20 February 2007 External T.I. 2007-0221381E5 - NPO status

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) Based on a specific provision in its original enabling documents is there a risk that the organization might be reassessed as a taxable entity?

(2) Will the organization lose its NPO status if it carries out certain proposed activities?

(3) Does section 159 apply to the legal representatives of the organization?

Position: (1) This is a completed transaction and outside of Rulings' authority but likely no.

(2) This question should be the subject of an advanced ruling request, but likely no.

(3) Question of Fact

Reasons: (1) The structure of this particular organization is quite unique. The wording is not clearly fatal to qualification as an NPO in these circumstances and not only was any questionable wording changed, it was never acted upon. The ultimate determination would have to be made by Compliance Programs Branch.

(2) The proposed activity is a means for the NPO to pursue its objects

(3) The application of section 159 depends on many factors, which determinations are outside of this Directorate's knowledge or mandate. If, at any time, the Organization violated the NPO rules, and thereby became taxable, section 159 may have application.

								2007-022138
XXXXXXXXXX 							Renée Shields
(613) 948-5273
February 20, 2007

Dear XXXXXXXXXX:

Re: Qualification as a Non-profit Organization ("NPO")

This is in response to your letter of January 17, 2007 requesting our comments about the NPO status of the XXXXXXXXXX (the "Organization") in light of certain facts and intended activities.

The situation outlined in your letter appears to relate 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 Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. With respect to situations involving a specific taxpayer and a transaction that has already been completed, you should submit all relevant facts and documentation to officials of 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 provide binding comments on the specific situation, we are prepared to provide the following general comments, which may be of assistance.

The Organization has been filing as an NPO whose members are associations with similar non-profit objectives.

Your first concern involves the original wording of the Organization's Letters Patent. Upon incorporation, the Letters Patent included an Article stating that upon liquidation or winding-up of the Organization, all of its remaining assets after payment of its liabilities would be distributed among the members. This Article was amended approximately three years later to provide that upon liquidation or winding-up of the Organization, all of its remaining assets after payment of its liabilities would be distributed by the directors of the Organization in their sole discretion. You have asked whether the Organization is at risk of being reassessed as a taxable entity for the period from incorporation to the amendment of its Letters Patent.

To qualify as a tax-exempt NPO, one of the requirements outlined in paragraph 149(1)(l) of the Income Tax Act (the "Act") is that the entity be organized and operated such that no part of its income is payable to or otherwise available for the personal benefit of a member. As noted in ¶11 of IT-496R, "Non-Profit Organizations," an NPO may run into difficulty with this prohibition upon wind-up. For this reason, it is recommended that the enabling documents provide that on wind-up, an NPO's assets and accumulated income will be transferred to another NPO or a registered charity with similar objects.

In the unique circumstances of the Organization, its members are themselves NPOs and it appears likely that the Organization and its member NPOs have similar and overlapping objects. Given these factors, together with the fact that the wording in question was amended prior to being acted upon, it is unlikely that the CRA would consider that the Organization did not qualify as an NPO from its creation. As a completed transaction involving an assessment question, this determination and any assessing action would be the responsibility of the Compliance Programs Branch of the CRA.

Your second concern is whether, in order for the Organization to better pursue its more general objects, funds can be directed to the member XXXXXXXXXX associations whose objects are in large part an extension of the Organization's. It is our view that given the unique structure of the Organization and the nature of its stated objects and purpose, this use of funds is an acceptable manner of pursuing its objects and would not result in a violation of paragraph 149(1)(l) of the Act.

You have requested confirmation that section 159 does not apply to the legal representatives of the Organization. The application of section 159 is a question of fact and not a determination that is within the Rulings Directorate's ability to make. If at any time the Organization has failed to comply with paragraph 149(1)(l) of the Act then it would be a taxable entity. In such a situation, section 159 may have application for the legal representatives of the Organization.

Yours truly,

Mickey Sarazin, CA
Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch