22 September 2005 External T.I. 2005-0142911E5 - Non-Profit Organizations

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: General comments on application of paragraph 149(1)(l).

XXXXXXXXXX 									2005-014291
R. Maley
September 22, 2005

Dear XXXXXXXXXX:

Re: Proposed Association

This is in response to your letter of July 17, 2005 seeking our views whether a proposed association could engage in revenue generating activities. We are inferring from your letter that you are seeking comments that would clarify whether a proposed association would be considered a "non-profit organization" within the meaning of paragraph 149(1)(l) of the Income Tax Act.

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in the Canada Revenue Agency (CRA) Information Circular IC70-6R5, "Advanced Income Tax Rulings" (which is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tp/ic70-6r5/README.html), 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), 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. This is also discussed in paragraphs 5 and 6 of CRA Interpretation Bulletin IT-496R, "Non-Profit Organizations", which is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tp/it496r/README.html. 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.

Based on the fairly vague description of the association in your letter, it would be difficult to know whether paragraph 149(1)(l) of the Act might apply to exempt its income from tax under Part I of the Act. We have, however, taken note of a couple of factors you have described that are possibly inconsistent with the application of that paragraph to the association. First, we note that jurisprudence has tended to distinguish between associations that happen to realize profits from their non-profit activities (for example, Gull Bay Development Corporation 84 DTC 6040 (FCTD)) which may qualify as non-profit organizations, and those that have as a purpose the raising of funds (for example, Woodward's Pension Society 62 DTC 1002 (SCC) and Tourbec (1979) Inc. 88 DTC (TCC)), which generally would not. It is not clear from your letter that your proposed association would fall within the first category of association and not the second.

This is discussed in paragraph 6 of IT-496R which notes that, while the carrying on of for-profit activities does not necessarily preclude a corporation from satisfying the criteria in paragraph 149(1)(l), for-profit activities may be carried out by an association only if they are strictly ancillary to a not-for-profit purpose.

Second, it is not clear from your letter whether any of the income of the association would be distributed or otherwise made available for the personal benefit of any of its members. This concern is discussed in paragraphs 11-13 of IT-496R. Paragraph 12 of IT-496R confirms that certain types of payments made to members will not, in and by themselves, disqualify an association from being tax-exempt under paragraph 149(1)(l) of the Act. Such payments include wages for services rendered to the association, provided the amounts paid are reasonable and no more than those paid in arm's length situations for similar services. However, your letter suggests that the association's members, in addition to being the association's employees, will also form part of the community that is the intended beneficiary of the association's income.

As noted, a determination whether paragraph 149(1)(l) of the Act applies to exempt a particular association under Part I of the Act can be made only after consideration has been given to all the facts for the particular year. This would normally be done by officials of your local Tax Services Office. However, we hope that you will find these comments to be helpful.

Yours truly,

Robin Maley
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch