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: Will a particular entity be organized exclusively for non-profit purposes so that if the other requirements under paragraph 149(1)(l) of the Act are met, it will be exempt from Part I tax after its proposed restructuring? Will one of the new proposed companies also be organized for a non-profit purpose so that if the other requirements of paragraph 149(1)(l) are met, it will also be exempt from Part I tax?
Position: Yes to both
Reasons: Based on the legislation and other Rulings given in similar circumstances
XXXXXXXXXX 2004-006688
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advanced Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above-named taxpayers. We also acknowledge the information provided in your subsequent letters dated XXXXXXXXXX, further clarifying the initial submission.
We understand that, to the best of your knowledge and that of the taxpayers, none of the issues involved in the ruling request is:
(i) in an earlier return of the taxpayers or a related person,
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person,
(iii) under objection by the taxpayers or a related person,
(iv) before the courts, or
(v) the subject of a ruling previously issued by the Directorate to the taxpayers or a related person.
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
FACTS
1. XXXXXXXXXX (the "Entity") is a society under the Society Act of XXXXXXXXXX and is governed by its Memorandum of Association ("MoA") as filed with the Registrar of Joint Stock Companies of XXXXXXXXXX in XXXXXXXXXX.
2. Since its inception, the Entity has been operated as a non-profit organization pursuant to paragraph 149(1)(l) of the Act and has filed its annual Non-Profit Information Return as required by subsection 149(12) of the Act. The Entity's business number is XXXXXXXXXX and it deals with the XXXXXXXXXX Tax Services Office.
3. The Entity was established to promote business, entrepreneurial development and economic independence XXXXXXXXXX.
4. The Entity's operations are currently funded by both the federal and provincial governments. Specifically, annual funding agreements are negotiated with XXXXXXXXXX.
5. The Entity's Board of Directors consists of a minimum of XXXXXXXXXX and a maximum of XXXXXXXXXX individuals, all of whom provide their services on a volunteer basis and possess specific business and/or training expertise. At all times, XXXXXXXXXX% of the Board of Directors must be comprised of individuals XXXXXXXXXX.
6. The Entity's officers include a Chair, Vice-Chair, Treasurer and Secretary. These elected positions represent individuals who provide business development skills and advice to XXXXXXXXXX businesses throughout the province. These individuals also provide their services on a volunteer basis such that there is no direct cost to the Entity.
7. The Entity's objects, as expressed in its MoA, are as follows:
XXXXXXXXXX.
8. The MoA provides that the Entity will not carry on a trade, industry or commercial business and the Entity shall be carried on without purpose of gain to any of the members and that any surplus or any accretions of the Entity shall be used solely for the purpose of the Entity and the promotion of its objects.
9. The MoA further provides that if for any reason the operations of the Entity are terminated or wound up, or are dissolved and there remains, at that time, any property whatsoever, these amounts will be paid to a charitable organization in Canada, having objects similar to those of the Entity.
10. Pursuant to the Entity's bylaws, any XXXXXXXXXX individual as approved by its Board of Directors, who is committed to the stated objects of the Entity and who contributes annually to the support of the Entity (not less than XXXXXXXXXX dollars) may be admitted to membership in the Entity.
PROPOSED TRANSACTIONS
11. The Entity is proposing to restructure its organization such that the current single-entity structure will be expanded into XXXXXXXXXX separate and distinct legal entities, XXXXXXXXXX of which are proposed non-profit organizations pursuant to paragraph 149(1)(l) of the Act and the other, a proposed charitable organization as defined in 149.1(1) of the Act.
12. The proposed structure will be similar to a "holding company" structure in that the proposed main organization will be incorporated as a Limited by Guarantee Company, responsible for the activities of the other entities or sub-units.
13. XXXXXXXXXX (the "Company") will be incorporated as the Limited by Guarantee Company under the Companies Act of XXXXXXXXXX and will act as the main holding company of the restructured group of entities, responsible for overseeing and directing the group's activities.
14. The Company will be established for purposes directed at the XXXXXXXXXX; however, the Company will not undertake any direct business activities itself. It will coordinate and guide the activities and initiatives of its associated organizations including the activities of the restructured XXXXXXXXXX (the "New Entity"), the consulting activities of the proposed XXXXXXXXXX.
15. The Company's objects, as outlined in its proposed Memorandum of Association (the "proposed MoA"), will be to:
XXXXXXXXXX.
16. As stated in the proposed MoA, the Company will operate without purpose of gain to any of the members and upon dissolution or wind-up of the organization, any residual amounts will be paid to an organization in Canada, having same or similar objects.
17. The Company's Board of Directors will be the same Board of Directors as originally elected by the Entity before the restructuring. They will continue to provide their services on a volunteer basis, such that there is no direct cost to the Company. If any amounts are paid as a reimbursement of Director expenses, these payments will only be made when the amount represents an expense that was required to further the objectives of the overall group of organizations.
18. The Company will not be a charity within the meaning assigned by subsection 149.1(1) of the Act.
19. After the restructuring, the New Entity will continue to operate as originally mandated in XXXXXXXXXX and its objects will remain the same. Specifically, the New Entity will continue to be governed by its MoA as described in paragraphs 5 to 10 above, however, certain consulting activities and XXXXXXXXXX will be transferred to the other organizations within the restructured group.
20. The New Entity will not be a charity within the meaning assigned by subsection 149.1(1) of the Act.
PURPOSE OF THE PROPOSED TRANSACTIONS
21. The purpose of the restructuring transactions is to improve the ability of the organization to promote XXXXXXXXXX business within XXXXXXXXXX and to permit it to attract more funding in order to sustain the long-term viability of the overall group.
RULING GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the transactions are as described above, we rule as follows:
A. The New Entity will be considered to be an association organized for any other purpose except profit with no part of its income payable to or otherwise available for the personal benefit of any member so that in any year in which it in fact operates on that basis, (this being a matter on which we do not rule since it is a question of fact the determination of which can only be made retrospectively for each taxation year) it will qualify for that year as a non-profit organization under paragraph 149(1)(l) of the Act and will be exempt from Part I tax upon its, otherwise, taxable income.
B. The Company will also be considered to be an association organized for any other purpose except profit with no part of its income payable to or otherwise available for the personal benefit of any member so that in any year in which it in fact operates on that basis, (this being a matter on which we do not rule since it is a question of fact the determination of which can only be made retrospectively for each taxation year) it will qualify for that year as a non-profit organization under paragraph 149(1)(l) of the Act and will be exempt from Part I tax upon its, otherwise, taxable income.
We note that the question of whether a corporation does, in fact, operate exclusively for any purpose other than profit with no part of its income payable to or otherwise available for the personal benefit of any member or shareholder, is a question of fact which must be determined on an ongoing basis. It is also a question of fact whether any future investments made by the New Entity or the Company, as provided in paragraphs 7(f) and (g) and paragraphs 15(e), (h), (i) and (j) respectively, would jeopardize their compliance with paragraph 149(1)(l) of the Act at that time.
The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are implemented by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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