25 October 2002 External T.I. 2002-0157525 - NPO DIRECTORS CO SELLS SUPLIES TO NPO

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:

Whether a non-profit organization (NPO) whose directors are also the directors of a for-profit company from whom the NPO will purchase supplies will qualify for tax-exempt status.

Position: Question of Fact

Reasons: The association must satisfy the conditions in 149(1)(l).

2002-015752
XXXXXXXXXX R. Shields
(613) 948-5273
October 25, 2002

Dear XXXXXXXXXX:

Re: Qualification as a Non-Profit Organization

This is in response to your facsimile of August 12, 2002 inquiring about whether a non-profit organization (NPO) whose directors are also the directors of a for-profit company from whom the NPO will purchase supplies will qualify for tax-exempt status. You have also asked whether the existence of common directors will affect the for-profit company's income tax returns.

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, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.

Whether a particular association qualifies under paragraph 149(1)(l) of the Income Tax Act ("the Act") as a tax-exempt NPO for a particular period is a question of fact that can only be determined after a review of the purposes and activities of the association. In order to be considered a tax-exempt NPO, the association must satisfy the conditions outlined in paragraph 149(1)(l) of the Act. The CCRA's position with respect to the application of paragraph 149(1)(l) is outlined in Interpretation Bulletin IT-496R, Non-Profit Organizations. Generally, an association is exempt from tax under Part I of the Act for a period throughout which the association complies with all of the following conditions:

(a) it is not a charity;

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

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

(d) it does not distribute or otherwise make 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.

When determining the purpose for which an association was organized, the instruments creating the association will normally be reviewed. These instruments may include letters patent, articles of incorporation, memoranda of agreement, by-laws, and so on. There are no rules regarding the persons who may own the shares or capital of a corporation for exemption under paragraph 149(1)(l). However, to qualify for exemption under 149(1)(l) no part of the income, whether current or accumulated from prior years, may be payable to or available for the personal benefit of any proprietor, shareholder or member of the organization. Examples of this could be the power to declare and pay dividends out of income, or payment of an unreasonably high amount to a member or shareholder for goods or services provided to the NPO by the member or shareholder. In our view, in light of the condition in paragraph 149(1)(l), the by-laws 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.

However, it is the CCRA's view, as set out in paragraph 12 of IT-496R that certain types of payments such as salaries, wages, fees or honorariums for services rendered to an association will not, in and by themselves, disqualify the association from being exempted, provided that the amounts paid are reasonable and in line with those paid in arm's length situations for similar services.

In addition to being organized exclusively for non-profit purposes, an NPO must in fact be operated in accordance with these purposes in each year for which it seeks exemption under paragraph 149(1)(l). 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.

In the scenario you have described, we would question the wages or commissions being paid to the directors, as well as the relationship between the NPO and its supplier, a for-profit company controlled by the directors of the NPO. The implications of these situations for an association's tax-exempt status under paragraph 149(1)(l) would have to be examined in light of all the applicable facts. As mentioned above, an advance income tax ruling may provide specificity in this regard.

With respect to your question about the for-profit corporation's ability to file an income tax return without reference to the NPO, we are unable to comment. If the two corporations are considered "associated corporations" pursuant to subsection 256(1) of the Act, this designation can have several implications under the Act. The rules with respect to the association of corporations are discussed in Interpretation Bulletin IT-64R4 Corporations: Association and Control.

We trust that these comments will be of assistance.

Yours truly,

Mickey Sarazin, C.A.

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