1 April 2004 External T.I. 2004-0060451E5 - Taxation of NPO's income from 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.

Principal Issues: Is a particular NPO subject to tax on its property income?

Position: Question of Fact.

Reasons: General information provided

2004-006045
XXXXXXXXXX Renée Shields
(613) 948-5273
April 1, 2004

Dear XXXXXXXXXX:

Re: Taxation of property income earned by a non-profit organization ("NPO")

This is in response to your letter of January 30, 2004 inquiring whether subsection 149(5) of the Income Tax Act (the "Act") will apply to tax the property income of a particular organization.

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 Revenue Agency ("CRA"). All publications referred to herein can be accessed on the CRA website at the following address: http://www.ccra-adrc.gc.ca/formspubs/menu-e.html.

The CRA's general views regarding NPOs are contained in Interpretation Bulletin IT-496R, "Non-profit Organizations" and in Interpretation Bulletin IT-83R3, "Non-profit Organizations - Taxation of Income from Property."

Paragraph 149(1)(l) of the Act generally provides an exemption from Part I tax for a club, society or association that, inter alia, is organized and operated exclusively for social welfare, civic improvement, pleasure or recreation, or any other purpose except profit. However, when the "main purpose" of an association is to provide dining, recreational or sporting facilities to its members, subsection 149(5) of the Act applies to deem the existence of an intervivos trust. The property of the association is deemed to be the property of the trust and tax is payable by the trust on its property income and certain capital gains.

As indicated in paragraph 4 of IT-83R3, the rental of building space that is in excess of an association's normal requirements would be property income of the trust. That being said, it is a question of fact beyond the scope of this letter whether the organization in question qualifies as an NPO for purposes of paragraph 149(1)(l) of the Act, and if so, whether its main purpose brings it within the application of subsection 149(5) of the Act. The determination of NPO status would require an examination of the information pertaining to an association and the activities of the association for each particular year for which an exemption is sought.

Since there is no definition of "main purpose" in the Act, its determination in any particular case is a question to be decided on the basis of all relevant facts. The dictionary meaning seems to be synonymous with "chief in size or extent" or perhaps of "pre-eminent importance" or "primarily". In this regard, we would generally consider that a primary purpose would be one for which more than 50% of assets, revenues, time, attention and efforts are expended.

Interpretation Bulletin IT-73R6, The Small Business Deduction, describes some factors to consider in making a determination of the "principal purpose" of a business. The comments at paragraph 14 therein may be of some assistance:

"14. The principal purpose of a corporation's business must be determined annually after all the facts relating to that business carried on by that corporation in that year have been considered and analyzed. Included in this evaluation should be such things as:

(a) the purpose for which the business was originally commenced;

(b) the history and evolution of its operations, including changes in its mode of operation and purpose of existence; and

(c) the manner in which the business is conducted."

We would add that although the use of assets of an association may be a factor to be considered in determining the purpose(s) or main purpose of the association, arguably of greater importance in such a determination is the content of the by-laws enacted by the association to regulate its affairs. This is consistent with paragraph 5 of IT-496R, which indicates that when determining the purpose for which an association was organized, the instruments creating the association will normally be reviewed. These instruments would generally include such documents as letters patent, articles of incorporation, memoranda of agreement and by-laws.

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