11 February 2004 External T.I. 2003-0023111E5 - 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.

Principal Issues: Whether a certain society was organized for non-profit purposes and exempt from Part 1 tax under section 149(1)(l) of the Act.

Position: Question of fact - only general comments provided

Reasons: This determination can only be made at the end of each particular taxation year and only having regard to all the facts - as such this determination falls within the responsibility of the appropriate TSO.

2003-002311
XXXXXXXXXX Kimberly Duval
(613) 957-8982
February 11, 2004

Dear XXXXXXXXXX:

Re: Society Qualifying as a Non-Profit Organization

This is in response to your letter of June 5, 2003 inquiring whether an entity would qualify as a non-profit organization within the meaning assigned by paragraph 149(1)(l) of the Income Tax Act (the "Act"). We apologize for the delay in responding to your request.

Our Comments

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, Advanced Income Tax Rulings, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advanced Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments that may be of assistance.

In general terms, paragraph 149(1)(l) of the Act provides an exemption from tax on the taxable income of a club, society or association (collectively hereinafter called "association"). An association is generally 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 that has as its primary purpose and function the promotion of amateur athletics in Canada.

As stated above in points (b) and (c) and as discussed in paragraphs 5 and 6 of the current version of IT-496, to qualify under paragraph 149(1)(l) of the Act, an association must be both organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit. An association may also be organized and operated exclusively for any combination of these purposes. 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.

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 each 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 for which it was organized or by revising its objectives in such a way that it is no longer considered to be organized in accordance with a purpose specified in paragraph 149(1)(l) of the Act.

Paragraph 6 of IT-496R discusses the phrase "any other purpose except profit" and states that this phrase may be interpreted as a "catch-all" phrase and may include organizations that are organized and operated on a non-profit basis for purposes, other than those specifically listed, and for other than commercial or financial reasons. For example, this phrase may be used to describe the aims of an association whose activities are directed toward the general improvement of conditions within one or more areas of business. However, the bulletin goes on to caution that an association may not qualify as a tax-exempt non-profit organization if it is primarily involved in an activity that is directly connected with the sales of members' goods or services and receives a fee or commission computed in relation to sales promoted for such activities.

Assuming that your particular entity does not engage in such activities and receive such fees or commissions, it may be considered to be organized as a non-profit organization for purposes of (b) above, provided it is, in fact, organized in accordance with its stated objectives. However, as we have not reviewed the instruments creating the entity (such as its letters patent, bylaws, etc), we cannot conclusively state that it is so organized. In addition, we are unable to comment on whether the entity would meet the "operated exclusively for non-profit purposes" as this determination can only be made after consideration has been given to all the facts for the particular year and would normally be conducted by officials of your local Tax Services Office.

We trust that these comments will be of assistance.

Yours truly,

Roxane Brazeau-LeBlond, C.A.

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