31 July 2002 External T.I. 2002-0141145 - NPO BENEFITS DISQUALIFY

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 CCRA.

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

Principal Issues:

Will the payment of a refund of fees, the distribution of excess cash or the provision of clothing and parties for members result in an organization ceasing to meet the provisions of paragraph 149(1)(l) of the Act?

Position: Probably but question of fact.

Reasons:

The provision of benefits to members is not allowed under 149(1)(l) of the Act.

XXXXXXXXXX 2002-014114
M. P. Sarazin, CA
(613) 957-2089
July 31, 2002

Dear XXXXXXXXXX:

Re: Status of Non-Profit Organization

This is in reply to your letter of May 14, 2002, requesting our views as to whether or not certain payments made by a non-profit organization (the "Organization") would result in the Organization ceasing to qualify for the exemption from tax under paragraph 149(1)(l) of the Income Tax Act (the "Act").

At the end of its operating cycle, the Organization has excess cash and it considers:

(a) refunding the members for their initial contributions to the Organization;

(b) distributing the excess cash evenly between the members; or

(c) using the excess cash to provide Organization members with clothing or extravagant parties.

You would like to know whether any of these uses for the excess cash would result in the Organization ceasing to qualify for the exemption from tax under paragraph 149(1)(l) of the Act.

Comments

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, dated May 17, 2002. Consequently, we can only provide the following general comments.

The determination of whether any particular entity is a non-profit organization is a question of fact. This would require a review of the instruments creating the particular organization, including any letters patent, articles of incorporation, memoranda of agreement, by-laws and so on.

The Canada Customs and Revenue Agency's general views regarding Non-Profit Organizations are found in Interpretation Bulletin IT-496R, "Non-Profit Organizations". Paragraph 1 of IT-496R describes the general conditions that have to be satisfied in order to qualify as a non-profit organization.

We would consider that an income earning activity carried on by non-profit organization in the course of its authorized activities would not, generally, in and of itself, disqualify the non-profit organization from satisfying paragraph 149(1)(l). It is important to note that any income earned by the Organization has to be used for the not-for-profit purposes described in the Organization's instruments. However, we note that the creation of excess cash by the Organization may be an indication that the Organization is operated on a profit basis rather than on a cost recovery basis. If this is the case, the Organization will not qualify for the exemption from tax under paragraph 149(1)(l) of the Act. You may review paragraphs 7 and 8 of IT-496R for a broader discussion of this issue.

In order to preserve its exempt status under paragraph 149(1)(l) of the Act, a non-profit organization is prohibited from distributing or otherwise making available for the personal benefit of a member any of its income unless the member is an association which has as its primary purpose and function the promotion of amateur athletics in Canada. In our view, the distribution of excess cash or the use of the excess funds to fund parties for members will result in prohibited personal benefits being provided to the Organization's members. The return of a member's original capital contribution or the provision of team uniforms including track suits and jackets may be accepted if it is done to further the objects and purposes of the Organization, as set out in its instruments. However, we would have to have all of the facts, including the Organization's enabling documents, to make this determination.

Since the main purpose of the Organization is to provide recreational or sporting facilities for its members, the Organization would be subjected to subsection 149(5) of the Act.

We trust these comments will be of assistance.

Yours truly,

Mickey Sarazin, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate