25 November 2004 External T.I. 2004-0092851E5 - NPO acquiring a building for office & for rental

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 an NPO lose its tax-exempt status if it purchases a building which will house its administration office but the balance of which will be rented out to earn income to cover administrative costs and contribute to salary expense?

Position: Question of Fact

Reasons: The property may have been acquired for the purpose of earning income. Depending upon the nature of the organization and the use to which these profits are put, this may or may not be objectionable.

2004-009285
XXXXXXXXXX Renée Shields
(613) 948-5273
November 25, 2004

Dear XXXXXXXXXX:

Re: Non-profit Organization ("NPO")

This is in response to your electronic correspondence of August 30, 2004 inquiring whether the acquisition of a particular real property would cause XXXXXXXXXX (the "Institute") to cease to be a tax-exempt NPO within paragraph 149(1) of the Income Tax Act (the "Act").

The situation outlined in your letter relates to a factual one, involving a specific taxpayer. 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. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your specific situation involve a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

The CRA's general views regarding non-profit organizations are contained in Interpretation Bulletin IT-496, "Non-profit Organizations". To qualify as an NPO within paragraph 149(1)(l) of the Act, an organization must be both organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit. This reply is premised upon the existence of a properly constituted and operated NPO, although it is important to note that we are not in a position to make this determination with respect to the Institute.

As noted in paragraph 7 of IT-496, it will be a question of fact to be determined with regard to the particular circumstances as to whether an association is carrying on a trade or business and if so, whether it will result in a finding that an association is not operated exclusively for non-profit purposes. It should be noted that an NPO may earn income in excess of its expenditures provided the requirements of the Act are met. Such excess income may result from the activities for which the NPO was established or from other activities.

In a situation where income is received from renting space in excess of that currently needed by an organization in a building that it owns or leases and in turn sub-lets, the exempt status of such an organization could be jeopardized. Generally, we would not be concerned when an organization rents space in its building which is in excess of its current needs to carry out its objects. We would be concerned, however, when an organization acquires property that is considerably in excess of what it might reasonably be expected to need in the foreseeable future, that the property may have been acquired for the purpose of earning income. Depending on the nature of the organization and the use to which these profits are put, this may or may not be objectionable.

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