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: 1. NPO1 and NPO2, which carry on similar non-profit activities and share many of the same members, wish to amalgamate to streamline their operations and reduce costs. However, because a contingent liability faced by NPO1 may increase following an amalgamation, they will defer the amalgamation until the lawsuit is resolved and will in the interim combine their operations, resulting in NPO2 carrying out the operations of both entities in property owned by NPO1. NPO2 would rent such property from NPO1 under a lease agreement which would be set at an amount that would cover the cost of NPO1's mortgage payments and other costs of the property. NPO1 and NPO2 have asked for a ruling that, notwithstanding the lease arrangement, they will still be considered to be organized exclusively for non-profit purposes within the meaning of paragraph 149(1)(l) of the Act?
2. Whether the amalgamation of NPO1 and NPO2 will result in a disposition, by either NPO1 or NPO2 of any of its assets or an acquisition by Amalco of any of the assets of NPO1 or NPO2 for purposes of the Act?
3. Whether any of the members of NPO1 and NPO2 will be considered to have received a gain on the disposition of his or her membership in NPO1 or NPO2, as the case may be, or to have received a benefit pursuant to subsections 15(1), 56(2) or 246(1) or Part XIII of the Act as a result of becoming members of Amalco?
Position: 1. Yes. 2. No. 3. No.
Reasons: 1.The ruling is given based on the overall circumstances, i.e., NPO1 and NPO2 share many of the same members and objects, the proposed lease is temporary and the payments thereunder cover only the mortgage payments and other costs, and any profits will be used for the non-profit objectives for which NPO1 was created.
2. Since NPO1 and NPO2 are not taxable corporations, section 87 of the Income Tax Act does not apply. Accordingly, reference must be made to the governing corporate statutes, which provide that an amalgamated corporation is a continuation of the predecessor corporations.
3. None of the members will receive any money or property or any enhancement of their membership benefits as a result of the amalgamation.
XXXXXXXXXX 2005-014247
XXXXXXXXXX, 2006
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX . ("NPO1") XXXXXXXXXX
XXXXXXXXXX . ("NPO2") XXXXXXXXXX
We are writing in response to your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of NPO1 and NPO2 (collectively the "Taxpayers"). We also acknowledge receipt of your correspondence dated XXXXXXXXXX, as well as the information provided during our various telephone conversations (XXXXXXXXXX).
To the best of your knowledge and that of the Taxpayers involved, none of the issues involved in the ruling request is:
(i) in an earlier return of one of the Taxpayers or a related person;
(ii) being considered by a tax services office or a tax centre in connection with a tax return already filed by one of the Taxpayers or a related person;
(iii) under objection by one of the Taxpayers or a related person;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
(v) the subject of a ruling previously issued by the Directorate to one of the Taxpayers or a related person.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.
Facts
1. NPO1 is a corporation without share capital incorporated in XXXXXXXXXX under the laws of the Province of XXXXXXXXXX (the "Province").
2. Pursuant to its Memorandum of Association, the main objects of NPO1 are:
XXXXXXXXXX.
3. NPO1's membership is comprised of XXXXXXXXXX. Membership fluctuates annually, and, as at XXXXXXXXXX, there were approximately XXXXXXXXXX members.
4. NPO1 operates according to its non-profit objectives and is not a charity within the meaning of subsection 149.1(1) of the Act. NPO1 provides XXXXXXXXXX, and other services to its members. It is a "non-profit organization" within the meaning of paragraph 149(1)(l) of the Act and, pursuant to this paragraph, claims an exemption under Part 1 of the Act when filing its T2 Corporation Income Tax Return.
5. NPO1's assets include cash, receivables, and capital assets comprising real property (the "Property") plus furniture, fixtures, and equipment. The Property is located at XXXXXXXXXX. It includes a building that functions as NPO1's head office, meeting place and education centre.
6. NPO2 (formerly named the XXXXXXXXXX) is a corporation without share capital incorporated in XXXXXXXXXX under the laws of the Province.
7. Pursuant to its Memorandum of Association, the main objects of NPO2 are:
XXXXXXXXXX.
8. NPO2 is a provincial association and its membership is comprised of XXXXXXXXXX. NPO 1 and NPO2 share many of the same members, and, as at XXXXXXXXXX, there were approximately XXXXXXXXXX members. While NPO1 deals with regional issues, NPO2 deals with provincial issues within the XXXXXXXXXX industry.
9. NPO2 operates according to its non-profit objectives and is not a charity within the meaning of subsection 149.1(1) of the Act. It is a "non-profit organization" within the meaning of paragraph 149(1)(l) of the Act and, pursuant to this paragraph, claims an exemption under Part 1 of the Act when filing its T2 Corporation Income Tax Return.
10. NPO2's assets include cash, receivables and furniture with a nominal value.
11. Various meetings, discussions, and planning have taken place over the past several years with a view to merging NPO1 and NPO2 into one organization. It is proposed that the merger will take place by way of a formal amalgamation of NPO1 and NPO2. The amalgamated entity would take the name of NPO2 and would carry out all the objects and purposes of NPO1 and NPO2 across the Province. Negotiations in this regard have been substantially complete.
12. Recently, NPO1 has been served with a lawsuit (the "Lawsuit") by XXXXXXXXXX (the "Plaintiff") that alleges that NPO1 has breached its contract with the Plaintiff. Under this contract, substantial consideration based on a fee per member of NPO1 was to be paid by NPO1 to the Plaintiff for several years. The Plaintiff is claiming both costs and damages.
13. NPO1 has received legal advice to defer the amalgamation until after the resolution and/or settlement of the Lawsuit, since such an amalgamation may increase any potential liability under the Lawsuit as a result of the amalgamated corporation having more members.
14. In anticipation of the proposed amalgamation, NPO2 has expanded its by-laws to include generally the objects and purposes of NPO1 to the extent that these were not already included in NPO2's objects and by-laws. Also, members of NPO1 have become members of NPO2, but have nonetheless retained their membership in NPO1. Starting in XXXXXXXXXX, membership fees are collected by NPO2 only.
15. Under XXXXXXXXXX of the Province's Corporations Act (the "PCA"), two or more corporations may amalgamate and continue as one corporation, and the Registrar of Companies established under the PCA will issue a certificate of amalgamation upon receipt of the articles of amalgamation and other documentation. XXXXXXXXXX of the PCA provides that on the date shown in the certificate of amalgamation, the predecessor corporations are amalgamated and continued as one corporation and that the amalgamated corporation possesses all the property and is subject to all of the debts and liabilities of each of the predecessor corporations. Under the PCA, the Taxpayers are considered "corporations".
Proposed Transactions
16. NPO1 and NPO2 will be amalgamated and continued pursuant to the PCA to form a new corporation ("Amalco") immediately after the resolution or settlement of the Lawsuit.
17. All of the property of NPO1 and NPO2 will be transferred to Amalco, and, for greater certainty, no member of either NPO1 or NPO2 will receive any amount or property from either NPO1 or NPO2 on the amalgamation and the continuation of the Taxpayers.
18. The rights attaching to a member's interest in Amalco will be substantially the same as his or her interest in NPO1 and NPO2, as the case may be.
19. As a temporary measure, before the lawsuit is settled and the amalgamation is undertaken, a written lease agreement (the "Lease") will be entered into between the Taxpayers by which the real property owned by NPO1 will be leased to NPO2 for purposes of carrying out the non-profit activities for which the Taxpayers were organized. The lease payments under the Lease will be approximately equal to NPO1's mortgage payments on the Property plus the other expenses incurred by NPO1 on the Property, including realty taxes and maintenance costs. Should there be any excess funds received as a result of this arrangement, they will be distributed to NPO2 which, in addition to carrying on the non-profit activities for which it was organized, will carry out the non-profit activities formerly carried on by NPO1. After undertaking these temporary measures, NPO1's only activity will be to hold the Property for carrying out the non-profit activities for which the Taxpayers were organized. For greater certainty, any equity in the Property, including any increase therein following the commencement of the Lease, will not be distributed nor be made otherwise available to any member of NPO1 or NPO2 but will remain with NPO1 until the amalgamation, at which time, it will be transferred to Amalco.
20. The Plaintiff's rights and position with respect to the Lawsuit will not be prejudiced in any manner by the transactions proposed above.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to achieve the efficiencies, improvements in service and other benefits available from a combined organization and to achieve these benefits immediately without having to wait until the resolution or settlement of the Lawsuit.
Rulings
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:
A. Notwithstanding the Lease, NPO1 or NPO2 will still be considered to be organized exclusively for non-profit purposes within the meaning of paragraph 149(1)(l) of the Act.
B. Provided that the amalgamation of NPO1 and NPO2 will be an amalgamation for purposes of the PCA such that Amalco will be a continuation of each of NPO1 and NPO2, the amalgamation of NPO1 and NPO2 will not result in a disposition, by either NPO1 or NPO2 of any of its assets or an acquisition by Amalco of any of the assets of NPO1 or NPO2 for purposes of the Act.
C. None of the members of NPO1 and NPO2 will be considered to have received a gain on the disposition of his or her membership in NPO1 or NPO2, as the case may be, or to have received a benefit pursuant to subsections 15(1), 56(2) or 246(1) or Part XIII of the Act as a result of becoming members of Amalco.
Caveat
The above advance income tax rulings, which are based on the Act in its present form and does not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R5, dated May 17, 2002, and are binding on the Canada Revenue Agency provided the proposed transactions are implemented before XXXXXXXXXX.
Nothing in this letter should be construed as confirming or implying that the Canada Revenue Agency has reviewed or is making a determination in respect of the non-profit status of NPO1, NPO2 or Amalco at any time.
Yours truly,
XXXXXXXXXX
for Director
Exempt Entities and Financial Sector Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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