and never was a non-profit organization for the purposes of paragraph 149(1)(l) of the Act.

Existence of a Trust

The existence of a trust is determined by the relationship between the settlor, the trustees and the beneficiaries. The relationship may or may not be defined by a formal written document, but is codified by any applicable trust legislation and common law. It is accepted at law that a trust cannot be established unless three certainties are present, namely the certainty of: (1) the intent to create a trust; (2) the property to be placed in trust; and, (3) the identity of the beneficiaries of the trust. The certainty of intention is established where it is clear that a trust relationship was intended as opposed to some other relationship such as an agency, a transfer, a gift of property or co-ownership. The property, or property substituted therefor, must be clearly identifiable in order for the certainty of property to exist. Lastly, in creating a valid trust, the beneficiaries must be identifiable.

The attempt to establish a trust will fail unless it is certain that the settlors intended to bring a trust relationship into existence and both the property and the beneficiaries or other objects of the trust are described with sufficient certainty. Whether the three certainties are present or not, is a question of fact and particular to the circumstances of each case. Based on the information presented, it is not clear that on the creation of the Association there was an intention to create a trust.

However, if is determined that under common law principles a trust (other than a bare trust) was created, it would appear that the Association would be a trust described in paragraph 75(2) of the Act since the property of the trust can revert to the persons from which it was received. The income or loss from property or from property substituted therefor, and any taxable capital gain or allowable capital loss from the disposition of the property or of property substituted therefor, of a trust described in subsection 75(2) of the Act is deemed by that provision to be the income or loss, as the case maybe, or a taxable capital gain or allowable capital loss, as the case may be, of the person(s) from whom the trust received the property. We have enclosed a copy of Interpretation Bulletin IT-369R, entitled "Attribution of Trust Income to Settlor," which may be of assistance.

Bare Trust

If a bare trust exists, it can be ignored for the purposes of the Act. In particular, with respect to this Association, the individual members may be assessed on the taxable capital gain realized on the basis of the existence of a bare trust relationship. The Department's position on "bare trusts" is set out in the Income Tax Technical News #7 of February 21, 1996 (copy attached). For this position to apply, there must be a trust under common law and three other conditions must be satisfied: (a) the trustee(s) must have no significant powers or responsibilities, and can take no action without instructions from the settlors; (b) the trustee's only function is to hold legal title to the property; and, (c) the settlors are the only beneficiaries and can cause the property to revert to them at any time.

Co-ownership

In the absence of a trust, the arrangement described may, in fact, be a co-ownership of property. On the disposition of the property, each member would be considered to have disposed of his or her interest therein.

Conclusion

Based on the above analysis, it would appear that regardless of whether the Association is a trust, it would be the Association's members who would be required to report the taxable capital gain arising on the disposition of the property. As the disposition took place during the XXXXXXXXXX taxation year, we would suggest that the members of the Association approach the XXXXXXXXXX Tax Services Office to make arrangements to amend their TI Income Tax Returns for the XXXXXXXXXX taxation year.

We hope these comments will be of assistance to you.

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